UNITED
STATES SECURITIES AND EXCHANGE COMMISSION




WASHINGTON
D.C. 20549




FORM
10-Q




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




FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
November 6, 2009, there were 33,724,538 shares of the registrant’s common stock
outstanding.








PageNumberPART
      I  FINANCIAL
      INFORMATIONITEM
      1:
                          Financial
      Statements (Unaudited):Condensed
      Consolidated Balance Sheets as of September 30, 2009 andDecember
      31, 2008
                          4Condensed
      Consolidated Statements of Operations for the three months and nine months
      endedSeptember
      30, 2009 and 2008
                          5Condensed
      Consolidated Statements of Cash Flows for the nine months
      endedSeptember
      30, 2009 and 2008
                          6Notes
      to Condensed Consolidated Financial Statements
                          7ITEM
      2:
                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          20ITEM
      3:
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          33ITEM
      4:
                          Controls
      and Procedures
                          33PART
      II  OTHER
      INFORMATIONITEM
      1:
                          Legal
      Proceedings
                          34ITEM1A:
                          Risk
      Factors
                          34ITEM
      2:
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          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)





September
      30,
                      
                      
                      December
      31,2009
                      
                      
                      2008(unaudited)ASSETSCurrent
      assets:Cash
      and cash equivalents
                      
                      $
                      82,871
                      
                      
                      $
                      61,488Short-term
      investments
                      
                      
                      46,043
                      
                      
                      
                      12,987Accounts
      receivable, net of allowance of $2,307 and $1,161 at September 30, 2009
      and December 31, 2008, respectively
                      
                      
                      9,006
                      
                      
                      
                      9,381Accounts
      receivable from affiliate
                      
                      
                      947
                      
                      
                      
                      351Inventories
                      
                      
                      2,764
                      
                      
                      
                      2,087Deferred
      production and marketing costs
                      
                      
                      395
                      
                      
                      
                      519Deferred
      tax assets, current portion
                      
                      
                      2,614
                      
                      
                      
                      2,310Other
      current assets
                      
                      
                      2,536
                      
                      
                      
                      2,270Total
      current assets
                      
                      
                      147,176
                      
                      
                      
                      91,393Long-term
      investments
                      
                      
                      -
                      
                      
                      
                      48,974Property
      and equipment, net
                      
                      
                      6,443
                      
                      
                      
                      8,331Intangible
      assets, net
                      
                      
                      22,314
                      
                      
                      
                      23,686Goodwill
                      
                      
                      37,772
                      
                      
                      
                      34,607Deferred
      tax assets
                      
                      
                      19,324
                      
                      
                      
                      22,160Other
      assets
                      
                      
                      687
                      
                      
                      
                      201Total
      assets
                      
                      $
                      233,716
                      
                      
                      $
                      229,352LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable and accrued expenses
                      
                      $
                      9,120
                      
                      
                      $
                      8,648Deferred
      revenue
                      
                      
                      11,574
                      
                      
                      
                      11,760Total
      current liabilities
                      
                      
                      20,694
                      
                      
                      
                      20,408Deferred
      tax liabilities
                      
                      
                      8,422
                      
                      
                      
                      10,236Other
      liabilities
                      
                      
                      249
                      
                      
                      
                      360Total
      liabilities
                      
                      
                      29,365
                      
                      
                      
                      31,004Commitments
      and contingencies
                      
                      
                      -
                      
                      
                      
                      -Stockholders’
      equity:Common
      stock, $.01 par value; 100,000,000 shares authorized and 33,727,656 and
      32,341,172 shares issued and outstanding at September 30, 2009 and
      December 31, 2008, respectively
                      
                      
                      337
                      
                      
                      
                      323Additional
      paid-in-capital
                      
                      
                      205,637
                      
                      
                      
                      200,822Accumulated
      deficit
                      
                      
                      (1,623
                      )
                      
                      
                      (2,797
                      )Total
      stockholders’ equity
                      
                      
                      204,351
                      
                      
                      
                      198,348Total
      liabilities and stockholders’ equity
                      
                      $
                      233,716
                      
                      
                      $
                      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 September 30,
                
                
                Nine
      Months Ended September 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Net
      revenues:Online
      sponsorship and advertising
                
                $
                14,122
                
                
                $
                13,949
                
                
                $
                41,162
                
                
                $
                40,323Registry
      services
                
                
                3,445
                
                
                
                3,453
                
                
                
                8,144
                
                
                
                8,520Merchandise
                
                
                7,462
                
                
                
                5,751
                
                
                
                20,737
                
                
                
                17,478Publishing
      and other
                
                
                3,144
                
                
                
                3,830
                
                
                
                11,318
                
                
                
                13,134Total
      net revenues
                
                
                28,173
                
                
                
                26,983
                
                
                
                81,361
                
                
                
                79,455Cost
      of revenue:Online
      sponsorship and advertising
                
                
                844
                
                
                
                601
                
                
                
                2,075
                
                
                
                1,583Merchandise
                
                
                4,062
                
                
                
                2,946
                
                
                
                10,638
                
                
                
                8,475Publishing
      and other
                
                
                1,273
                
                
                
                1,545
                
                
                
                4,600
                
                
                
                5,269Total
      cost of revenues
                
                
                6,179
                
                
                
                5,092
                
                
                
                17,313
                
                
                
                15,327Gross
      profit
                
                
                21,994
                
                
                
                21,891
                
                
                
                64,048
                
                
                
                64,128Operating expenses:Product
      and content development
                
                
                5,010
                
                
                
                5,296
                
                
                
                15,244
                
                
                
                15,285Sales
      and marketing
                
                
                8,116
                
                
                
                7,826
                
                
                
                23,775
                
                
                
                23,022General
      and administrative
                
                
                4,786
                
                
                
                4,005
                
                
                
                15,008
                
                
                
                14,027Depreciation
      and amortization
                
                
                2,489
                
                
                
                2,021
                
                
                
                7,670
                
                
                
                6,460Total
      operating expenses
                
                
                20,401
                
                
                
                19,148
                
                
                
                61,697
                
                
                
                58,794Income
      from operations
                
                
                1,593
                
                
                
                2,743
                
                
                
                2,351
                
                
                
                5,334Loss
      in equity interest
                
                
                (19
                )
                
                
                -
                
                
                
                (19
                )
                
                
                -Interest
      and other income, net
                
                
                93
                
                
                
                826
                
                
                
                613
                
                
                
                2,908Income
      before income taxes
                
                
                1,667
                
                
                
                3,569
                
                
                
                2,945
                
                
                
                8,242Provision
      for income taxes
                
                
                896
                
                
                
                1,329
                
                
                
                1,771
                
                
                
                3,132Net
      income
                
                $
                771
                
                
                $
                2,240
                
                
                $
                1,174
                
                
                $
                5,110Net
      earnings per share:Basic
                
                $
                0.02
                
                
                $
                0.07
                
                
                $
                0.04
                
                
                $
                0.16Diluted
                
                $
                0.02
                
                
                $
                0.07
                
                
                $
                0.04
                
                
                $
                0.16Weighted
      average number of shares used in calculating net earnings per
      shareBasic
                
                
                32,162
                
                
                
                31,572
                
                
                
                32,045
                
                
                
                31,424Diluted
                
                
                33,361
                
                
                
                32,709
                
                
                
                33,039
                
                
                
                32,632





See
accompanying Notes to Condensed Consolidated Financial
Statements


5




THE
KNOT, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(amounts
in thousands)


(unaudited)





Nine
      Months Ended September 30,2009
                
                
                2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      income
                
                $
                1,174
                
                
                $
                5,110Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                
                
                3,844
                
                
                
                3,688Amortization
      of intangibles
                
                
                3,825
                
                
                
                2,753Stock-based
      compensation
                
                
                3,187
                
                
                
                2,414Deferred
      income taxes
                
                
                1,611
                
                
                
                2,411Excess
      tax benefits from stock-based awards
                
                
                (892
                )
                
                
                (2,119
                )Reserve
      for returns
                
                
                2,136
                
                
                
                2,662Realized
      gain on value of auction rate securities
                
                
                (124
                )
                
                
                -Allowance
      for doubtful accounts
                
                
                826
                
                
                
                (249
                )Other
      non-cash charges
                
                
                (13
                )
                
                
                18Changes
      in operating assets and liabilities:(Increase)
      decrease in accounts receivable
                
