U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2006

or

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

FOR
THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION
FILE NUMBER: 000-28271

THE KNOT, INC.(Exact Name of
Registrant as Specified in its Charter)

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

462
Broadway, 6th Floor
New York, New York 10013(Address of Principal
Executive Officer and Zip Code)

(212)
219-8555(Registrants
Telephone Number, Including Area Code)

Indicate by check whether the registrant: (1) filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

| |       |      | 
| | ----- | ---- | 
| | Yes x | No o | 

Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of accelerated filer and large accelerated filer in Rule 12b-2 of
the Exchange Act. (Check one):

|                            |                     |                        
|--------------------------- | ------------------- | -----------------------
|Large accelerated filer
   ̈ | Accelerated filer  ̈ | Non-accelerated filer x

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

| |       |      | 
| | ----- | ---- | 
| | Yes o | No x | 

As of August 7, 2006, there were 26,383,664 shares of
the registrants common stock outstanding.

---



|         |                                                                                                                    |               | 
|-------- | ------------------------------------------------------------------------------------------------------------------ | ------------- | 
|         |                                                                                                                    | Page
  Number
|         |                                                                                                                    |              
|         |                                                                                                                    |               | 
|PART I   | FINANCIAL INFORMATION                                                                                              |               | 
|         |                                                                                                                    |               | 
|Item 1:  | Financial
  Statements (Unaudited):                                                                                |               | 
|         |                                                                                                                    |               | 
|         | Condensed Consolidated Balance
  Sheets as of June 30, 2006 and December 31, 2005                                  | 3             | 
|         | Condensed Consolidated Statements of
  Operations for the three months and six months ended June 30, 2006 and 2005 | 4             | 
|         | Condensed Consolidated Statements of
  Cash Flows for the six months ended June 30, 2006 and 2005                  | 5             | 
|         | Notes to Condensed Consolidated
  Financial Statements                                                             | 6             | 
|         |                                                                                                                    |               | 
|Item 2:  | Managements Discussion and Analysis
  of Financial Condition and Results of Operations                            | 15            | 
|         |                                                                                                                    |               | 
|Item 3:  | Quantitative and Qualitative
  Disclosures About Market Risk                                                       | 26            | 
|         |                                                                                                                    |               | 
|Item 4:  | Controls and Procedures                                                                                            | 26            | 
|         |                                                                                                                    |               | 
|PART II  | OTHER INFORMATION                                                                                                  |               | 
|         |                                                                                                                    |               | 
|Item 1:  | Legal Proceedings                                                                                                  | 26            | 
|         |                                                                                                                    |               | 
|Item 1A: | Risk Factors                                                                                                       | 27            | 
|         |                                                                                                                    |               | 
|Item 4:  | Submission of Matters to a Vote of
  Security Holders                                                              | 32            | 
|         |                                                                                                                    |               | 
|Item 6:  | Exhibits                                                                                                           | 32            | 

2

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Item 1. Financial Statements (Unaudited)

THE KNOT, INC.CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                         |  |                               |             |                                |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ----------- | ------------------------------ | - | ----------- | -
|                                                                                                                                                                                         |  | June 30,
  2006
  (Unaudited) |             | December 31,
  2005
  (Note 1) |  
|                                                                                                                                                                                         |  |                               |             |                                |  
|                                                                                                                                                                                         |  |                               |             |                                |   |             |  
|ASSETS                                                                                                                                                                                   |  |                               |             |                                |   |             |  
|Current assets:                                                                                                                                                                          |  |                               |             |                                |   |             |  
|Cash and cash
  equivalents                                                                                                                                                              |  | $                             | 24,662,169  |                                | $ | 17,685,067  |  
|Short-term
  investments                                                                                                                                                                 |  |                               | 9,600,000   |                                |   | 11,550,000  |  
|Accounts
  receivable, net of allowances of $481,632 and $379,464 at June 30, 2006 and December
  31, 2005, respectively                                                                 |  |                               | 4,782,900   |                                |   | 4,804,581   |  
|Inventories                                                                                                                                                                              |  |                               | 1,785,425   |                                |   | 1,622,056   |  
|Deferred
  production and marketing costs                                                                                                                                                |  |                               | 623,317     |                                |   | 419,555     |  
|Other current
  assets                                                                                                                                                                   |  |                               | 815,112     |                                |   | 881,114     |  
|                                                                                                                                                                                         |  |                               |             |                                |   |             |  
|Total current
  assets                                                                                                                                                                   |  |                               | 42,268,923  |                                |   | 36,962,373  |  
|Property and
  equipment, net                                                                                                                                                            |  |                               | 4,055,997   |                                |   | 2,986,354   |  
|Intangible
  assets, net                                                                                                                                                                 |  |                               | 9,077,421   |                                |   | 9,110,269   |  
|Other assets                                                                                                                                                                             |  |                               | 1,453,622   |                                |   | 325,927     |  
|                                                                                                                                                                                         |  |                               |             |                                |   |             |  
|Total assets                                                                                                                                                                             |  | $                             | 56,855,963  |                                | $ | 49,384,923  |  
|                                                                                                                                                                                         |  |                               |             |                                |   |             |  
|LIABILITIES
AND  STOCKHOLDERS EQUITY                                                                                                                                                    |  |                               |             |                                |   |             |  
|Current
  liabilities:                                                                                                                                                                   |  |                               |             |                                |   |             |  
|Accounts payable
  and accrued expenses                                                                                                                                                  |  | $                             | 5,018,166   |                                | $ | 5,574,078   |  
|Deferred revenue                                                                                                                                                                         |  |                               | 8,784,900   |                                |   | 7,816,435   |  
|Current portion
  of long-term debt                                                                                                                                                      |  |                               | 46,651      |                                |   | 46,651      |  
|                                                                                                                                                                                         |  |                               |             |                                |   |             |  
|Total current
  liabilities                                                                                                                                                              |  |                               | 13,849,717  |                                |   | 13,437,164  |  
|Long term debt                                                                                                                                                                           |  |                               | 105,906     |                                |   | 105,906     |  
|Other
  liabilities                                                                                                                                                                      |  |                               | 479,636     |                                |   | 504,565     |  
|                                                                                                                                                                                         |  |                               |             |                                |   |             |  
|Total
  liabilities                                                                                                                                                                      |  |                               | 14,435,259  |                                |   | 14,047,635  |  
|Commitments and
  contingencies                                                                                                                                                          |  |                               |             |                                |   |             |  
|Stockholders
  equity:                                                                                                                                                                  |  |                               |             |                                |   |             |  
|Preferred stock,
  $0.001 par value; 5,000,000 shares authorized; no shares issued and
  outstanding                                                                                     |  |                               |            |                                |   |            |  
|Common stock,
  $.01 par value; 100,000,000 shares, authorized;  23,448,397
  shares and 23,049,416 shares issued and outstanding at June 30, 2006 and December
  31, 2005, respectively |  |                               | 234,484     |                                |   | 230,494     |  
|Additional
  paid-in capital                                                                                                                                                             |  |                               | 78,837,169  |                                |   | 77,550,250  |  
|Deferred
  compensation                                                                                                                                                                  |  |                               |            |                                |   | (221,034    | )
|Accumulated
  deficit                                                                                                                                                                    |  |                               | (36,650,949 | )                              |   | (42,222,422 | )
|                                                                                                                                                                                         |  |                               |             |                                |   |             |  
|Total
  stockholders equity                                                                                                                                                             |  |                               | 42,420,704  |                                |   | 35,337,288  |  
|                                                                                                                                                                                         |  |                               |             |                                |   |             |  
|Total
  liabilities and stockholders equity                                                                                                                                             |  | $                             | 56,855,963  |                                | $ | 49,384,923  |  
|                                                                                                                                                                                         |  |                               |             |                                |   |             |  

See accompanying notes.

3

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THE KNOT, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

|                                                       |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|------------------------------------------------------ |  | --------------------------- | ---------- | ------------------------- | - | ---------- |  | ---- | ---------- |  | - | ---------- | 
|                                                       |  | Three Months Ended June 30, |            | Six Months Ended June 30, |  
|                                                       |  |                             |            |                           |  
|                                                       |  | 2006                        |            | 2005                      |   | 2006       |  | 2005 |           
|                                                       |  |                             |            |                           |   |            |  |      |           
|Net revenues:                                          |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|Online sponsorship and advertising                     |  | $                           | 8,354,105  |                           | $ | 6,054,693  |  | $    | 16,153,310 |  | $ | 11,829,477 | 
|Merchandise                                            |  |                             | 4,897,203  |                           |   | 4,066,734  |  |      | 8,035,013  |  |   | 7,452,953  | 
|Publishing and other                                   |  |                             | 4,477,627  |                           |   | 3,444,954  |  |      | 8,291,965  |  |   | 6,216,608  | 
|                                                       |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|                                                       |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|Total net revenues                                     |  | $                           | 17,728,935 |                           | $ | 13,566,381 |  | $    | 32,480,288 |  | $ | 25,499,038 | 
|Cost of revenues:                                      |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|Online sponsorship and advertising                     |  | $                           | 294,819    |                           | $ | 156,707    |  | $    | 607,767    |  | $ | 311,549    | 
|Merchandise                                            |  |                             | 2,337,972  |                           |   | 1,859,865  |  |      | 3,888,163  |  |   | 3,459,936  | 
|Publishing and other                                   |  |                             | 1,425,165  |                           |   | 858,836    |  |      | 2,690,979  |  |   | 2,015,417  | 
|                                                       |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|Total cost of revenues                                 |  | $                           | 4,057,956  |                           | $ | 2,875,408  |  | $    | 7,186,909  |  | $ | 5,786,902  | 
|                                                       |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|Gross profit                                           |  |                             | 13,670,979 |                           |   | 10,690,973 |  |      | 25,293,379 |  |   | 19,712,136 | 
|Operating expenses:                                    |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|Product and content development                        |  |                             | 1,828,038  |                           |   | 1,773,542  |  |      | 3,613,699  |  |   | 3,454,482  | 
|Sales and marketing                                    |  |                             | 4,368,057  |                           |   | 3,529,716  |  |      | 9,082,605  |  |   | 7,157,270  | 
|General and administrative                             |  |                             | 3,326,193  |                           |   | 3,856,310  |  |      | 6,588,009  |  |   | 6,974,463  | 
|Depreciation and amortization                          |  |                             | 452,629    |                           |   | 280,022    |  |      | 824,802    |  |   | 560,619    | 
|                                                       |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|Total operating expenses                               |  |                             | 9,974,917  |                           |   | 9,439,590  |  |      | 20,109,115 |  |   | 18,146,834 | 
|                                                       |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|Income from operations                                 |  |                             | 3,696,062  |                           |   | 1,251,383  |  |      | 5,184,264  |  |   | 1,565,302  | 
|Interest income, net                                   |  |                             | 363,240    |                           |   | 166,929    |  |      | 663,462    |  |   | 297,338    | 
|                                                       |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|Income before income taxes                             |  |                             | 4,059,302  |                           |   | 1,418,312  |  |      | 5,847,726  |  |   | 1,862,640  | 
|Provision for income taxes                             |  |                             | 173,177    |                           |   | 78,703     |  |      | 276,253    |  |   | 113,923    | 
|                                                       |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|Net income                                             |  | $                           | 3,886,125  |                           | $ | 1,339,609  |  | $    | 5,571,473  |  | $ | 1,748,717  | 
|                                                       |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|Net earnings per sharebasic                           |  | $                           | 0.17       |                           | $ | 0.06       |  | $    | 0.24       |  | $ | 0.08       | 
|                                                       |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|Net earnings per sharediluted                         |  | $                           | 0.15       |                           | $ | 0.05       |  | $    | 0.22       |  | $ | 0.07       | 
|                                                       |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|Weighted average number of common shares
  outstanding |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|Basic                                                  |  |                             | 23,173,216 |                           |   | 22,654,055 |  |      | 23,129,238 |  |   | 22,532,971 | 
|                                                       |  |                             |            |                           |   |            |  |      |            |  |   |            | 
|Diluted                                                |  |                             | 25,783,965 |                           |   | 24,717,359 |  |      | 25,681,506 |  |   | 24,507,398 | 
|                                                       |  |                             |            |                           |   |            |  |      |            |  |   |            | 

See accompanying notes.

4

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THE KNOT, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

|                                                                                    |  |                           |            |      |   |             |  
|----------------------------------------------------------------------------------- |  | ------------------------- | ---------- | ---- | - | ----------- | -
|                                                                                    |  | Six Months Ended June 30, |           
|                                                                                    |  |                           |           
|                                                                                    |  | 2006                      |            | 2005 |  
|                                                                                    |  |                           |            |      |  
|Operating activities                                                                |  |                           |            |      |   |             |  
|Net income                                                                          |  | $                         | 5,571,473  |      | $ | 1,748,717   |  
|Adjustments to reconcile net income to net
  cash provided by operating activities: |  |                           |            |      |   |             |  
|Depreciation and amortization                                                       |  |                           | 763,035    |      |   | 480,552     |  
|Amortization of intangibles                                                         |  |                           | 61,767     |      |   | 80,067      |  
|Stock-based compensation                                                            |  |                           | 689,166    |      |   |            |  
|Non-cash services expense                                                           |  |                           | 297,222    |      |   | 218,790     |  
|Reserve for returns                                                                 |  |                           | 1,271,691  |      |   | 1,055,450   |  
|Allowance for doubtful accounts                                                     |  |                           | 20,414     |      |   | (84,746     | )
|Other non-cash charges                                                              |  |                           | 95,693     |      |   | (33,895     | )
|Changes in operating assets and liabilities
  (net of business acquired):           |  |                           |            |      |   |             |  
|Accounts receivable                                                                 |  |                           | (1,270,424 | )    |   | (1,280,572  | )
|Inventories                                                                         |  |                           | (259,062   | )    |   | (25,642     | )
|Deferred production and marketing costs                                             |  |                           | (203,762   | )    |   | (85,772     | )
|Other current assets                                                                |  |                           | 66,002     |      |   | 97,511      |  
|Other assets                                                                        |  |                           | (1,127,695 | )    |   | 5,359       |  
|Accounts payable and accrued expenses                                               |  |                           | (455,695   | )    |   | 667,571     |  
|Deferred revenue                                                                    |  |                           | 939,546    |      |   | 829,289     |  
|Other liabilities                                                                   |  |                           | (24,929    | )    |   | (7,064      | )
|                                                                                    |  |                           |            |      |   |             |  
|Net cash provided by operating
activities                                           |  |                           | 6,434,442  |      |   | 3,665,615   |  
|                                                                                    |  |                           |            |      |   |             |  
|Investing activities                                                                |  |                           |            |      |   |             |  
|Purchases of property and equipment                                                 |  |                           | (1,932,895 | )    |   | (1,137,658  | )
|Purchases of short-term investments                                                 |  |                           | (1,500,000 | )    |   | (15,050,000 | )
|Proceeds from sales of short-term
  investments                                     |  |                           | 3,450,000  |      |   | 24,600,000  |  
|Acquisition of business, net of cash
  acquired                                     |  |                           |           |      |   | (621,105    | )
|                                                                                    |  |                           |            |      |   |             |  
|Net cash provided by investing
activities                                           |  |                           | 17,105     |      |   | 7,791,237   |  
|                                                                                    |  |                           |            |      |   |             |  
|Financing activities                                                                |  |                           |            |      |   |             |  
|Proceeds from issuance of common stock                                              |  |                           | 95,511     |      |   | 59,242      |  
|Proceeds from exercise of stock options                                             |  |                           | 430,044    |      |   | 650,610     |  
|                                                                                    |  |                           |            |      |   |             |  
|Net cash provided by financing
activities                                           |  |                           | 525,555    |      |   | 709,852     |  
|                                                                                    |  |                           |            |      |   |             |  
|Increase in cash and cash equivalents                                               |  |                           | 6,977,102  |      |   | 12,166,704  |  
|Cash and cash equivalents at beginning of
  period                                  |  |                           | 17,685,067 |      |   | 3,487,818   |  
|                                                                                    |  |                           |            |      |   |             |  
|Cash and cash equivalents at end of period                                          |  | $                         | 24,662,169 |      | $ | 15,654,522  |  
|                                                                                    |  |                           |            |      |   |             |  

See accompanying notes.

5

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THE KNOT, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND NATURE OF
OPERATIONS

The
accompanying unaudited condensed consolidated financial statements have been
prepared by the Companys management in accordance with U.S. generally accepted
accounting principles for interim financial information and applicable rules
and regulations of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and disclosures required by U.S. generally
accepted accounting principles for complete financial statements. In the
opinion of the management, all adjustments (consisting only of normally
recurring adjustments) considered necessary for a fair presentation have been
included.

The
accompanying balance sheet and financial information as of December 31, 2005 is
derived from audited financial statements but does not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements. The results of operations for the
six months ended June 30, 2006 are not necessarily indicative of the results
that may be expected for the full year. These financial statements should be
read in conjunction with the Companys audited financial statements and notes
thereto included in its Annual Report on Form 10-K for the year ended December
31, 2005.

The
Company has only achieved operating income in recent periods and has an
accumulated deficit of $36,650,949 as of June 30, 2006. The Company believes
that its current cash and cash equivalents will be sufficient to fund its
working capital and capital expenditure requirements for the foreseeable
future. This expectation is primarily based on internal estimates of revenue
growth, as well as continuing emphasis on controlling operating expenses.
However, there can be no assurance that actual costs will not exceed amounts
estimated, that actual revenues will equal or exceed estimated amounts, or that
the Company will sustain profitable operations, due to significant
uncertainties surrounding its estimates and expectations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF
CONSOLIDATION

The
condensed consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

USE OF ESTIMATES

Preparing
financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses. Actual
results may differ from these estimates. Interim results are not necessarily
indicative of results for a full year.

EARNINGS PER SHARE

The
Company computes earnings per share in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings per Share. Basic earnings per
share is computed by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted earnings per share adjusts
basic earnings per share for the effects of stock options, restricted common
stock, warrants and other potentially dilutive financial instruments, only in
the periods in which the effects are dilutive. For the three months ended June
30, 2006 and 2005, the weighted average number of shares used in calculating
diluted earnings per share includes stock options, restricted common stock and
warrants to purchase common stock of 2,610,749 and 2,063,304, respectively. For
the six months ended June 30, 2006 and 2005, the weighted average number of
shares used in calculating diluted earnings per share includes stock options,
restricted common stock and warrants to purchase common stock of 2,552,268 and
1,974,427, respectively. The calculation of earnings per share for the three
and six months ended June 30, 2005 excludes a weighted average number of stock
options of 61,000 and 56,000, respectively, because to include them in the calculation
would be antidilutive.

6

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SEGMENT INFORMATION

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

CONCENTRATION OF CREDIT RISK

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

For
the three and six months ended June 30, 2006 and 2005, no customer accounted
for more than 2% of net revenues. As of June 30, 2006 and December 31, 2005, no
single customer accounted for more than 5% and 7%, respectively, of accounts
receivable.

STOCK-BASED COMPENSATION

Prior
to January 1, 2006, stock-based compensation was accounted for using the
intrinsic value-based method in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, and the Company complied with the
disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure. Accordingly, the Company only recorded compensation expense for
stock options granted with an exercise price that was less than the fair market
value of the underlying stock at the date of grant or in connection with the
issuance of restricted common stock. Compensation expense was recognized over
the service periods necessary to vest the awards. To the extent stock awards
were forfeited prior to vesting, the corresponding expense that was previously
recognized, including expense for pro-forma disclosure purposes, was reversed
in the period of forfeiture. In addition, the Company did not record
compensation expense for rights to purchase shares under its Employee Stock
Purchase Plan (ESPP) because the plan satisfied certain conditions under APB
No. 25.

Effective
January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment, using
the modified prospective method. Under this method, previously reported amounts
are not restated. SFAS No. 123(R) requires the measurement of compensation
expense for all stock awards granted to employees and non-employee directors at
fair value on the date of grant and recognition of compensation expense over
the related service periods for awards expected to vest. Under the modified
prospective method, the Company recognizes compensation expense for all stock
awards granted after December 31, 2005, and for awards granted prior to January
1, 2006 that remained unvested as of that date or which may be subsequently
modified. The fair value of restricted stock is determined based on the number
of shares granted and the quoted price of the Companys common stock, and the
fair value of stock options granted is determined using the Black-Scholes
valuation model, which is consistent with the Companys valuation techniques
previously utilized for options in footnote disclosures required under SFAS No.
123 and SFAS No. 148.

The
Company will continue to recognize stock-based compensation for service-based
graded-vesting stock awards granted prior to January 1, 2006 using the
accelerated method prescribed by Financial Accounting Standards Board (FASB) Interpretation
No. 28.As permitted under
SFAS No. 123(R),for
stock awards granted after December 31, 2005, the Company has adopted the
straight-line attribution method.
In addition, effective January 1, 2006, the Company has included an estimate of
stock awards to be forfeited in the future in calculating stock-based
compensation expense for the period. The cumulative effect of this accounting
change for forfeitures was not material due to the significant reduction in
both the number of personnel receiving stock awards and the aggregate amount of
stock awards granted by the Company in 2004 and 2005.

In
accordance with the requirements of SFAS No. 123(R), deferred stock-based
compensation previously recorded on the Companys balance sheet as of December
31, 2005 was netted against additional paid-in capital effective January 1,
2006.

7

---



Total
stock-based compensation expense related to all of the Companys stock awards
was included in various operating expense categories for the three and six
months ended June 30, 2006, as follows:

|                                         |  |                                      |         |                                    |   |         | 
|---------------------------------------- |  | ------------------------------------ | ------- | ---------------------------------- | - | ------- | 
|                                         |  | Three
  Months Ended
  June 30, 2006 |         | Six Months
  Ended
  June 30, 2006 |  
|Product and content development          |  | $                                    | 25,000  |                                    | $ | 54,000  | 
|Sales and
  marketing                    |  |                                      | 68,000  |                                    |   | 122,000 | 
|General and
  administrative             |  |                                      | 268,000 |                                    |   | 513,000 | 
|                                         |  |                                      |         |                                    |   |         | 
|Total
  stock-based compensation expense |  | $                                    | 361,000 |                                    | $ | 689,000 | 
|                                         |  |                                      |         |                                    |   |         | 

The
adoption of SFAS No. 123(R) resulted in an increase to stock-based compensation
and a decrease to net income of $144,000 and $272,000 for the three and six
months ended June 30, 2006, respectively, and a related reduction in basic and
diluted earnings per share of $0.01 for each period.