                
                (2,587
                )
                
                
                1,557(Increase)
      decrease in accounts receivable from affiliate
                
                
                (595
                )
                
                
                368Increase
      in inventories
                
                
                (450
                )
                
                
                (726
                )Decrease
      (increase) in deferred production and marketing costs
                
                
                124
                
                
                
                (3
                )Increase
      in other current assets
                
                
                (227
                )
                
                
                (467
                )Decrease
      in other assets
                
                
                13
                
                
                
                59Increase
      (decrease) in accounts payable and accrued expenses
                
                
                299
                
                
                
                (381
                )(Decrease)
      increase in deferred revenue
                
                
                (186
                )
                
                
                1,065Decrease
      in other liabilities
                
                
                (110
                )
                
                
                (68
                )Net
      cash provided by operating activities
                
                
                11,855
                
                
                
                18,092CASH FLOWS FROM INVESTING
      ACTIVITIESPurchases
      of property and equipment
                
                
                (1,772
                )
                
                
                (4,691
                )Purchases
      of short-term investments
                
                
                -
                
                
                
                (64
                )Proceeds
      from sales/maturities of short-term investments
                
                
                9,991
                
                
                
                13,937Purchases
      of long-term investments
                
                
                -
                
                
                
                (39,600
                )Proceeds
      from sales/maturities of long-term investments
                
                
                6,050
                
                
                
                46,275Investment
      in equity interest
                
                
                (500
                )
                
                
                -Acquisitions
      of businesses, net of cash acquired
                
                
                (5,882
                )
                
                
                (1,360
                )Net
      cash provided by investing activities
                
                
                7,887
                
                
                
                14,497CASH FLOWS FROM FINANCING
      ACTIVITIESProceeds
      from issuance of common stock
                
                
                312
                
                
                
                380Proceeds
      from exercise of stock options
                
                
                860
                
                
                
                1,092Excess
      tax benefits from stock-based awards
                
                
                892
                
                
                
                2,119Repurchase
      of common stock
                
                
                (423
                )
                
                
                (281
                )Net
      cash provided by financing activities
                
                
                1,641
                
                
                
                3,310Increase
      in cash and cash equivalents
                
                
                21,383
                
                
                
                35,899Cash
      and cash equivalents at beginning of year
                
                
                61,488
                
                
                
                33,127Cash
      and cash equivalents at end of year
                
                $
                82,871
                
                
                $
                69,026Supplemental
      information:Cash
      paid for interest
                
                $
                -
                
                
                $
                4Cash
      paid for income taxes
                
                $
                1,141
                
                
                $
                603Cash
      paid for acquisitions
                
                $
                (6,594
                )
                
                $
                (1,368
                )Cash
      acquired in acquisitions
                
                
                712
                
                
                
                8$
                (5,882
                )
                
                $
                (1,360
                )





See
accompanying Notes to Condensed Consolidated Financial
Statements


6





THE
KNOT, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





1.
            Organization
      and Basis of Presentation





The
accompanying unaudited condensed consolidated financial statements include (1)
the accounts of The Knot, Inc. (“The Knot” or the “Company”) and all 100% owned
subsidiaries and (2) 50% of the net income of an entity formed in July 2009
accounted for as an equity interest. The condensed consolidated financial
statements included in this report have been prepared by the Company pursuant to
the rules and regulations of the SEC.  Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles in the United States
have been condensed or omitted pursuant to such SEC rules and
regulations.  The Company believes that the disclosures are adequate
to make the information presented not misleading.  The financial
statements contained herein should be read in conjunction with the consolidated
and combined financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K filed with the SEC for the year ended December
31, 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 nine months
ended September 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





The
adoption of the following accounting standards and updates during the first nine
months of 2009 did not result in a material impact to the Company’s condensed
consolidated financial statements:





On
January 1, 2008, the Company adopted the accounting standard that relates
to fair value and establishes a framework for measuring fair value in accordance
with generally accepted accounting principles, and expands disclosures about
fair value measurements. This standard 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.





On
January 1, 2008 the Company adopted the accounting standard that 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. This
standard also establishes additional disclosure requirements. Through September
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 this accounting standard.




On
January 1, 2009 the Company adopted the accounting standard related to
business combinations, which 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. The accounting standard also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination.





On
January 1, 2009 the Company adopted the accounting standard related to
noncontrolling interests in consolidated financial statements, which 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.  This standard also
establishes disclosure requirements that clearly identify and distinguish
between the interests of the parent and the interests of the noncontrolling
owners.


7





On January 1, 2009 the Company adoptedthe accounting standard
regarding the determination of the useful life of intangible assets that removes
that requirement to consider whether an intangible asset can be
renewedwithout substantial
cost or material modifications to the existing terms and conditions, and
replaces it with a requirement that an entity consider its own historical
experience in renewing similar arrangements, or a considerations of market
participantassumptions in the absence of historical
experience.  This standardalso 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.
 
 On April 9,2009,the Company adopted the accounting
standard that addresses recognition and presentation of other than temporary
impairments.  This standardreplacedthe existing requirement that the
entity’s management assert it has both the
intent and ability to hold
an impaired security until recovery with a requirement that management
assert(a) it does not have
the intent to sell the security, and (b) it is more likely than not it will have
to sell the security before recovery of its cost basis.  The
applicationof this
standard is limited to debt securities andis effective for interim and annual
periods ending after June 15,
2009.





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





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





New
Accounting Pronouncements





On June
12, 2009, the accounting standard relating to the transfers and servicing of
financial assets and extinguishment of liabilities was updated to require
additional information about transfers of financial assets, including
securitization transactions, and where companies have continuing exposure to the
risks related to transferred financial assets.  It eliminates the concept
of a “qualifying special-purpose entity,” changes the requirements for
derecognizing financial assets, and requires additional disclosures. This
standard update is effective as of January 1, 2010.  Earlier
application is prohibited. The Company is currently evaluating the potential
impact this new standard will have on its consolidated financial
statements.




On June
12, 2009, the accounting standard regarding the requirements of consolidation
accounting for variable interest entities was updated to require an enterprise
to perform an analysis to determine whether the entity's variable interest or
interests give it a controlling interest in a variable interest entity. This
standard update is effective for all interim and annual reporting periods as of
January 1, 2010. The Company is currently evaluating the impact this new
standard will have on its consolidated financial statements.


8




2.
            Fair
      Value Measurements





Cash and
cash equivalents and investments consist of the following:




September
      30,
                      
                      
                      December
      31,2009
                      
                      
                      2008(in
      thousands)Cash
      and cash equivalentsCash
                      
                      $
                      5,995
                      
                      
                      $
                      3,623Money
      market funds
                      
                      
                      75,687
                      
                      
                      
                      13,023Commercial
      paper
                      
                      
                      1,189
                      
                      
                      
                      44,842Subtotal
      cash and cash equivalents
                      
                      
                      82,871
                      
                      
                      
                      61,488Short-term
      investmentsAuction
      rate securities and related rights
                      
                      
                      46,043
                      
                      
                      
                      2,995US
      Treasury bill
                      
                      
                      -
                      
                      
                      
                      9,992Subtotal
      short-term investments
                      
                      
                      46,043
                      
                      
                      
                      12,987Long-term
      investmentsAuction
      rate securities and related rights
                      
                      
                      -
                      
                      
                      
                      48,974Total
      cash and cash equivalents and investments
                      
                      $
                      128,914
                      
                      
                      $
                      123,449





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





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





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





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





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





As of
September 30, 2009 the Company’s investment in cash and cash equivalents of
$82.9 million was measured at fair value using Level 1 inputs.





All of
the auction rate securities (“ARS”) are classified as Level 3 instruments and
are accounted for as short-term investments on the Company’s consolidated
balance sheet as of September 30, 2009.  On June 30, 2010, the Company
intends to exercise its right to sell, at par value, its entire portfolio of ARS
to UBS, one of the Company’s investment providers.  ARS are variable
interest rate debt securities which have student loans as the underlying
collateral. Approximately 86% 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.