The
following table details the effect on net income and earnings per share had
stock-based compensation expense been recorded based on the fair value method
under SFAS No. 123, as amended, for the three months and six months ended June
30, 2005.

| |                                                                                                               |  |                                   |           |                                 |   |           |  
| | ------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | --------- | ------------------------------- | - | --------- | -
| |                                                                                                               |  | Three Months
  EndedJune 30, 2005 |           | Six Months
  EndedJune 30, 2005 |  
| |                                                                                                               |  |                                   |           |                                 |  
| | Net income, as reported                                                                                       |  | $                                 | 1,339,609 |                                 | $ | 1,748,717 |  
| | Add: Total stock-based employee
  compensation expense included in reported net income                        |  |                                   | 0         |                                 |   | 0         |  
| | Deducted: Total stock-based employee
  compensation expense determined under fair value method for all awards |  | $                                 | (222,138  | )                               | $ | (461,229  | )
| |                                                                                                               |  |                                   |           |                                 |   |           |  
| | Net income, pro forma                                                                                         |  | $                                 | 1,117,471 |                                 | $ | 1,287,488 |  
| |                                                                                                               |  |                                   |           |                                 |   |           |  
| | Basic earnings per share, as reported                                                                         |  | $                                 | 0.06      |                                 | $ | 0.08      |  
| |                                                                                                               |  |                                   |           |                                 |   |           |  
| | Basic earnings per share, pro forma                                                                           |  | $                                 | 0.05      |                                 | $ | 0.06      |  
| |                                                                                                               |  |                                   |           |                                 |   |           |  
| | Diluted earnings per share, as
reported                                                                       |  | $                                 | 0.05      |                                 | $ | 0.07      |  
| |                                                                                                               |  |                                   |           |                                 |   |           |  
| | Diluted earnings per share, pro forma                                                                         |  | $                                 | 0.05      |                                 | $ | 0.05      |  
| |                                                                                                               |  |                                   |           |                                 |   |           |  

3. SHIPPING AND HANDLING CHARGES

For
the three months ended June 30, 2006 and 2005, merchandise revenue included
outbound shipping and handling charges of approximately $708,000 and $562,000,
respectively. For the six months ended June 30, 2006 and 2005, merchandise
revenue included outbound shipping and handling charges of approximately
$1,160,000 and $1,028,000, respectively.

4. INVENTORY

Inventory
consists of the following:

|                 |  |          |           |              |      |           | 
|---------------- |  | -------- | --------- | ------------ | ---- | --------- | 
|                 |  | June 30, |           | December 31, |     
|                 |  |          |          
|                 |  | 2006     |           |              | 2005 |          
|                 |  |          |           |              |      |          
|                
|Raw
  materials  |  | $        | 226,685   |              | $    | 215,940   | 
|Finished
  goods |  |          | 1,558,740 |              |      | 1,406,116 | 
|                 |  |          |           |              |      |           | 
|                 |  | $        | 1,785,425 |              | $    | 1,622,056 | 
|                 |  |          |           |              |      |           | 

5. INTANGIBLE ASSETS

Intangible
assets consist of the following:

8

---



|                                   |  |          |           |              |   |           |  
|---------------------------------- |  | -------- | --------- | ------------ | - | --------- | -
|                                   |  | June 30, |           | December 31, |  
|                                   |  |          |          
|                                   |  | 2006     |           | 2005         |  
|                                   |  |          |           |              |  
|                                  
|Goodwill,
  net                    |  | $        | 8,904,714 |              | $ | 8,904,714 |  
|Covenant not
  to compete          |  |          | 700,000   |              |   | 700,000   |  
|Less
  accumulated amortization    |  |          | (625,000  | )            |   | (575,000  | )
|                                   |  |          |           |              |   |           |  
|Covenant not
  to compete, net     |  |          | 75,000    |              |   | 125,000   |  
|                                   |  |          |           |              |   |           |  
|Trademarks
  and domain names      |  |          | 128,919   |              |   | 100,000   |  
|Less
  accumulated amortization    |  |          | (31,212   | )            |   | (19,445   | )
|                                   |  |          |           |              |   |           |  
|Trademarks
  and domain names, net |  |          | 97,707    |              |   | 80,555    |  
|                                   |  |          |           |              |   |           |  
|Total                              |  | $        | 9,077,421 |              | $ | 9,110,269 |  
|                                   |  |          |           |              |   |           |  

The
Company completed its most recent goodwill impairment test as of October 1,
2005. The test primarily involved the assessment of the fair market value of
the Company as the single reporting unit. No impairment of goodwill was
indicated at that time. Under SFAS No. 142, the Company is required to perform
goodwill impairment tests on at least an annual basis or more frequently if
circumstances dictate. There can be no assurance that future goodwill
impairment tests will not result in a charge to income.

The
covenant not to compete is being amortized over the related contractual period
of seven years. Trademarks and domain
names are being amortized on a straight-line basis over five years.

Amortization expense was $32,000 and
$37,000
for the three months ended June 30, 2006 and 2005, respectively, and $62,000
and $80,000 for the six months ended June 30, 2006 and 2005, respectively. Estimated
annual amortization expense is $125,000 in 2006, $51,000 in 2007, $26,000 in
each of 2008 and 2009, $6,000 in 2010 and $1,000 in 2011.

6. ACCOUNTS PAYABLE
AND ACCRUED EXPENSES

Accounts
payable and accrued expenses consist of the following:

|                                    |  |          |           |              |   |           | 
|----------------------------------- |  | -------- | --------- | ------------ | - | --------- | 
|                                    |  | June 30, |           | December 31, |  
|                                    |  |          |          
|                                    |  | 2006     |           | 2005         |  
|                                    |  |          |           |              |  
|Accounts
  payable                  |  | $        | 1,330,115 |              | $ | 1,971,455 | 
|Professional
  services             |  |          | 698,468   |              |   | 1,198,788 | 
|Compensation
  and related benefits |  |          | 807,723   |              |   | 1,030,129 | 
|Other
  accrued expenses            |  |          | 2,181,860 |              |   | 1,373,706 | 
|                                    |  |          |           |              |   |           | 
|                                    |  | $        | 5,018,166 |              | $ | 5,574,078 | 
|                                    |  |          |           |              |   |           | 

7. LONG-TERM DEBT

Long-term
debt as of June 30, 2006 consists of the following:

|                                                                                                      |  |   |         | 
|----------------------------------------------------------------------------------------------------- |  | - | ------- | 
|Note due in annual installments of $60,000
  through October 2008, based on imputed interest of 8.75% |  | $ | 152,557 | 
|                                                                                                      |  |   |         | 
|Less current
  portion                                                                                |  |   | 46,651  | 
|                                                                                                      |  |   |         | 
|                                                                                                      |  |   |         | 
|Long
  term-debt, excluding current portion                                                           |  | $ | 105,906 | 
|                                                                                                      |  |   |         | 

Maturities
of long-term obligations during the three years ending June 30, 2009 are as
follows: 2007, $46,651; 2008, $50,733 and 2009, $55,173. Interest expense for
the three and six months ended June 30, 2006 was $3,000 and $7,000,
respectively. Interest expense for the three and six months ended June 30, 2005
was $4,000 and

9

---



$9,000,
respectively.

8. STOCK PLANS

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

Under
the terms of the 1999 Plan, 3,849,868 shares of common stock of the Company
were initially reserved for incentive stock options, nonqualified stock options
(incentive and nonqualified stock options are collectively referred to as
options), stock appreciation rights, stock issuances (which may be subject to
the attainment of designated performance goals or service requirements
(Restricted Stock)), or any combination thereof. On May 15, 2001, the
Companys stockholders approved a further increase of 1,000,000 to the number
of shares reserved for issuance under the 1999 Plan. Through June 30, 2006, an
additional 1,835,711 shares were added to the reserve pursuant to the automatic
share increase provisions of the 1999 Plan. The shares reserved under the 1999
Plan automatically increase on the first trading day in January of each
calendar year by an amount equal to two percent (2%) of the total number of
shares of the Companys common stock outstanding on the last trading day of
December in the prior calendar year, but in no event will this annual increase
exceed 1,000,000 shares (or such other lesser number determined by the Board of
Directors). In January 2006, the Board of Directors exercised its discretion
under the 1999 Plan and determined that there would be no increase in the
number of shares reserved for this year pursuant to the automatic increase
provision. 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 two to four 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 vest over a four-year period and have
terms not to exceed 10 years.

As
of June 30, 2006, under the 1999 Plan and the 2000 Plan, there were 2,294,016
shares subject to outstanding options and 1,992,986 shares subject to
outstanding options that were exercisable at such date. As of June 30, 2006,
there were 236,500 of service-based restricted stock awards outstanding. As of
June 30, 2006, there were 2,236,053 shares available for future grants under
the 1999 Plan and 270,418 shares available for future grants under the 2000
Plan.

The
Employee Stock Purchase Plan (the ESPP) was adopted by the Board of Directors
and approved by the stockholders in November 1999 and became effective upon
completion of the Companys initial public offering of its common stock. The
Compensation Committee of the Board of Directors administers the ESPP. The ESPP
permits a participating employee to make contributions to purchase shares of
common stock by having withheld from his or her salary an amount between 1
percent and 15 percent of compensation. Under the ESPP, eligible employees of
the Company may elect to participate on the start date of an offering period or
on any subsequent semi-annual entry date within the offering period. On each
purchase date during an offering period, a participating employees
contributions will be used to purchase up to 1,000 shares of the Companys
common stock for such participating employee at a 15 percent discount from the
fair market value, as defined in the ESPP, of such stock. Each offering period
is determined by the plan administrator and may not exceed two years. The
Company initially reserved 300,000 shares of common stock under the ESPP. The
shares reserved automatically increase on the first trading day in January of
each calendar year by the lesser of the (i) the number of shares of common
stock issued under the ESPP in the immediately preceding calendar year, (ii)
300,000 shares or (iii) such other lesser amount approved by the Board of
Directors. Through June 30, 2006, 329,243 shares were issued under the ESPP and
305,203 shares were added to the reserve pursuant to the automatic increase
provision.

The following represents a summary of
the Companys stock option activity under the 1999 and 2000 Plans for the six
months ended June 30, 2006:

10

---



|                                         |  |        |           |                                       |   |      | 
|---------------------------------------- |  | ------ | --------- | ------------------------------------- | - | ---- | 
|                                         |  | Shares |           | Weighted 
  Average 
  Exercise Price |  
|                                         |  |        |           |                                       |  
|Options outstanding at December 31, 2005 |  |        | 2,515,749 |                                       | $ | 2.63 | 
|Options granted                          |  |        |          |                                       |   |     | 
|Options exercised                        |  |        | (173,441  | )                                     |   | 2.55 | 
|Options canceled                         |  |        | (48,292   | )                                     |   | 4.41 | 
|                                         |  |        |           |                                       |   |      | 
|Options outstanding at June 30, 2006     |  |        | 2,294,016 |                                       | $ | 2.60 | 
|                                         |  |        |           |                                       |   |      | 

The
weighted average grant-date fair value of options granted during the three and
six months ended June 30, 2005 was $1.86 and $2.43, respectively. The fair
value of options which vested during the three months ended June 30, 2006 and
June 30, 2005 was $1.77 and $1.79, respectively. The fair value of options
which vested during the six months ended June 30, 2006 and June 30, 2005 was
$1.77 and $1.69, respectively. The total intrinsic value of options exercised
during the three months ended June 30, 2006 and 2005 was $1.2 million and
$356,000, respectively. The total intrinsic value of options exercised during
the six months ended June 30, 2006 and 2005 was $2.3 million and $1.8 million,
respectively.

The
following table summarizes information about options outstanding at June 30,
2006:

|                          |  |                                                |           |                                                                  |                     |                                       |                     |                                              |      |                                       |  |           |  |   |      |  | 
|------------------------- |  | ---------------------------------------------- | --------- | ---------------------------------------------------------------- | ------------------- | ------------------------------------- | ------------------- | -------------------------------------------- | ---- | ------------------------------------- |  | --------- |  | - | ---- |  | 
|                          |  |                                                |           |                                                                  | Options Outstanding |                                       | Options Exercisable |                                             
|                          |  |                                                |           |                                                                  |                     |                                       |                     |                                             
|Range of
  exercise price |  | Number
  Outstanding
  as of
  June 30,
  2006 |           | Weighted
  Average
  Remaining
  Contractual
  Life
  (In Years) |                     | Weighted
  Average
  Exercise
  Price |                     | Number
  Exercisable
  as of
  June 30, 2006 |      | Weighted
  Average
  Exercise
  Price | 
|                          |  |                                                |           |                                                                  |                     |                                       |                     |                                              |      |                                       |  |          
|$0.42 to
  $1.03          |  |                                                | 623,685   |                                                                  |                     | 4.73                                  |                     | $                                            | 0.76 |                                       |  | 621,920   |  | $ | 0.76 | 
|$1.37 to
  $4.10          |  |                                                | 1,511,931 |                                                                  |                     | 6.31                                  |                     |                                              | 3.07 |                                       |  | 1,301,557 |  |   | 2.95 | 
|$4.80 to
  $9.00          |  |                                                | 158,400   |                                                                  |                     | 8.00                                  |                     |                                              | 5.41 |                                       |  | 69,509    |  |   | 5.96 | 
|                          |  |                                                |           |                                                                  |                     |                                       |                     |                                              |      |                                       |  |           |  |   |      | 
|                          |  |                                                | 2,294,016 |                                                                  |                     | 5.99                                  |                     | $                                            | 2.60 |                                       |  | 1,992,986 |  | $ | 2.37 | 
|                          |  |                                                |           |                                                                  |                     |                                       |                     |                                              |      |                                       |  |           |  |   |      | 

The
weighted average remaining contractual life of options exercisable as of June
30, 2006 was 5.69 years.

As
of June 30, 2006, there were 2,236,053 shares available for future grants under
the 1999 Plan and 270,418 shares available for future grants under the 2000
Plan.

The
aggregate intrinsic value of stock options outstanding at June 30, 2006 was
$42.0 million, of which $37.0 million relates to vested awards. The intrinsic
value for stock options is calculated based on the exercise price of the
underlying awards and the quoted price of the Companys common stock as of June
30, 2006. The following table summarizes nonvested stock option activity for
the six months ended June 30, 2006:

|                                                     |  |        |          |                                         |   |      | 
|---------------------------------------------------- |  | ------ | -------- | --------------------------------------- | - | ---- | 
|                                                     |  | Shares |          | Weighted
  Average 
  Exercise 
  Price |  
|                                                     |  |        |          |                                         |  
|Nonvested
  options outstanding at December 31, 2005 |  |        | 558,377  |                                         | $ | 3.89 | 
|Vested                                               |  |        | (210,284 | )                                       |   | 3.42 | 
|Canceled                                             |  |        | (47,063  | )                                       |   | 4.50 | 
|                                                     |  |        |          |                                         |   |      | 
|Nonvested
  options outstanding at June 30, 2006     |  |        | 301,030  |                                         | $ | 4.12 | 
|                                                     |  |        |          |                                         |   |      | 

The
weighted average grant-date fair value of ESPP rights arising from elections
made by ESPP plan participants during the six months ended June 30, 2006 and
2005 was $8.81 and $1.74, respectively. During the six months ended June 30,
2006, ESPP rights to approximately 13,000 shares were granted to employees who
elected to change their payroll percentage deductions effective February 1,
2006, as permitted semi-annually within the current offering period under the
ESPP plan. These ESPP rights were treated as modified stock awards which had a
weighted average grant-date value of $10.60. The fair value of ESPP rights that
vested during the six months ended June 30, 2006 and 2005 was $4.26 and $1.29,
respectively. On January 31, 2006, the Company issued 24,040 shares at a

11

---



weighted
average price of $3.89 under the ESPP.

The
intrinsic value of shares purchased through the ESPP on January 31, 2006 and of
outstanding ESPP rights as of June 30, 2006 were $237,000 and $591,000,
respectively. The intrinsic value of ESPP rights is calculated as the discount
from the quoted price of the Companys common stock, as defined in the ESPP,
which was available to employees as of the respective dates.

As
of June 30, 2006, there was $274,000 of unrecognized compensation cost related
to nonvested stock options and ESPP rights, net of estimated forfeitures, which
is expected to be recognized over a weighted average period of 1.4 years.

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

|                                         |  |                           |     |               |  |            |  |               |             |  |  |        | 
|---------------------------------------- |  | ------------------------- | --- | ------------- |  | ---------- |  | ------------- | ----------- |  |  | ------ | 
|                                         |  | Six Months Ended June 30, |    
|                                         |  |                           |    
|                                         |  | 2006                      |     | 2005          | 
|                                         |  |                           |     |               | 
|                                         |  | Options                   |     | ESPP
  Rights |  | Options    |  | ESPP
  Rights |            
|                                         |  |                           |     |               |  |            |  |               |            
|Weighted
  average expected option lives |  |                           | N/A |               |  | 0.50 years |  |               | 3.69 years  |  |  | 1 year | 
|Risk-free
  interest rate                |  |                           | N/A |               |  | 4.60%      |  |               | 3.25%-3.71% |  |  | 2.95%  | 
|Expected
  volatility                    |  |                           | N/A |               |  | 25.8%      |  |               | 33%-67.1%   |  |  | 34.2%  | 
|Dividend
  yield                         |  |                           | N/A |               |  | 0%         |  |               | 0%          |  |  | 0%     | 

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

During
the three and six months ended June 30, 2006, the Company recorded $144,000 and
$272,000, respectively, of compensation expense related to options and ESPP
rights and received cash from the exercise of options and ESPP rights of
$125,000 and $526,000, respectively, for which the Company issued new shares of
common stock.

As
of June 30, 2006, there were 236,500 service-based restricted stock awards
outstanding. During the three and six months ended June 30, 2006, 7,500 and
201,500 shares of restricted stock were awarded at a weighted average
grant-date fair value of $11.58 and $15.57, respectively, and no shares of
restricted stock vested or canceled during the period. The aggregate intrinsic
value of restricted shares at June 30, 2006 was $4.9 million. The intrinsic
value for restricted shares is calculated based on the par value of the
underlying shares and the quoted price of the Companys common stock as of June
30, 2006.

As
of June 30, 2006, there was $2.1 million of total unrecognized compensation
cost related to nonvested restricted shares which is expected to be recognized
over a weighted average period of 2.5 years. As of June 30, 2006, no
forfeitures of restricted shares were anticipated. During the three and six
months ended June 30, 2006, the Company recorded $216,000 and $417,000,
respectively, of compensation expense related to restricted shares.

9.
AGREEMENT WITH COLLAGES. NET, INC. (Collages)

In
March 2005, the Company entered into a Marketing Services Agreement (the
Agreement) with Collages, a provider of hosting and website development
services to professional photographers. Under the Agreement, which has a term
of three years, the Company delivers online and print advertising services to
Collages in exchange for having received Collages Series A Preferred Stock,
which vests over the first two years of the Agreement. Through June 30, 2006,
the fair value of the marketing services to be provided over the term of the
Agreement approximated the fair value of Series A Preferred Stock received.

Since
inception of the Agreement through June 30, 2006, the Company has earned
approximately $724,000 in revenue pursuant to the Agreement. The Company has
deferred recognition of this revenue since the realization of the resulting
asset, representing an equity investment in Collages, is not reasonably
assured.

12

---



10. COMMITMENTS AND
CONTINGENCIES

Legal
Proceedings

On
September 19, 2003, WeddingChannel.com, Inc. (WeddingChannel) filed a
complaint against the Company in the United States District Court for the
Southern District of New York. The complaint alleges that the Company has
violated U.S. Patent 6,618,753 (Systems and Methods for Registering Gift
Registries and for Purchasing Gifts), and further alleges that certain actions
of the Company give rise to various federal statute, state statute and common
law causes of actions. WeddingChannel is seeking, among other things, damages
and injunctive relief. If the Company is found to have willfully infringed the
patent-in-suit, enhanced damages may be awarded. This complaint was served on
the Company on September 22, 2003.

Based
on information currently available, the Company believes that the claims are
without merit and is vigorously defending itself against all claims. On October
14, 2003, the Company filed an answer and counterclaims against WeddingChannel.
The Companys answer raises various defenses to the counts alleged by
WeddingChannel. Additionally, the Company has brought counterclaims including a
request that the court declare that the patent-in-suit is invalid,
unenforceable and not infringed. On April 15, 2005, WeddingChannel specified
that they were seeking damages in an amount ranging from approximately $1.1
million to in excess of approximately $13 million plus interest. The Company
raised defenses to WeddingChannels patent and other claims, which, if
successful, would obviate or substantially limit any potential damages
payments. WeddingChannel has also requested unspecified damages in connection
with other claims set forth in its complaint.

The
Company has filed a series of summary judgment motions seeking to dismiss
entirely and/or limit WeddingChannels claims for patent infringement, and
WeddingChannel filed certain cross-motions for summary judgment concerning
certain of the Companys defenses. These motions were argued before the Court
on September 28 and October 19, 2005, and have not yet been decided.

On
January 17, 2006, a stay was entered in the litigation between the Company and
WeddingChannel for a period of not less than 60 days, upon the joint request of
the parties. On June 5, 2006, the Company entered into a Merger Agreement
pursuant to which WeddingChannel will become a wholly-owned subsidiary of the
Company (see Note 12). The Company expects that the litigation will be
withdrawn effective as of the closing of the Merger, and, therefore, that the
Company will not suffer any harm to its business, results of operations or
financial condition relating to this litigation.

If,
however, the Merger is not consummated, it is likely that the stay will be
lifted and that the litigation will resume. In such an event, if the Companys
motions are unsuccessful and all or a portion of WeddingChannels patent
infringement claims remain, the case may go to trial in the second half of
2006. There can be no assurance that the Companys answer or counterclaims
against WeddingChannel will be successful. If the Companys answer and its
defenses do not succeed or if its counterclaims are found to be without merit,
or if the Company determines to settle this litigation at a later date, the
Company could suffer harm to its business and a material adverse effect to its
financial condition and results of operations.

The
Company is 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.

11. PRIVATE PLACEMENT
OF COMMON STOCK

On July 10,
2006, the Company completed the sale of 2,750,000 shares of common stock to
three institutional investors for gross proceeds of $50.2 million. The net
proceeds after placement fees and other offering costs were approximately $47.6
million.

12. MERGER AGREEMENT

On
June 5, 2006, the Company entered into a definitive Agreement and Plan of
Merger and Reorganization (the Merger Agreement) with WeddingChannel, IDO
Acquisition Corporation (a wholly-owned subsidiary of the

13

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Company) and
Lee Essner (as the WeddingChannel stockholder representative) to acquire
WeddingChannel in a merger transaction pursuant to which WeddingChannel will
become a wholly-owned subsidiary of the Company (the Merger). Pursuant to the
terms of the Merger Agreement, the Company will pay approximately $57.9 million
in cash and issue 1,150,000 shares of its common stock in exchange for all of
the capital stock and stock options of WeddingChannel (the Primary
Consideration). The Company intends to finance a portion of the cash portion
of the purchase price through a follow-on offering of its common stock pursuant
to a registration statement that the Company first filed on July 20, 2006 (the
Follow-On Offering). Alternatively, the Company may pay $28.0 million in cash
and issue 3,200,000 shares of its common stock in exchange for all of the
capital stock and stock options of WeddingChannel. The cash portion of the
purchase price will be adjusted if WeddingChannels working capital is above or
below $10.0 million at closing.

The
  Merger has been approved by the boards of directors of both companies. Stockholders
  representing approximately 30% of the outstanding capital stock of WeddingChannel
  have agreed to vote their shares in favor of the Merger. The Merger is subject
  to customary closing conditions, including stockholder approval and approval
  of the California Commission of Corporations of the fairness of the terms and
  conditions of the Merger (or, in lieu thereof, the existence of an effective
  registration statement covering the shares of common stock to be issued by the
  Company in the Merger). The Merger is currently expected to close in the third
  quarter of 2006. The Merger Agreement also contains certain termination rights
  in favor of each of the Company and WeddingChannel.

The planned
merger with WeddingChannel is expected to have a material effect on the
Companys consolidated financial position, results of operations and cash flow.

On
  August 11, 2006, the Company notified WeddingChannel that it will deliver the
  Primary Consideration to the WeddingChannel stockholders upon the closing of
  the Merger.

13. ACQUISITION

On
July 25, 2006, the Company acquired the publishing business and related assets
of OAM Solutions, Inc., the publisher of Lila Guides, local information
guides for parents, for $2.0 million, which includes cash paid and liabilities
assumed. Substantially all of the purchase price is expected to be allocated to
intangible assets or goodwill.