9


At
September 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 short-term ARS investments at $45.5 million, which represents
a decline in value of $537,000 from par.  The assumptions used in
preparing the discounted cash flow model were based on data available as of
September 30, 2009 and included estimates of interest rates, timing and amount
of cash flows, credit and liquidity premiums, and expected holding periods for
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 on
June 30, 2010, if the Right is not exercised before July 2, 2012 it will expire
and UBS will have no further obligation to buy the Company’s 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 the Company may: incur further losses on the
carrying value of the ARS; be forced to liquidate the securities at depressed
prices; or, have to hold the securities to their full maturities which may be
over 20 years from now.





The
enforceability of the Right results in a separate freestanding instrument that
is accounted for separately from the ARS portfolio. The Company elected to
account for this security at fair value.  The Company valued the
security using a discounted cash flow approach based on data available as of
September 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 right was determined to be $530,000 as of September 30, 2009.
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 $7,000 gain for
the three months ended September 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 UBS 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.





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
                  
                  
                  (6,050
                  )Change
      in fair value of ARS portfolio
                  
                  
                  3,085Change
      in fair value of ARS Right
                  
                  
                  (2,961
                  )Balance
      at September 30, 2009
                  
                  $
                  46,043





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 nine months ended September 30, 2009 and 2008, as
follows:


10





Three
      Months Ended
                      September
      30,
                    
                    
                    Nine
      Months Ended
                      September
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(in
      thousands)Product
      and content development
                    
                    $
                    369
                    
                    
                    $
                    208
                    
                    
                    $
                    999
                    
                    
                    $
                    567Sales
      and marketing
                    
                    
                    272
                    
                    
                    
                    (63
                    )
                    
                    
                    802
                    
                    
                    
                    350General
      and administrative
                    
                    
                    465
                    
                    
                    
                    404
                    
                    
                    
                    1,386
                    
                    
                    
                    1,497Total
      stock based compensation
                    
                    $
                    1,106
                    
                    
                    $
                    549
                    
                    
                    $
                    3,187
                    
                    
                    $
                    2,414





The
Knot Stock-Based Incentive Plans





The 2009
Stock Incentive Plan (the “2009 Plan”) was adopted by the Board of Directors,
and became effective in May 2009 following approval by the stockholders, as a
successor plan to the Company’s 1999 Stock Incentive Plan (the “1999
Plan”).  All incentive stock options, nonqualified stock options
(incentive and nonqualified stock options are collectively referred to as
“options”), stock appreciation rights, stock issuances which may be subject to
the attainment of designated performance goals or service requirements
(“restricted stock”), or any combination thereof outstanding under the 1999 Plan
have been incorporated into the 2009 Plan.  Under the terms of the
2009 Plan 1,000,000 shares of common stock of the Company were initially
reserved for issuance in addition to the 3,190,737 shares which 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.  As of September 30, 2009, there were
3,283,120 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 nine months ended September 30,
2009:





Shares
                                          
                                          
                                          Weighted
                                            Average
                                            Exercise
                                            Price(in
      thousands)Options
      outstanding at December 31, 2008
                                          
                                          
                                          1,496
                                          
                                          
                                          $
                                          6.04Options
      exercised
                                          
                                          
                                          (414
                                          )
                                          
                                          
                                          2.86Options
      canceled
                                          
                                          
                                          (167
                                          )
                                          
                                          
                                          18.20Options
      outstanding at September 30, 2009
                                          
                                          
                                          915
                                          
                                          
                                          $
                                          5.26


11





The total
intrinsic value of options exercised during the three months ended September 30,
2009 and 2008 was $42,000 and $8,500, respectively. The total intrinsic value of
options exercised during the nine months ended September 30, 2009 and 2008 was
$1.9 million and $2.5 million, respectively.





The
following table summarizes information about options outstanding at September
30, 2009:





Options Outstanding
                        
                        
                        Options ExercisableRange of Exercise Price
                        
                        Number
                          Outstanding as
                          of September
                          30,2009
                        
                        
                        Weighted
                          Average
                          Remaining
                          Contractual
                          Life (in Years)
                        
                        
                        Weighted
                          Average
                          Exercise
                          Price
                        
                        
                        Number
                          Exercisable as
                          of September
                          30, 2009
                        
                        
                        Weighted
                          Average
                          Exercise
                          Price(in
      thousands)
                        
                        
                        
                        
                        
                        
                        
                        
                        (in
      thousands)$0.42
      to $1.03
                        
                        
                        255
                        
                        
                        
                        1.31
                        
                        
                        $
                        0.94
                        
                        
                        
                        255
                        
                        
                        $
                        0.94$1.37
      to $4.10
                        
                        
                        500
                        
                        
                        
                        3.83
                        
                        
                        
                        3.30
                        
                        
                        
                        500
                        
                        
                        
                        3.30$18.26
                        
                        
                        160
                        
                        
                        
                        2.66
                        
                        
                        
                        18.26
                        
                        
                        
                        107
                        
                        
                        
                        18.26915
                        
                        
                        
                        2.92
                        
                        
                        $
                        5.26
                        
                        
                        
                        862
                        
                        
                        $
                        4.45





The
weighted average remaining contractual life of options exercisable as of
September 30, 2009 was 2.94 years.  The aggregate intrinsic value of
stock options outstanding at September 30, 2009 was $6.4 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 September 30, 2009.





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





Shares
                          
                          
                          Weighted
                            Average
                            Exercise
                            Price(in
      thousands)Nonvested
      options outstanding at December 31, 2008
                          
                          
                          190
                          
                          
                          $
                          18.26Vested
                          
                          
                          (53
                          )
                          
                          
                          18.26Canceled
                          
                          
                          (84
                          )
                          
                          
                          18.26Nonvested
      options outstanding at September 30, 2009
                          
                          
                          53
                          
                          
                          $
                          18.26





During
the three months ended September 30, 2009 there were no stock options that
vested.  During the three months ended September 30, 2008 the weighted
average fair value of options that vested was $1.93.  During the nine
months ended September 30, 2009 and 2008 the weighted average fair value of
options that vested was $5.95 and $5.69, respectively.


12





Restricted
Stock





As of
September 30, 2009 and 2008, there were 1,528,662 and 707,006 service-based
restricted stock awards outstanding, respectively.  During the three
months ended September 30, 2009 and 2008, 17,000 and 318,000 shares,
respectively, of restricted stock were awarded at weighted average grant-date
fair values of $9.55 and $8.46, respectively.  During the nine months
ended September 30, 2009 and 2008, 1,054,500 and 509,500 shares, respectively,
of restricted stock were awarded at weighted average grant-date fair values of
$6.99 and $9.82, respectively.  During the nine months ended September
30, 2009 and 2008, 147,813 and 111,166 shares of restricted stock, respectively,
vested.  During the nine months ended September 30, 2009 and 2008,
42,992 and 103,875 shares of restricted stock, respectively, were
canceled.  During the nine months ended September 30, 2009 and 2008,
49,290 and 28,847 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
September 30, 2009 and 2008 was $16.7 million and $5.9 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 September 30, 2009.





As of
September 30, 2009, there was $9.5 million of total unrecognized compensation
cost related to non-vested restricted shares, net of estimated forfeitures,
which is expected to be recognized over a weighted average period of 2.95 years.
During the three months ended September 30, 2009 and 2008, the Company recorded
$999,000 and $464,000, respectively, of compensation expense related to
restricted shares.  During the nine months ended September 30, 2009
and 2008, the Company recorded $2.9 million and $1.7 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. In addition to the 1,000 share purchase limit, the cost of shares
purchased under the plan by a participating employee cannot exceed $25,000 in
any plan year.  The Company initially reserved 300,000 shares of
common stock under the 1999 ESPP. The shares reserved under the 1999 ESPP
automatically increased on the first trading day in January of each calendar
year by the lesser of the (i) the number of shares of common stock issued under
the 1999 ESPP in the immediately preceding calendar year, (ii) 300,000 shares or
(iii) such other lesser amount approved by the Board of Directors. Through
September 30, 2009, 483,861 shares were issued under the 1999 ESPP and 457,663
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.