14. COMMON STOCK
OFFERING

On
August 10, 2006, the Company priced the Follow-On Offering for the sale of
2,000,000 shares of its common stock, at a public offering price per share of
$16.00. When the public offering transaction closes, which is expected to occur
on August 15, 2006, the Company will receive net proceeds of approximately
$29.5 million after underwriting discounts and other expenses associated with
the offering. As of August 14, 2006, the underwriters have not exercised their
overallotment option. In the event the underwriters exercise their
overallotment option in full, the Company will issue an additional 952,500
shares of common stock. The Company plans to use the proceeds of the Follow-On
Offering to finance part of the cash portion of the purchase price pursuant to
the Merger Agreement with WeddingChannel (see Note 12).

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Item 2.   Managements Discussion and Analysis of
Financial Condition and Results of Operations

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

Overview

The
Knot is a leading lifestage media company targeting couples planning their
weddings and future lives together. We commenced operations in May 1996. Our
principal website, at www.theknot.com,
is the most trafficked wedding site online, and offers extensive
wedding-related content and shopping and an active community. The Knot also
provides wedding content to MSN and Comcast. We publish The Knot Weddings Magazine, which features
editorial content and a shopping directory format which covers every major
wedding planning decision and is distributed to newsstands and bookstores
across the nation. We also publish The Knot
Weddings regional magazines in 15 markets in the United States and The Knot Real Weddings in two additional
local markets. In November 2004, we launched The Nest, the first online
destination for the newly married audience, at www.thenest.com.
In January 2005, we acquired the business and assets of GreatBoyfriends LLC
including the websites www.greatboyfriends.com
and www.greatgirlfriends.com,
which are referral-based online dating services supported by subscriptions. We
also author books on wedding-related and newlywed-related topics. We are based
in New York and have several other offices across the country.

Each
year, approximately 2.2 million couples get married in the United States.
According to an independent research report, the domestic wedding market
generates approximately $72 billion in retail sales annually, including gifts
purchased from couples registries. Presumed to be a once-in-a-lifetime
occasion, a wedding is a major milestone event and, therefore, consumers tend
to allocate significant budgets to the wedding and related purchases. Weddings
also generate substantial revenues for travel services companies. Honeymoon
travel generates an estimated $5.0 billion annually.

Vendors
and advertisers highly value to-be-weds as a consumer group. Replenished on an
annual basis, wielding substantial budgets and facing a firm deadline, engaged
couples are the ideal recipients of advertisers messages and vendors products
and services. During the year prior to and the year following a wedding, the
average couple will make more buying decisions and purchase more products and
services than at any other time in their lives. The challenges and obstacles that
engaged couples face make them especially receptive to marketing messages. We
provide national and local advertisers with targeted access to couples actively
seeking information and advice and making meaningful spending decisions
relating to all aspects of their weddings.

National
online advertisers can enter into arrangements to exclusively sponsor entire
editorial areas or special features on our site. We may also offer sponsors
additional online promotional events such as sweepstakes, newsletter and direct
e-mail programs, or inclusion of their special offers in our membership
gateway. With our expansion into local markets and the further development of The Knot Weddings Magazine, we have
expanded the scope of the integrated marketing programs we offer to our
national online advertisers to include print advertising in our national and
regional magazines. Also, we now offer national advertisers the opportunity to
sponsor content on The Knot TV, a streaming video channel that broadcasts 24/7
on our website. Advertisers can promote their services and products within the
programming on this channel.

The Local Resources area on The Knot website provides access to the local
wedding market through 67 online city and regional guides that host profiles
for over 13,000 local vendors, such as reception halls, bands, florists and
caterers. Local wedding vendors can supplement print advertisements in our
regional magazines with profiles and sponsorship badges as well as preferred
placement and other premium programs within their appropriate online city
guide. Local advertisers can also reach their markets through targeted local
emails. We also offer programs to local vendors that include advertising
placement in The Knot Weddings Magazine.

We
address a portion of the retail opportunity in the wedding market by
integrating our informative content with shopping services which range from
wedding gifts to a comprehensive array of supplies that relate to the wedding

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itself. We
have created two shopping areas on The Knot website called The Knot Gift
Registry Center and The Knot Wedding Shop.

The
Knot Gift Registry Center offers a large selection of china, crystal and
flatware through our partnership with Michael C. Fina. In addition, earlier
this year, we announced a new partnership with Target Corporation under which
Target Club Wedd became our premier registry provider allowing our members easy
access to Target Club Wedds extensive registry assortment. We earn commissions
from the sale of products in connection with these retail partnerships.

We
sell wedding supplies direct to consumers through our integrated shopping
destination, The Knot Wedding Shop. We offer over one thousand products,
including disposable cameras, wedding bubbles and bells, candy and cookies,
ring pillows, toasting flutes, reception decorations, table centerpieces,
goblets and glasses, garters and unity candles. We offer personalization
options for many of our wedding supplies. We have launched our own line of
Knot-branded wedding supplies called The Knot Wedding Collections and our own
line of wedding-themed apparel, which can be personalized as well. In 2005, we
launched ShopForWeddings.com.
ShopForWeddings.com is our
separate online store for wedding supplies, which we developed in order to
attract additional users and generate further revenues. We fulfill all retail
and wholesale wedding supplies orders from our Redding, California facility.

Our
strategy is to expand our position as a leading lifestage media and services
company providing comprehensive planning and other information, services and
products to couples planning their weddings and future lives together. Key
elements of our business strategy include the following:

Increase
Market Share and Leverage Assets. Acquiring companies
or services that are complementary to our business will increase our leverage
with advertisers in the marketplace as well as our ability to satisfy our
customers. The completion of the pending merger with WeddingChannel will
significantly increase our market share and provide additional opportunities to
leverage our core assets of our audience and local and national sales forces.
WeddingChannels registry offerings will also enhance the service we are able
to provide our engaged couples and their wedding guests. We have also acquired
and created other small properties to leverage the services to clients and the
technologies we have developed. Recent acquisitions of WeddingTracker.com and Wed-o-rama.comallow us to offer our
engaged couples premium personal wedding webpage design and hosting for a fee.
Our recent launch of PartySpot.com
leverages our local sales force and their vendors to provide local party
planning information and resources to families hosting rehearsal dinners,
proms, bar mitzvahs, sweet sixteens and graduation parties.

Build
Strong Brand Recognition. Maintaining The Knots
strong brand position is critical to attracting and expanding both our online
and offline user base and securing our leading position in the bridal market.

We
promote our brand through aggressive public relations outreach, including
television appearances by Carley Roney, our editor-in-chief and lead wedding
expert. Through our regional magazines and the expansion of our in-depth online
city guides, we are aggressively increasing our brand awareness at the local
level. Our local advertising sales force further supports The Knot brand
through participation in their local wedding professional associations and
appearances at local bridal events.

Capitalize
on Multiple Revenue Opportunities. We intend to use
the size and favorable demographics of our online and offline communities to
continue to grow our existing multiple revenue streams within the wedding
space. We will pursue additional revenue opportunities in connection with the
needs of todays engaged and newly married couples including premium services.

Leverage
our Relationship with our Audience. We believe a large
and active membership base is critical to our success. Membership enrollment is
free; and our members enjoy the use of personal Web pages, message boards,
budgeting and planning tools, wedding checklists and wedding fashion and
honeymoon searches. New membership growth has leveled off in recent years. We
enrolled approximately 1.0 million and 1.1 million new members in the years
2005 and 2004, respectively. During the first six months of 2006, we were
enrolling an average of approximately 3,400 new members per day. Our priority
in the wedding space is to increase member usage through our content and
product offerings, additional interactive premium services, active community
participation and strategic relationships.

Expansion
into other Life Stages and Services. With the launch
of our website at www.thenest.com,
we are expanding our relationship with our core membership base and providing
access to additional services and products relevant to newlyweds and growing
families. We plan to develop The Nest brand in the same manner we built The
Knot brand with increased consumer awareness leading to increased advertiser
adoption.

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Becoming
parents for the first time is another major life change for newlyweds, and we
believe there will be an opportunity to continue serving our audience as they
enter this next significant life stage. We have also created or acquired other
small properties to leverage the clients and technologies we have developed and
to broaden the complementary services we offer.

The
pursuit of our business strategies may involve potential acquisitions, or
investments in, complementary businesses or products.

On
  June 5, 2006, we announced that we entered into a definitive Merger Agreement
  to acquire WeddingChannel.com, Inc. (WeddingChannel), a privately-held
  provider of wedding planning and gift buying services, in a merger transaction
  pursuant to which WeddingChannel will become a wholly owned subsidiary of The
  Knot (the Merger). Under the terms of the Merger Agreement, we will
  pay approximately $57.9 million in cash and issue 1,150,000 shares of our common
  stock in exchange for all of the outstanding capital stock and stock options
  of WeddingChannel (the Primary Consideration). We intend to finance
  part of the cash portion of the purchase price through a follow-on offering
  of our common stock pursuant to a registration statement that we first filed
  on July 20, 2006 (the Follow-On Offering). Alternatively, we may
  pay $28.0 million in cash and issue 3,200,000 shares of our common stock in
  exchange for all of the capital stock and stock options of WeddingChannel. The
  cash portion of the purchase price will be adjusted if WeddingChannels
  working capital is above or below $10.0 million at closing. The planned merger
  with WeddingChannel is expected to have a material effect on our consolidated
  financial position, results of operations and cash flow.

The Merger has been approved by the boards of directors of both companies.
Stockholders representing approximately 30% of the outstanding capital stock of
WeddingChannel have agreed to vote their shares in favor of the Merger. The
Merger is subject to customary closing conditions, including stockholder
approval and approval of the California Commission of Corporations of the
fairness of the terms and conditions of the Merger (or, in lieu thereof, the
existence of an effective registration statement covering the shares of common
stock to be issued by us in the Merger). The Merger is currently expected to close
in the third quarter of 2006. The Merger Agreement also contains certain
termination rights in favor of each of us and WeddingChannel.

For
the six months ended June 30, 2006, our revenue increased by $7.0 million, or
approximately 27%, when compared to 2005. This growth resulted primarily from
increases in our higher margin online sponsorship and advertising revenues of
$4.3 million, or 37%, as a result of the continued expansion of our client
base, increased spending by our clients on additional or premium programs and
through the impact of price increases in local markets. Merchandise revenue,
derived primarily from the sale of wedding supplies to retail customers,
increased by $582,000, or 8%. While retail supplies revenues were relatively flat
in the first quarter of 2006, these revenues increased by $1.0 million for the
three months ended June 30, 2006 or 28%. Site improvements and more effective
marketing efforts resulted in increased traffic and sales with respect to the
shopping areas on our site. We also conducted a review of our wholesale
customer base in the last half of 2004 and eliminated a number of marginal
accounts in 2004 and 2005, which contributed to a decline in wholesale supplies
revenue of $225,000 for the six months ended June 30, 2006 as compared to the
prior year. Revenue from our registry services decreased by $224,000. In 2006,
we are no longer maintaining inventory and recording sales of registry-related
products. We are now generally receiving only commissions from the sale of
products through our retail partnerships. Publishing and other revenue
increased by $2.1 million or 33%. This increase primarily reflects growth in
the sale of advertising pages to designers in our national publication and to
local vendors in our local print publications, as well as rate increases.

Recent Developments

Private
Placement of Common Stock

On
July 10, 2006, we completed the sale of 2,750,000 shares of common stock to
three institutional investors for gross proceeds of $50.2 million. The net
proceeds after placement fees and other offering costs were approximately $47.6
million.

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Lilaguides
Acquisition

On July 25,
  2006, we acquired the publishing business and related assets of OAM Solutions,
  Inc., the publisher of Lila Guides, local information guides for
  parents, for $2.0 million, which includes cash paid and liabilities assumed.
  Substantially all of the purchase price is expected to be allocated to intangible
  assets or goodwill.