The
weighted average grant-date fair value of 1999 ESPP rights arising from
elections made by 1999 ESPP plan participants was $2.11 and $1.98 during the
three and nine months ended September 30, 2009.  The weighted average
grant-date fair value of 1999 ESPP rights arising from elections made by 1999
ESPP plan participants was $1.35 and $2.79 for the three and nine months ended
September 30, 2008. The fair value of 1999 ESPP rights that vested during the
three and nine months ended September 30, 2009 were $1.85 and $2.03,
respectively.  The fair value of 1999 ESPP rights that vested during
the three and nine months ended September 30, 2008 were $2.07 and $3.90,
respectively.  On January 31, 2009, the Company issued 25,485 shares
at a weighted average price of $5.85 under the 1999 ESPP.  On July 31,
2009, the Company issued 26,198 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 and July
31, 2009 was $26,000 and $76,000, respectively.  The intrinsic value
of outstanding 1999 ESPP rights as of September 30, 2009 was $38,000. 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
September 30, 2009, there was $238,000 of unrecognized compensation cost related
to non-vested stock options and 1999 ESPP rights, net of estimated forfeitures,
which is expected to be recognized over a weighted average period of .66
years.


13





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:





Nine Months Ended September 30,2009
                      
                      
                      2008Weighted
      average expected lives
                      
                      0.50
      years
                      
                      
                      0.50
      yearsRisk-free
      rate
                      
                      
                      0.26$ -
      0.36%
                      
                      
                      
                      1.88%
      - 2.15%Expected
      volatility
                      
                      
                      34.4% - 44.6%
                      
                      
                      
                      37.6% - 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 September
30, 2009 and 2008, the Company recorded $106,000 and $85,000, respectively, of
compensation expense related to options and 1999 ESPP rights.  During
the nine months ended September 30, 2009 and 2008, the Company recorded $308,000
and $670,000, respectively, of compensation expense related to options and 1999
ESPP rights.





4.
            Comprehensive
      Income





Comprehensive
income is comprised of the following:




Three
      Months
                      Ended
      September 30,
                    
                    
                    Nine
      Months
                      Ended
      September 30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(in
      thousands)Net
      income
                    
                    $
                    771
                    
                    
                    $
                    2,240
                    
                    
                    $
                    1,174
                    
                    
                    $
                    5,110Unrealized
      loss on auction rate securities
                    
                    
                    -
                    
                    
                    
                    (100
                    )
                    
                    
                    -
                    
                    
                    
                    (3,200
                    )Comprehensive
      income
                    
                    $
                    771
                    
                    
                    $
                    2,140
                    
                    
                    $
                    1,174
                    
                    
                    $
                    1,910




5.
            Inventory





Inventory
consists of the following:




September
      30,
                        2009
                      
                      
                      December
      31,
                        2008(in
      thousands)InventoryRaw
      materials
                      
                      $
                      659
                      
                      
                      $
                      366Finished
      goods
                      
                      
                      2,105
                      
                      
                      
                      1,721Total
      inventory, net
                      
                      $
                      2,764
                      
                      
                      $
                      2,087


14




6.
            Goodwill
      and Other Intangibles





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





Amount(in
      thousands)Balance
      at December 31, 2008
                          
                          $
                          34,607WedSnap
      acquisition (see Note 8)
                          
                          
                          2,413Acquisitions
      of an e-commerce company and web-based registry company(see
      Note 8)
                          
                          
                          1,082Breastfeeding.com
      goodwill adjustment
                          
                          
                          (330
                          )Balance
      at September 30, 2009
                          
                          $
                          37,772





Other
intangible assets consisted of the following:





September
      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
                    
                    $
                    13,236
                    
                    
                    $
                    -
                    
                    
                    $
                    13,236
                    
                    
                    $
                    11,851
                    
                    
                    $
                    -
                    
                    
                    $
                    11,851URL's
                    
                    
                    64
                    
                    
                    
                    -
                    
                    
                    
                    64
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Subtotal
      indefinite lived intangible assets
                    
                    
                    13,300
                    
                    
                    
                    -
                    
                    
                    
                    13,300
                    
                    
                    
                    11,851
                    
                    
                    
                    -
                    
                    
                    
                    11,851Definite
      lived intangible assets:Customer
      and advertiser relationships
                    
                    
                    5,709
                    
                    
                    
                    (3,101
                    )
                    
                    
                    2,608
                    
                    
                    
                    5,709
                    
                    
                    
                    (1,769
                    )
                    
                    
                    3,940Developed
      technology and patents
                    
                    
                    12,990
                    
                    
                    
                    (7,608
                    )
                    
                    
                    5,382
                    
                    
                    
                    12,280
                    
                    
                    
                    (5,683
                    )
                    
                    
                    6,597Trademarks
      and tradenames
                    
                    
                    129
                    
                    
                    
                    (115
                    )
                    
                    
                    14
                    
                    
                    
                    129
                    
                    
                    
                    (96
                    )
                    
                    
                    33Service contracts and
      other
                    
                    
                    3,622
                    
                    
                    
                    (2,612
                    )
                    
                    
                    1,010
                    
                    
                    
                    3,328
                    
                    
                    
                    (2,063
                    )
                    
                    
                    1,265Subtotal definite
      lived intangible assets
                    
                    
                    22,450
                    
                    
                    
                    (13,436
                    )
                    
                    
                    9,014
                    
                    
                    
                    21,446
                    
                    
                    
                    (9,611
                    )
                    
                    
                    11,835Total intangible
      assets
                    
                    $
                    35,750
                    
                    
                    $
                    (13,436
                    )
                    
                    $
                    22,314
                    
                    
                    $
                    33,297
                    
                    
                    $
                    (9,611
                    )
                    
                    $
                    23,686




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 $1.4 million and $916,000 for the three months ended September 30,
2009 and 2008, respectively, and $3.8 million and $2.8 million for the nine
months ended September 30, 2009 and 2008, respectively. Estimated annual
amortization expense is $5.1 million in 2009, $5.1 million in 2010, $2.2 million
in 2011, $187,000 in 2012, $187,000 in 2013, and $143,000
thereafter.


15




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.  On September 15, 2009, the United
States District Court for the Eastern District of Texas granted the motion made
by several defendants to transfer the case to the United States District Court
for the Northern District of California, and the claims made against The Knot
were transferred along with the claims made against most of the other
defendants. While 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
September 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.  At acquisition WedSnap had 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.




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.


16





Assets
      and Liabilities Acquired
                  
                  Amount(in
      thousands)Current
      assets
                  
                  $
                  2Property
      and equipment
                  
                  
                  8Intangible
      assets:Tradename
                  
                  
                  180Technology
                  
                  
                  460Non-compete
                  
                  
                  200Goodwill
                  
                  
                  2,413Total
      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 $3.4
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
                  
                  $
                  959Property
      and equipment
                  
                  
                  178Intangible
      assets:Tradename
                  
                  
                  970Technology
                  
                  
                  110Patent
                  
                  
                  60Pending
      patent
                  
                  
                  80Goodwill
                  
                  
                  1,082Total
      assets acquired
                  
                  
                  3,439Current
      liabilities
                  
                  
                  17Total
      liabilities assumed
                  
                  
                  17Total
      estimated cost
                  
                  $
                  3,422





The
goodwill of approximately $1.1 million that was acquired during the nine months
ended September 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 nine months ended September 30, 2009 and 2008 had
the acquisition been consummated on January 1, 2009.





9.
Income Taxes





As of
September 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.


17


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 September 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
September 30 2009, the Company has not recorded any interest and penalties
related to uncertain tax positions.





10.
Earnings Per Share





Basic
earnings per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share adjusts basic earnings per share for the effects of stock options,
restricted common stock, warrants and other potentially dilutive financial
instruments, only in the periods in which the effects are dilutive.





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





Three
      Months
                    Ended
      September 30,
                  
                  
                  Nine
      Months
                    Ended
      September 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008(in
      thousands, except for per share data)Net
      income
                  
                  $
                  771
                  
                  
                  $
                  2,240
                  
                  
                  $
                  1,174
                  
                  
                  $
                  5,110Total weighted-average basic shares
                  
                  
                  32,162
                  
                  
                  
                  31,572
                  
                  
                  
                  32,045
                  
                  
                  
                  31,424Dilutive securities:Restricted
      stock
                  
                  
                  508
                  
                  
                  
                  48
                  
                  
                  
                  292
                  
                  
                  
                  36Employee
      Stock Purchase Plan
                  
                  
                  12
                  
                  
                  
                  24
                  
                  
                  
                  16
                  
                  
                  
                  14Options/warrants
                  
                  
                  679
                  
                  
                  
                  1,065
                  
                  
                  
                  686
                  
                  
                  
                  1,158Total weighted-average diluted shares
                  
                  
                  33,361
                  
                  
                  
                  32,709
                  
                  
                  
                  33,039
                  
                  
                  
                  32,632Net
      income per share:Basic
                  
                  $
                  0.02
                  
                  
                  $
                  0.07
                  
                  
                  $
                  0.04
                  
                  
                  $
                  0.16Diluted
                  
                  $
                  0.02
                  
                  
                  $
                  0.07
                  
                  
                  $
                  0.04
                  
                  
                  $
                  0.16





The
calculation of earnings per share excludes a weighted average number of stock
options and restricted stock of 165,812 and 258,100 for the three and nine
months ended September 30, 2009, respectively, and 630,395 and 566,939 for the
three and nine months ended September 30, 2008, respectively, because to include
them in the calculation would be antidilutive.


18




11.
Subsequent Events





The
Company has evaluated subsequent events up through November 9,
2009, the date the financial statements were issued and determined there
were no subsequent events to report as of that date.


19




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.





-
            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.





20




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





Third
Quarter 2009





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





·
            Total
      net revenues increased 4.4% to $28.2
million.





·
            Local
      online advertising revenue increased 4.1% to $8.7
  million.





·
            Merchandise
      revenue increased 29.7% to $7.5 million primarily due to an acquisition of
      an e-commerce company in May 2009.





·
            Registry
      services revenue was flat.





·
            National
      online advertising revenue and publishing and other revenue declined by
      3.1% and 17.9% to $5.4 million and $3.1 million,
    respectively.





·
            Total
      operating expenses increased by $1.3 million to $20.4
      million.





·
            Interest
      income declined by $733,000 this quarter from the third quarter of 2008
      due to lower interest rates earned on our cash and
      investments.





·
            Net
      income for the third quarter was $771,000 or $0.02 per basic and diluted
      share, compared to net income of $2.2 million, or $0.07 per basic and
      diluted share in the third quarter of
2008.





·
            At
      September 30, 2009 we had total cash, cash equivalents, and investments of
      $128.9 million. Cash and cash equivalents were $82.9 million and
      investments were $46.0 million.  All our investments are
      short-term and consisted entirely of auction rate
    securities.





·
            At
      September 30, 2009 we had no
debt.


21




Results
of Operations





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





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





Three Months Ended September 30,2009
                  
                  
                  2008Amount
                  
                  
                  % of Net
                    Revenue
                  
                  
                  Amount
                  
                  
                  % of Net
                    Revenue(in
      thousands, except for per share data)Net
      revenues
                  
                  $
                  28,173
                  
                  
                  
                  100.0
                  %
                  
                  $
                  26,983
                  
                  
                  
                  100.0
                  %Cost
      of revenues
                  
                  
                  6,179
                  
                  
                  
                  21.9
                  
                  
                  
                  5,092
                  
                  
                  
                  18.9Gross
      profit
                  
                  
                  21,994
                  
                  
                  
                  78.1
                  
                  
                  
                  21,891
                  
                  
                  
                  81.1Operating
      expenses
                  
                  
                  20,401
                  
                  
                  
                  72.4
                  
                  
                  
                  19,148
                  
                  
                  
                  71.0Income
      from operations
                  
                  
                  1,593
                  
                  
                  
                  5.7
                  
                  
                  
                  2,743
                  
                  
                  
                  10.1Loss
      in equity interest
                  
                  
                  (19
                  )
                  
                  
                  (0.1
                  )
                  
                  
                  -
                  
                  
                  
                  -Interest
      and other income, net
                  
                  
                  93
                  
                  
                  
                  0.3
                  
                  
                  
                  826
                  
                  
                  
                  3.1Income
      before income taxes
                  
                  
                  1,667
                  
                  
                  
                  5.9
                  
                  
                  
                  3,569
                  
                  
                  
                  13.2Provision
      for income taxes
                  
                  
                  896
                  
                  
                  
                  3.2
                  
                  
                  
                  1,329
                  
                  
                  
                  5.0Net
      income
                  
                  $
                  771
                  
                  
                  
                  2.7
                  %
                  
                  $
                  2,240
                  
                  
                  
                  8.2
                  %Net
      earnings per share:Basic
                  
                  $
                  0.02
                  
                  
                  
                  
                  
                  
                  $
                  0.07Diluted
                  
                  $
                  0.02
                  
                  
                  
                  
                  
                  
                  $
                  0.07




22




Net
Revenues





Net
revenues increased to $28.2 million for the three months ended September 30,
2009, from $27.0 million for the three months ended September 30, 2008. The
following table sets forth revenues by category for the three months ended
September 30, 2009 compared to the three months ended September 30, 2008, the
percentage increase or decrease between those periods, and the percentage of
total net revenue that each category represented for those periods:





Three Months Ended September 30,Net Revenue
                  
                  
                  
                  
                  
                  Percentage of
                    Total Net Revenue2009
                  
                  
                  2008
                  
                  
                  Percentage
                    Increase/
                    (Decrease)
                  
                  
                  2009
                  
                  
                  2008(in
      thousands)National
      online sponsorship andadvertising
                  
                  $
                  5,436
                  
                  
                  $
                  5,608
                  
                  
                  
                  (3.1
                  )
      %
                  
                  
                  19.3
                  %
                  
                  
                  20.8
                  %Local
      online sponsorship andadvertising
                  
                  
                  8,686
                  
                  
                  
                  8,341
                  
                  
                  
                  4.1
                  
                  
                  
                  30.8
                  
                  
                  
                  30.9Total
      online sponsorship and advertising
                  
                  
                  14,122
                  
                  
                  
                  13,949
                  
                  
                  
                  1.2
                  
                  
                  
                  50.1
                  
                  
                  
                  51.7Registry
      services
                  
                  
                  3,445
                  
                  
                  
                  3,453
                  
                  
                  
                  (0.2
                  )
                  
                  
                  12.2
                  
                  
                  
                  12.8Merchandise
                  
                  
                  7,462
                  
                  
                  
                  5,751
                  
                  
                  
                  29.7
                  
                  
                  
                  26.5
                  
                  
                  
                  21.3Publishing
      and other
                  
                  
                  3,144
                  
                  
                  
                  3,830
                  
                  
                  
                  (17.9
                  )
                  
                  
                  11.2
                  
                  
                  
                  14.2Total
      net revenues
                  
                  $
                  28,173
                  
                  
                  $
                  26,983
                  
                  
                  
                  4.4
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %





Online sponsorship and
advertising - Net revenues increased 1.2% driven by increased local
online advertising partially offset by a decline in national online
advertising.  Local online sponsorship and advertising revenue
increased 4.1%, driven by an increased number of local vendor
clients.  As of September 30, 2009 we had over 16,000 local vendors
who display over 19,000 profiles compared to over 13,000 vendors who displayed
over 15,000 profiles as of September 30, 2008.  The average annual local
revenue per vendor has decreased 13.5% from September 30, 2008 to September 30,
2009 due to an increase in the number of vendors that advertise at a lower price
point.  National online sponsorship and advertising revenue decreased
3.1% driven by lower advertiser spending by national advertisers at The Nest,
The Knot and WeddingChannel websites.  This decrease was partially
offset by increased advertising spend for The Bump
website.





Registry services – Net
revenues were flat compared to the prior year quarter.





Merchandise – Net revenues
increased 29.7%, driven by revenues from an e-commerce company that we
acquired on May 1, 2009, which contributed $2.0 million of net revenue during
the quarter.





Publishing and other – Net
revenues decreased 17.9% driven by declines in advertising revenue related to
both our national and regional magazines.