Common Stock
Offering

On
  August 10, 2006, we priced the Follow-On Offering for the sale of 2,000,000
  shares of our common stock, at a public offering price per share of $16.00.
  When the public offering transaction closes, which is expected to occur on August
  15, 2006, we will receive net proceeds of approximately $29.5 million after
  underwriting discounts and other expenses associated with the offering. As of
  August 14, 2006, the underwriters have not exercised their overallotment option.
  In the event the underwriters exercise their overallotment option in full, we
  will issue an additional 952,500 shares of common stock. We plan to use the
  proceeds of the Follow-On Offering to finance part of the cash portion of the
  purchase price pursuant to the Merger Agreement with WeddingChannel.

Merger Agreement

On
  August 11, 2006, the Company notified WeddingChannel that it will deliver the
  Primary Consideration to the WeddingChannel stockholders upon the closing of
  the Merger.

Critical Accounting Policies

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

Revenue Recognition

We
derive revenues from the sale of online sponsorship and advertising programs,
from the sale of merchandise and from the publication of magazines.

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

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

Certain
elements of online sponsorship and advertising contracts provide for the
delivery of a minimum number of impressions. Impressions are the featuring of a
sponsors advertisement, banner, link or other form of content on our sites. To
date, we have recognized applicable online sponsorship and advertising revenues
over the duration of the contracts on a straight-line basis, as we have
exceeded minimum guaranteed impressions. To the extent that minimum guaranteed
impressions are not met, we are generally obligated to extend the period of the
contract until the guaranteed impressions are achieved. If this were to occur,
we would defer and recognize the corresponding revenues over the extended
period.

Merchandise
revenues generally include the selling price of wedding supplies through our
websites as well as related outbound shipping and handling charges since we are
the primary party obligated in a transaction, are subject to inventory risk,
and we establish our own pricing and selection of suppliers. Merchandise
revenues also include commissions earned in connection with the sale of
products from our gift registry under agreements with certain retail partners
where we are not primarily obligated, not subject to inventory risk and amounts
earned are determined using a fixed percentage. Merchandise revenues are
recognized when products are shipped to customers, reduced by discounts as well
as an allowance for estimated sales returns.

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Publishing
revenue includes print advertising revenue derived from the publication of The
Knot Weddings Magazine,the publication of regional magazines, The Knot
Weddings and other publications, as well as fees from the license of the
Weddingpages name for use in publication by certain former franchisees. These
revenues and fees are recognized upon the publication of the related magazines,
at which time all material services related to the magazine have been
performed, or as fees are earned under the terms of license agreements. Additionally,
publishing revenues are derived from the sale of magazines on newsstands and in
bookstores, and from author royalties received related to book publishing
contracts. Revenues from the sale of magazines are recognized when the products
are shipped, reduced by an allowance for estimated sales returns. Author
royalties, to date, have been derived from publisher royalty advances that are
recognized as revenue when all of our contractual obligations have been met
which is typically upon the delivery to, and acceptance by, the publisher of
the final manuscript.

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

Revenue
for which realization is not reasonably assured is deferred.

Allowance for Doubtful Accounts

We
maintain an allowance for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. As of June 30, 2006
and December 31, 2005, our allowance for doubtful accounts amounted to $242,000
and $274,000, respectively. In determining these allowances, we evaluate a
number of factors, including the credit risk of customers, historical trends
and other relevant information. If the financial condition of our customers
were to deteriorate, additional allowances may be required.

Inventory

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

Goodwill

As
of June 30, 2006, we had recorded goodwill and other intangible assets of $9.1
million. In our most recent assessment of impairment of goodwill as of October
1, 2005, we made estimates of fair value using multiple approaches. In our
ongoing assessment of impairment of goodwill and other intangible assets, we
consider whether events or changes in circumstances such as significant
declines in revenues, earnings or material adverse changes in the business
climate, indicate that the carrying value of assets may be impaired. As of June
30, 2006, no impairment indicators were noted. Future adverse changes in market
conditions or poor operating results of strategic investments could result in
losses or an inability to recover the carrying value of the investments,
thereby possibly requiring impairment charges in the future.

Deferred Taxes

A
tax valuation allowance is established, as needed, to reduce net deferred tax
assets to the amount for which recovery is probable. As of June 30, 2006, we
have established a full valuation allowance of $12.5 million against our net
deferred tax assets. Depending on the amount and timing of taxable income we
may ultimately generate in the future, as well as other factors including
limitations which may arise from changes in the Companys ownership, we could
recognize no benefit from our deferred tax assets, in accordance with our
current estimate, or we could recognize some or all of their full value.

Stock-Based Compensation

Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards
(SFAS) No. 123(R), Share-Based Payment, using the modified perspective
method. Under this method, previously reported amounts are not restated. SFAS
No. 123(R) requires the measurement of compensation expense for all stock
awards granted to

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employees and
non-employee directors at fair value on the date of grant and recognition of
compensation expense over the related service periods for awards expected to
vest. Under the modified perspective method, we recognize compensation expense
for all stock awards granted after December 31, 2005, and for awards granted
prior to January 1, 2006 that remained unvested as of that date or which may be
subsequently modified.

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

We
will continue to recognize stock-based compensation for service-based
graded-vesting stock awards granted prior to January 1, 2006 using the
accelerated method prescribed by FASB Interpretation No. 28. As permitted by
SFAS No. 123(R), for stock awards granted after December 31, 2005, we have
adopted the straight-line attribution method. In addition, effective January 1,
2006, we have included an estimate of stock awards to be forfeited in the
future in calculating stock-based compensation expense for the period. The
cumulative effect of this accounting change for forfeitures as of January 1,
2006 was not material due to the significant reduction in both the number of
personnel receiving stock awards and the aggregate amount of stock awards
granted by us in 2004 and 2005. We consider several factors when estimating
future forfeitures, including types of awards, employee level and historical
experience. Actual forfeitures may differ substantially from our current
estimates.

Refer
to the section entitled Stock-Based Compensation on page 22 for a further
discussion of the impact of SFAS No. 123(R) on our recording of stock-based
compensation for the three and six months ended June 30, 2006.

Results
of Operations

Net Revenues

Net
revenues were $17.7 million and $32.5 million for the three and six months
ended June 30, 2006, respectively, compared to $13.6 million and $25.5 million
for the corresponding periods in 2005.

Online
sponsorship and advertising revenues increased to $8.4 million and $16.2
million for the three and six months ended June 30, 2006, respectively, as
compared to $6.1 million and $11.8 million for the corresponding periods in
2005. Revenue from local vendor online advertising programs increased by $1.2
million and $2.3 million for the three and six months ended June 30, 2006,
respectively, or by approximately 28% and 29% when compared to the
corresponding periods in 2005, primarily as a result of an increase in the
number and average spending of local vendor clients, including the continuing
impact of price increases. In addition, there was an increase of $1.1 million
and $2.0 million in national online sponsorship and advertising revenue for the
three and six months ended June 30, 2006, or approximately 61% and 54%,
respectively, when compared to the corresponding periods in 2005, largely due
to an increase in the average spending by our national accounts. Online
sponsorship and advertising revenues amounted to 47% of our net revenues for
the three months ended June 30, 2006 and 45% for the three months ended June
30, 2005. For the six months ended June 30, 2006 and 2005, sponsorship and
advertising revenues amounted to 50% and 46% of our net revenues, respectively.

Merchandise
revenues, which consist primarily of the sale of wedding supplies, increased to
$4.9 million and $8.0 million for the three and six months ended June 30, 2006,
respectively, as compared to $4.1 million and $7.5 million for the
corresponding periods in 2005. While retail supplies revenues were relatively
flat in the first quarter of 2006, these revenues increased by $1.0 million in
the three months ended June 30, 2006 or 28%. Site improvements and more
effective marketing efforts resulted in increased traffic and sales with
respect to the shopping areas on our site. The sale of wedding supplies to
wholesale customers decreased by $102,000 and $225,000 for the three and six
months ended June 30, 2006, respectively, as compared to the prior year. We
previously conducted a review of our wholesale customer base and eliminated a
number of marginally profitable accounts in 2004 and 2005. The balance of the
merchandise revenue variance relates to registry revenue. In 2006, we are no
longer maintaining inventory and recording sales of registry-related products.
We are now generally receiving only commissions from the sale of products
through our retail partnerships. Merchandise revenues amounted to 28% of our
net revenues for the three months ended June 30, 2006 and 30% for the three
months ended June 30, 2005. For the six months ended June 30, 2006 and 2005,
merchandise revenue was 25% and 29% of our net revenues, respectively.

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Publishing
and other revenues increased to $4.5 million and $8.3 million for the three and
six months ended June 30, 2006, respectively, as compared to $3.4 million and
$6.2 million for the corresponding periods in 2005. Local print revenue
increased by $875,000 and $1.2 million for the three and six months ended June
30, 2006, respectively, or approximately 28% and 29%, respectively, when
compared to the corresponding periods in 2005, due to an increase in
advertising pages sold, including pages associated with the local section of
our national magazine, and a small increase in pricing. For the six months
ended June 30, 2006, national print revenue increased by $309,000 or 19% as a
result of an increase in the number of designer advertisers and advertising
page rates for both designer and national advertisers. In 2006, we also
recorded $131,000 and $361,000 in author royalties for the three and six months
ended June 30, 2006, respectively, upon the delivery and acceptance of two new
books from our current program of wedding and newlywed-related publications.
Additionally, for the three and six months ended June 30, 2006, respectively,
we recorded revenues of $263,000 and $309,000 from our bridal events program in
partnership with Four Seasons Hotels and Resorts. Publishing and other revenue
amounted to 25% of our net revenues for the three months ended June 30, 2006 and
2005. For the six months ended June 30, 2006 and 2005, publishing and other
revenue was 26% and 24% of our net revenues, respectively.

Cost of Revenues

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

Cost
of revenues increased to $4.1 million and $7.2 million for the three and six
months ended June 30, 2006, respectively, from $2.9 million and $5.8 million
for the corresponding periods in 2005. Online advertising cost of revenue
increased by $138,000 and $296,000 for the three and six months ended June 30,
2006, respectively, primarily due to the publication costs associated with The
Knot TV. The cost of revenues from the sale of merchandise increased by
$478,000 and $428,000 for the three and six months ended June 30, 2006,
respectively, due to the increase in revenue in the second quarter and a small
decline in margin as a result of increased product promotions. Publishing and
other cost of revenue increased by $566,000 and $676,000 for the three and six
months ended June 30, 2006, respectively, due to higher costs for both our
national and local print publications as a result of increased advertising page
counts and direct costs related to the bridal events program. These higher
costs were offset, in part, by improved margins for our print publications
driven by the gains in print advertising revenue. As a percentage of our net
revenues, cost of revenues was 23% and 22% for the three and six months ended
June 30, 2006, respectively, as compared to 21% and 23% for each of the
corresponding periods in the prior year.

Product and Content Development

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

Product
and content development expenses were relatively flat for the three months
ended June 30, 2006 and 2005, and increased to $3.6 million for the six months
ended June 30, 2006, as compared to the corresponding period in 2005. Personnel
and related expenses increased by $202,000 and $404,000 for the three and six
months ended June 30, 2006, respectively, primarily due to additional
investments in information technology staff. These increases included
approximately $25,000 and $54,000, respectively, related to stock-based
compensation and were generally offset by reductions in costs for computer
hardware and software and outside consultants. In addition, for the six months
ended June 30, 2005, we incurred severance and other costs of approximately
$120,000 in connection with the relocation of a significant portion of our
information technology function to Austin, Texas. As a percentage of our net
revenues, product and content development expenses decreased to 10% and 11%,
respectively, for the three and six months ended June 30, 2006 from 13% and 14%
for each of the corresponding periods in 2005.