23




Gross
Margin





The
following table presents the components of gross profit and gross margin for the
three months ended September 30, 2009 compared to the three months ended
September 30, 2008:




Three Months Ended September 30,2009
                    
                    
                    2008
                    
                    
                    Increase/(Decrease)Gross
                      Profit
                    
                    
                    Gross
                      Margin%
                    
                    
                    Gross
                      Profit
                    
                    
                    Gross
                      Margin%
                    
                    
                    Gross
                      Profit
                    
                    
                    Gross
                      Margin%(in
      thousands)Online
      sponsorship andadvertising
      (national &local)
                    
                    $
                    13,278
                    
                    
                    
                    94.0
                    %
                    
                    $
                    13,348
                    
                    
                    
                    95.7
                    %
                    
                    $
                    (70
                    )
                    
                    
                    (1.7
                    )
      %Registry
                    
                    
                    3,445
                    
                    
                    
                    100.0
                    
                    
                    
                    3,453
                    
                    
                    
                    100.0
                    
                    
                    
                    (8
                    )
                    
                    
                    -Merchandise
                    
                    
                    3,400
                    
                    
                    
                    45.6
                    
                    
                    
                    2,805
                    
                    
                    
                    48.8
                    
                    
                    
                    595
                    
                    
                    
                    (3.2
                    )Publishing
      and other
                    
                    
                    1,871
                    
                    
                    
                    59.5
                    
                    
                    
                    2,285
                    
                    
                    
                    59.7
                    
                    
                    
                    (414
                    )
                    
                    
                    (0.2
                    )Total
      gross profit
                    
                    $
                    21,994
                    
                    
                    
                    78.1
                    %
                    
                    $
                    21,891
                    
                    
                    
                    81.1
                    %
                    
                    $
                    103
                    
                    
                    
                    (3.0
                    )
      %





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
certain promotions conducted in 2009.  We had various promotions to
help drive sales and an event that provided customers with free shipping. We
also had increased shipping costs primarily due to expediting backordered
items.  The decrease in online sponsorship and advertising gross
margin was due to increased headcount in our online media advertising group
partially offset by slightly lower revenues year over year. The decrease in
publishing and other gross margin was driven by lower advertising sold in our
publications.





Operating
Expenses





Operating
expenses increased 6.5% to $20.4 million, compared to $19.1 million in 2008,
driven by increased stock-based compensation cost related to restricted stock
awards granted over the past twelve months, increased legal fees in
connection with our acquisition and equity interest activities, increased bad
debt expense, accelerated amortization of the Macy’s relationship intangible
asset and incremental operating expenses associated with our acquisitions
completed since the fourth quarter of 2008.  These increases were
offset by lower recruiting and outside consultant costs.  As a percentage
of net revenue, operating expenses were 72.4% and 71.0% during the three months
ended September 30, 2009 and 2008, respectively.





The
following table presents the components of operating expenses and the percentage
of revenue that each component represented for the three months ended September
30, 2009 compared to the three months ended September 30, 2008:




Three Months Ended September 30,Operating Expenses
                  
                  
                  
                  
                  
                  Percentage of
                    Total Net Revenue2009
                  
                  
                  2008
                  
                  
                  Percentage
                    Increase/
                    (Decrease)
                  
                  
                  2009
                  
                  
                  2008(in
      thousands)Product
      and content development
                  
                  $
                  5,010
                  
                  
                  $
                  5,296
                  
                  
                  
                  (5.4
                  )
       %
                  
                  
                  17.8
                  %
                  
                  
                  19.6
                  %Sales
      and marketing
                  
                  
                  8,116
                  
                  
                  
                  7,826
                  
                  
                  
                  3.7
                  
                  
                  
                  28.8
                  
                  
                  
                  29.0General
      and administrative
                  
                  
                  4,786
                  
                  
                  
                  4,005
                  
                  
                  
                  19.5
                  
                  
                  
                  17.0
                  
                  
                  
                  14.8Depreciation
      and amortization
                  
                  
                  2,489
                  
                  
                  
                  2,021
                  
                  
                  
                  23.2
                  
                  
                  
                  8.8
                  
                  
                  
                  7.6Total
      operating expenses
                  
                  $
                  20,401
                  
                  
                  $
                  19,148
                  
                  
                  
                  6.5
                  %
                  
                  
                  72.4
                  %
                  
                  
                  71.0
                  %




24




Product and Content Development
– The decrease in these expenseswas due to lower
consultant cost due to fewer information technology projects year over
year.  We had lower production costs due to timing of The Knot TV and
Nest TV programs.  Additionally, we had recruiting cost resulting from
information technology and editorial recruiting in 2008 that did not recur in
2009.  These decreases were offset by incremental operational expenses
related to our acquisitions completed since the fourth quarter of 2008 and
increased stock-based compensation cost related to restricted stock awards
granted over the past twelve months.





Sales and Marketing – The
increase in these expenses was primarily due to increased stock-based
compensation cost related to restricted stock awards granted over the past
twelve months and incremental operational expenses related to our acquisitions
completed since the fourth quarter of 2008. These increases were partially
offset by lower research costs and lower fulfillment cost on our national
publications.





General and Administrative –
The increase in these expenses was primarily due to legal fees in connection
with our acquisition and equity interest activities.  We also had
increased bad debt expense related to increased reserves given the current state
of the economy.  Additionally, we had increased employee related costs
to support our overall growth.





Depreciation and Amortization
–The increase in expense was primarily due to a reduction in the estimated
useful life of our Macy’s customer relationship intangible assets resulting in
increased amortization and incremental amortization from intangible assets
acquired from acquisitions completed since the fourth quarter of
2008.





Loss
in Equity Interest





Loss in
equity interest was $19,000 for the three months ended September 30,
2009.  The entity in which we have an equity interest was formed in
July 2009.  Therefore, there was no equity income or loss for the
three months ended September 30, 2008.





Interest
and Other Income





Interest
and other income, net was $93,000 for the three months ended September 30, 2009
as compared to $826,000 for three months ended September 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.





Provision
for Taxes on Income





The
effective tax rate for the three months ended September 30, 2009, was 53.7% as
compared to 37.2% for the three months ended September 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 proportion 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.


25




Nine
Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008





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





Nine Months Ended September 30,2009
                  
                  
                  2008Amount
                  
                  
                  % of Net
                    Revenue
                  
                  
                  Amount
                  
                  
                  % of Net
                    Revenue(in
      thousands, except for per share data)Net
      revenues
                  
                  $
                  81,361
                  
                  
                  
                  100.0
                  %
                  
                  $
                  79,455
                  
                  
                  
                  100.0
                  %Cost
      of revenues
                  
                  
                  17,313
                  
                  
                  
                  21.3
                  
                  
                  
                  15,327
                  
                  
                  
                  19.3Gross
      profit
                  
                  
                  64,048
                  
                  
                  
                  78.7
                  
                  
                  
                  64,128
                  
                  
                  
                  80.7Operating
      expenses
                  
                  
                  61,697
                  
                  
                  
                  75.8
                  
                  
                  
                  58,794
                  
                  
                  
                  74.0Income
      from operations
                  
                  
                  2,351
                  
                  
                  
                  2.9
                  
                  
                  
                  5,334
                  
                  
                  
                  6.7Loss
      in equity interest
                  
                  
                  (19
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Interest
      and other income, net
                  
                  
                  613
                  
                  
                  
                  0.8
                  
                  
                  
                  2,908
                  
                  
                  
                  3.7Income
      before income taxes
                  
                  
                  2,945
                  
                  
                  
                  3.7
                  
                  
                  
                  8,242
                  
                  
                  
                  10.4Provision
      for income taxes
                  
                  
                  1,771
                  
                  
                  
                  2.3
                  
                  
                  
                  3,132
                  
                  
                  
                  3.9Net
      income
                  
                  $
                  1,174
                  
                  
                  
                  1.4
                  %
                  
                  $
                  5,110
                  
                  
                  
                  6.5
                  %Net
      earnings per share:Basic
                  
                  $
                  0.04
                  
                  
                  
                  
                  
                  
                  $
                  0.16Diluted
                  
                  $
                  0.04
                  
                  
                  
                  
                  
                  
                  $
                  0.16




26




Net
Revenues





Net
revenues increased to $81.4 million for the nine months ended September 30,
2009, from $79.5 million for the nine months ended September 30, 2008. The
following table sets forth revenues by category for the nine months ended
September 30, 2009 compared to the nine months ended September 30, 2008, the
percentage increase or decrease between those periods, and the percentage of
total net revenue that each category represented for those
periods:




Nine Months Ended September 30,Net Revenue
                  
                  
                  
                  
                  
                  Percentage of
                    Total Net Revenue2009
                  
                  
                  2008
                  
                  
                  Percentage
                    Increase/
                    (Decrease)
                  
                  
                  2009
                  
                  
                  2008(in
      thousands)National
      online sponsorship andadvertising
                  
                  $
                  15,250
                  
                  
                  $
                  15,699
                  
                  
                  
                  (2.9
                  )
      %
                  
                  
                  18.7
                  %
                  
                  
                  19.8
                  %Local
      online sponsorship andadvertising
                  
                  
                  25,912
                  
                  
                  
                  24,624
                  
                  
                  
                  5.2
                  
                  
                  
                  31.8
                  
                  
                  
                  31.0Total
      online sponsorship andadvertising
                  
                  
                  41,162
                  
                  
                  
                  40,323
                  
                  
                  
                  2.1
                  
                  
                  
                  50.5
                  
                  
                  
                  50.8Registry
      services
                  
                  
                  8,144
                  
                  
                  
                  8,520
                  
                  
                  
                  (4.4
                  )
                  
                  
                  10.0
                  
                  
                  
                  10.7Merchandise
                  
                  
                  20,737
                  
                  
                  
                  17,478
                  
                  
                  
                  18.6
                  
                  
                  
                  25.5
                  
                  
                  
                  22.0Publishing
      and other
                  
                  
                  11,318
                  
                  
                  
                  13,134
                  
                  
                  
                  (13.8
                  )
                  
                  
                  14.0
                  
                  
                  
                  16.5Total
      net revenues
                  
                  $
                  81,361
                  
                  
                  $
                  79,455
                  
                  
                  
                  2.4
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %





Online sponsorship and
advertising - Net revenues increased 2.1% driven by increased local
vendor online advertising programs partially offset by decreased revenue from
national advertising programs.  Local online sponsorship and
advertising revenue increased 5.2%, driven by an increased number of local
vendor clients.  As of September 30, 2009 we had over 16,000 local
vendors who display over 19,000 profiles compared to over 13,000 vendors who
displayed over 15,000 profiles as of September 30, 2008.  The average
local revenue per vendor has decreased 13.5% from September 30, 2008 to
September 30, 2009 due to an increase in the number of vendors that advertise at
a lower price point. National online sponsorship and advertising revenue
decreased 2.9%, driven by lower advertiser spending by national advertisers at
WeddingChannel and The Knot websites.  This decrease was partially
offset by increased advertising spend for The Bump
website.





Registry services – Net
revenues decreased 4.4%, driven by a net decrease in sales year-to-date by our
retail registry partners resulting in lower commissions earned.





Merchandise – Net revenues
increased 18.6%, driven by revenues from an e-commerce company that we
acquired on May 1, 2009, which contributed $3.1 million of net
revenue.





Publishing and other – Net
revenues decreased 13.8% driven by declines in advertising revenue in our
regional and national magazines.  These decreases were partially
offset by advertising revenues fromThe Bump
magazines.  We acquired The Bump Media in February 2008 and did not
have any publications during the first half of 2008.


27




Gross
Margin





The
following table presents the components of gross profit and gross margin for
nine months ended September 30, 2009 compared to the nine months ended September
30, 2008:




Nine Months Ended September 30,2009
                  
                  
                  2008
                  
                  
                  Increase/(Decrease)Gross
                    Profit
                  
                  
                  Gross
                    Margin%
                  
                  
                  Gross
                    Profit
                  
                  
                  Gross
                    Margin%
                  
                  
                  Gross
                    Profit
                  
                  
                  Gross
                    Margin%(in
      thousands)Online
      sponsorship andadvertising (national &local)
                  
                  $
                  39,087
                  
                  
                  
                  95.0
                  %
                  
                  $
                  38,740
                  
                  
                  
                  96.1
                  %
                  
                  $
                  347
                  
                  
                  
                  (1.1
                  )
      %Registry
                  
                  
                  8,144
                  
                  
                  
                  100.0
                  
                  
                  
                  8,520
                  
                  
                  
                  100.0
                  
                  
                  
                  (376
                  )
                  
                  
                  -Merchandise
                  
                  
                  10,099
                  
                  
                  
                  48.7
                  
                  
                  
                  9,003
                  
                  
                  
                  51.5
                  
                  
                  
                  1,096
                  
                  
                  
                  (2.8
                  )Publishing
      and other
                  
                  
                  6,718
                  
                  
                  
                  59.4
                  
                  
                  
                  7,865
                  
                  
                  
                  59.9
                  
                  
                  
                  (1,147
                  )
                  
                  
                  (0.5
                  )Total
      gross profit
                  
                  $
                  64,048
                  
                  
                  
                  78.7
                  %
                  
                  $
                  64,128
                  
                  
                  
                  80.7
                  %
                  
                  $
                  (80
                  )
                  
                  
                  (2.0
                  )
      %





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
certain promotions conducted in 2009.  We had various promotions to
help drive sales and an event that provided customers with free shipping. We
also had increased shipping costs primarily due to expediting backordered
items.  The decrease in online sponsorship and advertising gross
margin was due to increased headcount in our online media advertising group
partially offset by slightly lower revenues year over year. The decrease in
publishing and other gross margin was driven by lower advertising sold in our
publications.





Operating
Expenses





Operating expenses increased
4.9% to $61.7million, compared to $58.8million in 2008, driven byincreased bad debt expense,accelerated amortization of
the Macy’s relationship intangible
assets,increasedstock-based compensation cost related to
restricted stock awards
granted over the past twelve months, increasedlegal fees in connection with our
acquisition and equity interest activities, increased compensation due to
increased employee headcountand incremental operating expenses
associated with our acquisitionscompletedsince the fourth quarter of 2008 and our
software development center in China. These increases were partially
offset by declines in travel and entertainment and recruiting
expense.  As a percentage of net revenue, operating expenses were
75.8% and 74.0% during theninemonths endedSeptember30, 2009 and 2008,
respectively.





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




Nine Months Ended September 30,Operating Expenses
                    
                    
                    
                    
                    
                    Percentage of
                      Total Net Revenue2009
                    
                    
                    2008
                    
                    
                    Percentage
                      Increase/
                      (Decrease)
                    
                    
                    2009
                    
                    
                    2008(in
      thousands)Product
      and content development
                    
                    $
                    15,244
                    
                    
                    $
                    15,285
                    
                    
                    
                    (0.3
                    )
      %
                    
                    
                    18.7
                    %
                    
                    
                    19.2
                    %Sales
      and marketing
                    
                    
                    23,775
                    
                    
                    
                    23,022
                    
                    
                    
                    3.3
                    
                    
                    
                    29.2
                    
                    
                    
                    29.0General
      and administrative
                    
                    
                    15,008
                    
                    
                    
                    14,027
                    
                    
                    
                    7.0
                    
                    
                    
                    18.4
                    
                    
                    
                    17.7Depreciation
      and amortization
                    
                    
                    7,670
                    
                    
                    
                    6,460
                    
                    
                    
                    18.7
                    
                    
                    
                    9.5
                    
                    
                    
                    8.1Total
      operating expenses
                    
                    $
                    61,697
                    
                    
                    $
                    58,794
                    
                    
                    
                    4.9
                    %
                    
                    
                    75.8
                    %
                    
                    
                    74.0
                    %




28




Product and Content Development
– The decrease in these expenseswas primarily due lower
consultant and computer costs due to fewer information technology projects year
over year, as well as lower recruiting costs.  In 2008 we had
increased information technology and editorial staffing initiatives that did not
recur in 2009. These favorable variances were offset by increased employee
compensation and related costs due to our increased headcount in information
technology and editorial.  We had incremental operational expenses
related to our acquisitions completed since the fourth quarter of
2008.  Additionally, we also had increased stock-based compensation
cost related to restricted stock awards granted over the past
twelve months.





Sales and Marketing – The
increase in these expenses was primarily due to increased headcount and
promotional costs in national sales and sales support staff departments to
support our growth initiatives.  We also had increased stock-based
compensation cost related to restricted stock awards granted over the past
twelve months.  Additionally, we had incremental operational expenses
related to our acquisitions since the fourth quarter of 2008.





General and Administrative –
The increase in these expenses was primarily due to higher bad debt expense
related to increased reserves, given the current state of the
economy.  We also had increased employee related costs to support our
overall growth.   Additionally, we had incremental operational
expenses related to our acquisitions completed since the fourth quarter of 2008.
These increases were offset by lower recruiting fees related to staffing
initiatives in 2008 that did not recur in 2009.





Depreciation and Amortization
–The increase in expense was primarily due to a reduction in the estimated
useful life of our Macy’s customer relationship intangible assets resulting in
increased amortization and incremental amortization from intangible assets
acquired from acquisitions completed since the fourth quarter of
2008.   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 $613,000 for the nine months ended September 30, 2009
as compared to $2.9 million for the nine months ended September 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.