Sales and Marketing

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

Sales
and marketing expenses increased to $4.4 million and $9.1 million for the three
and six months ended June 30, 2006, respectively, from $3.5 million and $7.2
million for the corresponding periods in 2005. Personnel and

21

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related costs
increased by $537,000 and $1.3 million for the three and six months ended June
30, 2006, respectively, primarily as a result of investments in national and
local sales staff, in part, as additional support for sales efforts for new
initiatives, including The Nest. These increases included approximately $68,000
and $122,000, respectively, related to stock-based compensation. We also
incurred additional promotion costs of $135,000 and $289,000 for the three and
six months ended June 30, 2006, respectively, as compared to the corresponding
periods in 2005. For the six months ended June 30, 2006, we also incurred
higher sales commissions and incentives of $122,000 in 2006 as a result of the
increases in online advertising and print revenue. As a percentage of our net
revenues, sales and marketing expenses were 25% and 28% for the three and six
months ended June 30, 2006, respectively, and 26% and 28% for the corresponding
periods in 2005.

General and Administrative

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

General
and administrative expenses decreased to $3.3 million and $6.6 million for the
three and six months ended June 30, 2006, respectively, as compared to $3.9
million and $7.0 million for the corresponding periods in 2005. Legal and other
professional costs related to our current litigation with WeddingChannel
amounted to $11,000 and $151,000 during the three and six months ended June 30,
2006, respectively. On January 17, 2006, a stay was entered in the litigation
between The Knot and WeddingChannel for a period of not less than 60 days, upon
the joint request of the parties. Prior to the stay, we filed a series of
summary judgment motions seeking to dismiss entirely and/or limit
WeddingChannels claims for patent infringement, and WeddingChannel filed
certain cross-motions for summary judgment concerning certain of our defenses.
These motions were argued before the Court on September 28 and October 19,
2005, and have not yet been decided. On June 5, 2006, we entered into a
definitive Agreement and Plan of Merger and Reorganization with WeddingChannel
to acquire WeddingChannel. We expect that the litigation will be withdrawn
effective as of the closing of the Merger. If, however, the Merger is not
consummated, it is likely that the stay will be lifted and that the litigation
will resume. In such an event, if our motions are unsuccessful and all or a
portion of WeddingChannels patent infringement claims remain, the case may go
to trial in the second half of 2006. Legal costs related to this litigation
were $1.6 million and $2.3 million in the three and six months ended June 30,
2005, respectively. For the three months ended June 30, 2006, we recorded
stock-based compensation expense of approximately $268,000, $129,000 in costs
with respect to the development of a formal disaster recovery plan for the
Company, consulting costs related to Sarbanes-Oxley compliance of $192,000, and
additional professional and other legal costs of $214,000. For the six months
ended June 30, 2006, we recorded stock-based compensation expense of
approximately $513,000, $327,000 in costs with respect to the development of a
formal disaster recovery plan for the Company, consulting costs related to
Sarbanes-Oxley compliance of $260,000, and additional professional and other
legal costs of $393,000. In March 2005, we incurred $95,000 in fees in connection
with our re-listing on the Nasdaq National Market. As a percentage of our net
revenues, general and administrative expenses decreased to 19% and 20% for the
three and six months ended June 30, 2006, respectively, from 28% and 27% for
each of the corresponding periods in 2005.

Stock-Based Compensation

The
following table details the effect on net income and earnings per share had
stock-based compensation expense been recorded based on the fair value method
under SFAS No. 123, as amended, for the three and six months ended June 30,
2005.

| |                                                                                                               |  |                                   |           |                                 |   |           |  
| | ------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | --------- | ------------------------------- | - | --------- | -
| |                                                                                                               |  | Three Months
  EndedJune 30, 2005 |           | Six Months
  EndedJune 30, 2005 |  
| |                                                                                                               |  |                                   |           |                                 |  
| | Net income, as reported                                                                                       |  | $                                 | 1,339,609 |                                 | $ | 1,748,717 |  
| | Add: Total stock-based employee
  compensation expense included in reported net income                        |  |                                   | 0         |                                 |   | 0         |  
| | Deducted: Total stock-based employee
  compensation expense determined under fair value method for all awards |  | $                                 | (222,138  | )                               | $ | (461,229  | )
| |                                                                                                               |  |                                   |           |                                 |   |           |  
| | Net income, pro forma                                                                                         |  | $                                 | 1,117,471 |                                 | $ | 1,287,488 |  
| |                                                                                                               |  |                                   |           |                                 |   |           |  
| | Basic earnings per share, as reported                                                                         |  | $                                 | 0.06      |                                 | $ | 0.08      |  
| |                                                                                                               |  |                                   |           |                                 |   |           |  
| | Basic earnings per share, pro forma                                                                           |  | $                                 | 0.05      |                                 | $ | 0.06      |  
| |                                                                                                               |  |                                   |           |                                 |   |           |  
| | Diluted earnings per share, as reported                                                                       |  | $                                 | 0.05      |                                 | $ | 0.07      |  
| |                                                                                                               |  |                                   |           |                                 |   |           |  
| | Diluted earnings per share, pro forma                                                                         |  | $                                 | 0.05      |                                 | $ | 0.05      |  
| |                                                                                                               |  |                                   |           |                                 |   |           |  

22

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As
of June 30, 2006, total unrecognized estimated compensation expense related to
nonvested stock options, restricted shares and ESPP rights was $2.4 million,
which is expected to be recognized over a weighted average period of 2.4 years.
We currently believe that stock-based compensation expense for the calendar
year ended December 31, 2006 will range from $1.5 million to $1.8 million.

Since
June 2005, we have awarded shares of restricted stock as our primary form of
stock-based compensation. However, we may elect to resume granting stock
options in the future.

Depreciation
and Amortization

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

Depreciation
and amortization increased to $453,000 and $825,000 for the three and six
months ended June 30, 2006, respectively, as compared to $280,000 and $561,000
for the corresponding periods in 2005. The increase was primarily due to
increasing capital expenditures over calendar year 2005 and in the six months ended June 30, 2006, including amounts for our
new e-commerce platform and additional computer hardware and software to
establish secondary back-up systems in connection with the development of a
formal disaster recovery plan for our Company and due to leasehold improvements
to be made at our Omaha facility.

Interest Income

Interest
income, net of interest expense, increased to $363,000 and $663,000 for the
three and six months ended June 30, 2006, respectively, as compared to $167,000
and $297,000 for the corresponding periods in 2005. These increases were
primarily the result of higher funds
available for investment and higher interest rates.

Provision for Taxes
on Income

For
the three and six months ended June 30, 2006, we incurred income tax expense of
$173,000 and $276,000, respectively, as compared to $79,000 and $114,000 for
the corresponding periods in 2005. This was primarily due to operating income
generated in certain states and a provision for federal minimum tax related to
the use of our net operating loss carryforwards.

Liquidity and Capital
Resources

As
of June 30, 2006, our cash, cash equivalents and short-term investments
amounted to $34.3 million. We currently invest primarily in short-term debt
instruments that are highly liquid, of high-quality investment grade, and have
maturities of less than three months, with the intent to make such funds
readily available for operating purposes.

Net
cash provided by operating activities was $6.4 million for the six months ended
June 30, 2006. This resulted primarily from the net income for the period of
$5.6 million, depreciation, amortization, non-cash services expense and
stock-based compensation of $1.8 million, a decrease in accounts receivable,
net of deferred revenue, of $961,000 due to improved collection efforts and
further credit card usage by local vendors. These sources of cash were offset,
in part, by an increase in other assets of $1.1 million due primarily to legal
and other costs associated with the merger agreement with WeddingChannel, a
decrease in accounts payable and accrued expenses of $456,000 and an increase
in deferred production and marketing expenses of $204,000. Inventory also
increased by $163,000 due to higher seasonal sales of wedding supplies in the
second and third quarters. Net cash provided by operating activities was $3.7
million for the six months ended June 30, 2005. This resulted from the net
income for the period of $1.7 million, depreciation, amortization and non-cash
services expense of $779,000, a decrease in accounts receivable, net of
deferred revenue, of $519,000 due to improved collection efforts and further
credit card usage by local vendors and an increase in accounts payable and
accrued expenses of $668,000. These sources of cash were offset, in part, by a
small increase in inventory of $76,000.

23

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Net
cash provided by investing activities was $17,000 for the six months ended June
30, 2006 due primarily to the sale of short-term investments, net of purchases,
of $2.0 million offset, in part, by the purchases of property, equipment and
software of $1.9 million. Net cash provided by investing activities was $7.8
million for the six months ended June 30, 2005 and consisted primarily of
proceeds from the sale of short-term investments, net of purchases, of $9.6
million offset, in part, by purchases of property and equipment of $1.1 million
and cash paid for the acquisition of the business and assets of GreatBoyfriends
LLC of $621,000. We currently believe that purchases of property and equipment
for the calendar year ended December 31, 2006 will increase to between $3.5
million and $4.0 million as a result of the planned acquisition of additional
computer hardware and software to establish secondary back-up systems in
connection with the development of a formal disaster recovery plan for our
Company and due to leasehold improvements to be made at our Omaha facility.

Net
cash provided by financing activities was $526,000 and $710,000 for the six
months ended June 30, 2006 and 2005, respectively, primarily due to proceeds
from the issuance of common stock in connection with the exercise of stock
options and through our Employee Stock Purchase Plan.

Through
June 30, 2006, we have reserved all future tax benefits resulting from tax
deductions in excess of recognized stock-based compensation expense and,
accordingly, we have not reflected any such benefits in our consolidated
statements of cash flows.

We
have only achieved operating income in recent periods, and we have an
accumulated deficit of $36.7 million as of June 30, 2006. We believe that our
current cash and cash equivalents will be sufficient to fund our working
capital and capital expenditure requirements for the foreseeable future. This
expectation is primarily based on internal estimates of revenue growth, as well
as continuing emphasis on controlling operating expenses. However, there can be
no assurance that actual costs will not exceed amounts estimated, that actual
revenues will equal or exceed estimated amounts, or that we will sustain
profitable operations, due to significant uncertainties surrounding our
estimates and expectations.

Contractual
Obligations and Commitments

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

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

As
of June 30, 2006, we had no material commitments for capital expenditures.

As
of June 30, 2006, we had commitments under non-cancelable operating leases
amounting to approximately $4.6 million.

As
of June 30, 2006, other long-term liabilities of $480,000 substantially
represented accruals to recognize rent expense on a straight-line basis over
the respective lives of three of our operating leases under which rental
payments increase over the lease periods. These accruals will be reduced as the
operating lease payments, summarized in the table of contractual obligations
below, are made.

Our
contractual obligations as of June 30, 2006 are summarized as follows:

|                        |  |                        |       |                    |   |             |  |             |       |                     |   |       |  |   |     | 
|----------------------- |  | ---------------------- | ----- | ------------------ | - | ----------- |  | ----------- | ----- | ------------------- | - | ----- |  | - | --- | 
|                        |  | Payments due by Period |      
|                        |  |                        |      
|Contractual Obligations |  | Total                  |       | Less than 1
  year |   | 1-3
  years |  | 3-5
  years |       | More than 5
  years |  
|                        |  |                        |       |                    |   |             |  |             |       |                     |  
|                        |  | (in thousands)         |      
|                        |  |                        |      
|Long term
  debt        |  | $                      | 153   |                    | $ | 47          |  | $           | 106   |                     | $ |      |  | $ |    | 
|Operating leases        |  |                        | 4,573 |                    |   | 969         |  |             | 1,732 |                     |   | 1,415 |  |   | 457 | 
|Purchase
  commitments  |  |                        | 1,578 |                    |   | 1,010       |  |             | 568   |                     |   |      |  |   |    | 
|                        |  |                        |       |                    |   |             |  |             |       |                     |   |       |  |   |     | 
|Total                   |  | $                      | 6,304 |                    | $ | 2,026       |  | $           | 2,406 |                     | $ | 1,415 |  | $ | 457 | 
|                        |  |                        |       |                    |   |             |  |             |       |                     |   |       |  |   |     | 

24

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Seasonality

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

25

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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, cash equivalents and short-term investments of
approximately $34.3 million as of June 30, 2006. These funds are generally
invested in highly liquid debt instruments. As such instruments mature and the
funds are re-invested, we are exposed to changes in market interest rates. This
risk is not considered material, and we manage such risk by continuing to
evaluate the best investment rates available for short-term, high quality
investments.