Loss
in Equity Interest





Loss
in equity interest was $19,000 for the nine months ended September 30,
2009.  The entity in which we have an equity interest was formed in
July 2009. Therefore, there was no equity income or loss for the nine months
ended September 30, 2008.


Provision
for Taxes on Income





The
effective tax rate for the nine months ended September 30, 2009, was 60.1% as
compared to 38.0% for the nine months ended September 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 proportion 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.


29




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 September 30, 2009,
we had $82.9 million in cash and cash equivalents compared to $69.0 million at
September 30, 2008.





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





For
      the Nine Months Ended
                        September
      30,2009
                      
                      
                      2008(in
      thousands)Net
      cash provided by operating activities
                      
                      $
                      11,855
                      
                      
                      $
                      18,092Net
      cash provided by investing activities
                      
                      
                      7,887
                      
                      
                      
                      14,497Net
      cash provided by financing activities
                      
                      
                      1,641
                      
                      
                      
                      3,310Increase
      in cash and cash equivalents
                      
                      $
                      21,383
                      
                      
                      $
                      35,899





Operating
Activities





Net cash
provided by operating activities was $11.9 million for the nine months ended
September 30, 2009. This resulted primarily from net income for the period of
$1.2 million, depreciation, amortization, stock-based compensation, deferred
income taxes and other non cash items of $14.4 million.  These sources
of cash were offset by increased accounts receivable of $2.6 million due to
increased billings, increased accounts receivable from affiliates of
$595,000 due to open billings to Macy’s for registry related to
the seasonality in our revenues from them.  Additionally, we had
increased inventory of $450,000 to support higher seasonal sales.





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





Investing
Activities





Net cash
provided by investing activities was $7.9 million for the nine months ended
September 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 $6.1 million of proceeds from the redemption of long-term
auction rate securities.  These sources of cash were offset by
business acquisitions of $5.9 million, net of cash acquired, the
purchase of property and equipment of $1.8 million and our contribution of
$500,000 to the entity in which we have an equity interest.





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


30




Financing
Activities





Net cash
provided by financing activities was $1.6 million for the nine months ended
September 30, 2009.  This was primarily due to excess tax
benefits from stock-based awards of $892,000.  We had proceeds from
the issuance of common stock in connection with the exercise of vested stock
options and warrants and through our employee stock purchase plan of $860,000.
 We had proceeds from the issuance of common stock in connection with the
exercise of vested options and our employee stock purchase plan of
$312,000.  These sources of cash were partially offset by common stock
repurchases of $423,000 in connection with the surrender of restricted shares by
employees to satisfy tax withholding obligations related to the vesting of the
stock awards.  .





Net cash
provided by financing activities was $3.3 million for the nine months ended
September 30, 2008.  This was primarily due to excess tax benefits
from stock-based awards of $2.1 million.  We had proceeds from the
issuance of common stock in connection with the exercise of stock options and
warrants and through our employee stock purchase plan of $1.1 million. We had
proceeds from the issuance of common stock in connection with the exercise of
vested options and our employee stock purchase plan of
$380,000.  These sources of cash were offset by repurchases of
$282,000 for 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
September 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 September 30, 2009, there have
been no material changes to any of the critical accounting policies contained
therein.





Recently
Adopted Accounting Pronouncements





The
adoption of the following accounting standards and updates during the first nine
months of 2009 did not result in a material impact to our condensed consolidated
financial statements:





On
January 1, 2008, we adopted the accounting standard that relates to fair
value and establishes a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands disclosures about fair
value measurements. This standard 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.


31





On
January 1, 2008 we adopted the accounting standard that 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. This standard also
establishes additional disclosure requirements. Through September 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 our investment providers, entitling us 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 to the condensed consolidated financial statements for a discussion
of the application of this accounting standard.





On
January 1, 2009 we adopted the accounting standard related to business
combinations, which 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. The accounting standard also establishes disclosure
requirements to enable the evaluation of the nature and financial effects of the
business combination.





On
January 1, 2009 we adopted the accounting standard related to noncontrolling
interests in consolidated financial statements, which 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.  This standard also establishes
disclosure requirements that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling
owners.





On January 1, 2009weadoptedthe accounting standard regarding the
determination of the useful life of intangible assets that removes that
requirement to consider whether anintangible asset can be renewed without
substantial cost or material modifications to the existing terms and conditions,
and replaces it with a requirement that an entity consider its own historical
experience in renewing similar arrangements, or a considerations of market participant
assumptions in the absence of historical experience.  This standardalso 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
extendthe
arrangement.
 
 On April 9, 2009,we adopted the accounting standard that
addresses recognition and presentation of other than temporary
impairments.  This standardreplacedthe existing requirement that the
entity’s management assert it has both the
intent and ability to hold
an impaired security until recovery with a requirement that management
assert(a) it does not have
the intent to sell the security, and (b) it is more likely than not it will have
to sell the security before recovery of its cost basis.  The application of this
standard is limited to debt securities andis effective for interim and annual
periods ending after June 15, 2009.




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





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





New
Accounting Pronouncements





On June
12, 2009, the accounting standard relating to the transfers and servicing of
financial assets and extinguishment of liabilities was updated to require
additional information about transfers of financial assets, including
securitization transactions, and where companies have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
“qualifying special-purpose entity,” changes the requirements for derecognizing
financial assets, and requires additional disclosures. This standard update is
effective as of January 1, 2010.  Earlier application is prohibited.
We are currently evaluating the potential impact this new standard will have on
its consolidated financial statements.





On June
12, 2009, the accounting standard regarding the requirements of consolidation
accounting for variable interest entities was updated to require an enterprise
to perform an analysis to determine whether the entity's variable interest or
interests give it a controlling interest in a variable interest entity. This
standard update is effective for all interim and annual reporting periods as of
January 1, 2010. We are currently evaluating the impact this new standard will
have on its consolidated financial statements.


32





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 $82.9 million as of September 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
September 30, 2009 we held $46.0 million of investments in auction rate
securities (“ARS”).  All of which are classified as short-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 September 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 $45.5 million, which represents a decline in value of $537,000
from par. The assumptions used in preparing the discounted cash flow model
include estimates of, based on data available as of September 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.





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
September 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 September 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.


33





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.  On September 15, 2009, the United States District Court for
the Eastern District of Texas granted the motion made by several defendants to
transfer the case to the United States District Court for the Northern District
of California, and the claims made against The Knot were transferred along with
the claims made against most of the other defendants. While we intend to
vigorously defend against the claims asserted and pursue our counter-claims,
this case is in the preliminary stages of litigation and, as a result, the
ultimate outcome of this case and any potential financial impact on us are not
reasonably determinable at this time.





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





ITEM 1A.  Risk Factors





Risks
that could have a negative impact on our business, results of operations and
financial condition include without limitation, (i) our online wedding-related
and other websites may fail to generate sufficient 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.




34




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





Issuer
Purchases of Equity Securities





Period
                
                (a) Total Numberof
                  SharesPurchased
                
                
                (b) Average
                  Price Paidper
                  Share
                
                
                ( c) Total Number of
                  Shares Purchased as
                  Part of Publicly
                  Announced Plans or
                  Programs
                
                
                (d) MaximumNumber
                  of SharesThat May
                  Yet BePurchased
                  Underthe Plans or
                  ProgramsJuly
      1 to July 31, 2009
                
                
                10,755
                
                
                $
                8.60
                
                
                
                n/a
                
                
                
                n/aAugust
      1 to August 31, 2009
                
                
                5,286
                
                
                $
                9.67
                
                
                
                n/a
                
                
                
                n/aSeptember
      1 to September 30, 2009
                
                
                4,676
                
                
                $
                10.60
                
                
                
                n/a
                
                
                
                n/aTotal
                
                
                20,717
                
                
                
                
                
                
                
                -
                
                
                
                -





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).





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:  November
      9, 2009
            THE
      KNOT, INC.By:
            /s/
      John P. MuellerJohn
      P. MuellerChief
      Financial Officer(Principal
      Financial Officer and Duly AuthorizedOfficer)




36




EXHIBIT
INDEX





Number
            
            Description10.25
            
            Suspension
      to Name And Likeness Licensing Agreement between The Knot, Inc. and Carley
      Roney dated as of July 1, 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