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

Item
4. Controls and Procedures

The
Companys management, including the Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the Companys disclosure controls and
procedures, as that term is defined in Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act), as of June 30,
2006. 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 quarter ended June 30, 2006 identified in connection with the
evaluation thereof by the Companys management, including the Chief Executive
Officer and Chief Financial Officer, that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over
financial reporting.

PART
II. OTHER INFORMATION

Item 1. Legal
Proceedings

On
September 19, 2003, WeddingChannel.com, Inc. (WeddingChannel) filed a
complaint against The Knot in the United States District Court for the Southern
District of New York. The complaint alleges that The Knot has violated U.S.
Patent 6,618,753 (Systems and Methods for Registering Gift Registries and for
Purchasing Gifts), and further alleges that certain actions of The Knot give
rise to various federal statute, state statute and common law causes of
actions. WeddingChannel is seeking, among other things, damages and injunctive
relief. If The Knot is found to have willfully infringed the patent-in-suit,
enhanced damages may be awarded. This complaint was served on the Company on
September 22, 2003.

Based
on information currently available, The Knot believes that the claims are
without merit and is vigorously defending itself against all claims. On October
14, 2003, The Knot filed an answer and counterclaims against WeddingChannel.
The Knots answer raises various defenses to the counts alleged by
WeddingChannel. Additionally, The Knot has brought counterclaims including a
request that the court declare that the patent-in-suit is invalid,
unenforceable and not infringed. On April 15, 2005, WeddingChannel specified
that they were seeking damages in an amount ranging from approximately $1.1 million
to in excess of approximately $13 million plus interest. The Knot raised
defenses to WeddingChannels patent and other claims, which, if successful,
would obviate or substantially limit any potential damages payments.
WeddingChannel has also requested unspecified damages in connection with other
claims set forth in its complaint.

The
Knot has filed a series of summary judgment motions seeking to dismiss entirely
and/or limit WeddingChannels claims for patent infringement, and
WeddingChannel filed certain cross-motions for summary

26

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judgment concerning certain of The Knots defenses.
These motions were argued before the Court on September 28 and October 19,
2005, and have not yet been decided.

On
January 17, 2006, a stay was entered in the litigation between The Knot and WeddingChannel
for a period of not less than 60 days, upon the joint request of the parties.
On June 5, 2006, we entered into a definitive Agreement and Plan of Merger and
Reorganization (the Merger Agreement) pursuant to which WeddingChannel will
become a wholly-owned subsidiary of The Knot (the Merger). We expect that the
litigation will be withdrawn effective as of the closing of the Merger, and,
therefore, that we will not suffer any harm to our business, results of
operations or financial condition relating to this litigation.

If,
however, the Merger is not consummated, it is likely that the stay will be
lifted and that the litigation will resume. In such an event, if our motions
are unsuccessful and all or a portion of WeddingChannels patent infringement
claims remain, the case may go to trial in the second half of 2006. There can
be no assurance that our answer or counterclaims against WeddingChannel will be
successful. If our answer and our defenses do not succeed or if its
counterclaims are found to be without merit, or if we determine to settle this
litigation at a later date, we could suffer harm to our business and a material
adverse effect to our financial condition and results of operations.

The
Knot is 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.

Item 1A. Risk Factors

Risks
that could have a negative impact on our business, results of operations and
financial condition include without limitation, (i) The Knots unproven
business model, (ii) The Knots history of significant losses, (iii) the
significant fluctuation to which The Knots quarterly revenues and operating
results are subject, (iv) the risks and related costs associated with ongoing
litigation, (v) the seasonality of the wedding industry and (vi) other factors
detailed in documents The Knot files from time to time with the Securities and
Exchange Commission. A more detailed description of each of these and other
risk factors can be found under the caption Risk Factors in our most recent
Annual Report on Form 10-K, filed on March 17, 2006.

In
addition, the following risks could have a negative impact on our business,
results of operations and financial condition:

Risks Related to the Pending Merger
with WeddingChannel

We may fail to consummate our pending Merger with
WeddingChannel, which could materially and adversely affect our business,
results of operations and financial condition, as well as the trading price of
our common stock.

On
June 5, 2006, we announced that we entered into a definitive merger agreement
(the Merger Agreement) with WeddingChannel, a privately-held provider of
wedding planning and gift buying services. We refer to this transaction in this
Quarterly Report on Form 10-Q as the Merger. Under the terms of the Merger
Agreement, we will pay approximately $57.9 million in cash and issue 1,150,000
shares of our common stock in exchange for all of the outstanding capital stock
and stock options of WeddingChannel. We intend to finance the cash portion of
the purchase price through our existing cash resources and, subject to market
conditions, the proceeds of a public offering of our common stock (the Follow-On
Offering).

Separately,
on July 10, 2006, we issued and sold 2,750,000 shares of its common stock in a
private placement (the Private Placement) to three institutional investors at
a price of $18.25 per share. The proceeds from the Private Placement will be
used for general corporate purposes, including working capital and capital
expenditures.

On
August 10, 2006, we priced the Follow-On Offering for the sale of 2,000,000
shares of our common stock, at a public offering price of $16.00. We expect
that the Follow-On Offering, the net proceeds of which we intend to use to fund
part of the cash portion of the purchase price for our pending Merger with
WeddingChannel, will be consummated on August 15, 2006, prior to the completion
of the Merger. The consummation of the Merger is subject to closing conditions,
including, among others, receipt of approval of WeddingChannels stockholders,
receipt of necessary regulatory approvals, the absence of a material adverse
effect on either party and material performance of

27

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each partys obligations under the Merger Agreement.
We intend to consummate the Merger as soon as possible; however, we cannot
assure you that the conditions required to consummate the Merger will be
satisfied or waived on the anticipated schedule or at all.

In
the event that we complete the Follow-On Offering but fail to consummate the
Merger, we will have issued a significant number of additional shares of our
common stock, but we will not have acquired the additional revenue sources
anticipated to result from the Merger. Among other consequences, our earnings
per share would likely decline because our earnings may not increase to an
extent commensurate with the increase in our outstanding shares of common stock
following the Follow-On Offering as well as our recently completed Private
Placement. In addition, if the Merger is not completed, we estimate that we
would have an additional $29.5 million of net proceeds from the Follow-On
Offering, exclusive of net proceeds, if any, in the event the underwriters
exercise some or all of their overallotment option of 952,500 shares of our
common stock. These proceeds would be utilized by our management in its sole
discretion. Furthermore, WeddingChannels litigation with us is likely to
proceed if the Merger is not consummated. As a result, failure to consummate
the Merger could materially and adversely affect our business, results of
operations and financial condition, as well as the trading price of our common
stock.

We may not realize the anticipated benefits of acquiring
WeddingChannel.

The
Knot and WeddingChannel entered into the Merger Agreement in order to, among
other objectives, create a combined company that will serve as a more effective
marketing resource for advertisers and that will achieve cost savings and
operating efficiencies. Achieving the anticipated benefits of the Merger is
subject to uncertainties, including whether The Knot integrates WeddingChannel
in an efficient and effective manner, and general competitive factors in the
marketplace. Failure to achieve these anticipated benefits could result in
increased costs, decreases in expected revenues and diversion of managements
time and energy and could materially and adversely impact The Knots business,
financial condition and results of operations.

We may experience difficulties integrating WeddingChannel
with The Knot.

Integrating
WeddingChannels operations into The Knots business will be a time-consuming
process that will require considerable attention on the part of our management.
We may experience unanticipated difficulties or expenses in connection with the
integration of editorial, information technology and customer service
functions. Similarly, the process of combining sales and marketing forces,
consolidating information technology, communications and administrative
functions, and coordinating product and service offerings can take longer, cost
more, and provide fewer benefits than initially projected. To the extent any of
these events occurs, the anticipated benefits of the Merger may not be
realized, or may be realized more slowly than is currently expected. In
addition, any failure to integrate the two companies in a timely and efficient
manner may increase the risk that the Merger will result in the loss of
customers or key employees or the continued diversion of the attention of
management.

The Merger may result in a loss of customers, advertisers or
suppliers, or a reduction in revenues from existing customers or advertisers.

Some
customers of The Knot or WeddingChannel may seek alternative sources of
services or products due to, among other reasons, a desire not to do business
with the combined company or perceived concerns that the combined company may
not continue to support and maintain certain services or customer service
standards or develop certain product lines. Difficulties in combining
operations could also result in the loss of suppliers or potential disputes or
litigation with customers, suppliers or others. Any steps by management to
counter such potential increased customer or supplier attrition may not be
effective. Failure by management to control attrition could result in worse than
anticipated financial performance.

Some
advertisers have historically placed ads on both The Knots website and
WeddingChannels website. It is possible, following the completion of the
Merger, that these advertisers will decide to reduce their overall spending
with the combined company as compared to their prior advertising spending with
the two websites when they were separate and run by unrelated companies. To the
extent that this occurs, this may have a material adverse effect on our business,
financial condition and results of operations.

28

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The combined company will depend on a limited number of
customers for some significant portion of our sales, and our financial success
is linked to the success of our customers, our customers commitment to our
services and products, and our ability to satisfy and retain our customers.

One
customer would have accounted for more than 10% of our pro forma consolidated
net revenues, after giving effect to the Merger, during the year ended December
31, 2005. We expect that this customer will continue to represent a significant
portion of our net revenues in the future, especially with the consolidation
that is occurring in the retail industry. The loss of this customer or a
reduction in the amount of our net revenues generated by this customer could
have a material adverse effect on our business, results of operations or
financial condition.

The combined company will generate significant revenues from
its registry services business, in which we will face various risks.

The
registry services business of the combined company is dependent on the
continued use of our website by our retail partners whose registries are posted
on the website. While Federated Department Stores, Inc. (Federated) has
entered into an extension of their current registry services contract with
WeddingChannel, contingent upon the closing of the Merger, various other
retailers have contracts with WeddingChannel that are coming up for renewal in
the near future. In the event that one or more retail partners should decide
not to renew their registry services agreements with WeddingChannel following
the completion of the Merger, that could materially and adversely affect our
business, results of operations and financial condition.

The
registry services business of the combined company is also dependent on our
retail partners keeping their respective websites operational, as well as on
the traffic which visits those sites. We also rely on information provided by
these partners to update and integrate registry information daily. Any decline
in traffic or technical difficulties experienced by these websites may
negatively affect the revenues of the combined company.

The
fulfillment and delivery of products purchased by customers using our registry
services is administered by our retail partners and, therefore, we are
dependent on our retail partners to manage inventory, process orders and
distribute products to our customers in a timely manner. If our retail partners
experience problems with customer fulfillment or inventory management, or if we
cannot integrate our processes with those of our partners, our business,
results of operations and financial condition would be harmed.

The
retail services business is highly competitive. Our retail partners compete for
customers, employees, locations, products and other important aspects of their
businesses with many other local, regional, national and international
retailers, both online and offline. We are dependent on our retail partners to
manage these competitive pressures, and to the extent they are unable to do so,
we may experience lower revenue and/or higher operating costs, which could
materially and adversely affect our results of operations.

The services and products of the combined company may
infringe on intellectual property rights of third parties and any infringement
could require us to incur substantial costs and distract our management.

Although
we will avoid knowingly infringing intellectual property rights of third
parties, including licensed content, the combined company may be subject to
claims alleging infringement of third-party proprietary rights. If we are
subject to claims of infringement or are infringing the rights of third
parties, we may not be able to obtain licenses to use those rights on
commercially reasonable terms, if at all. In that event, we would need to
undertake substantial reengineering to continue our online offerings. Any
effort to undertake such reengineering might not be successful.

The combined company will be dependent on certain key
personnel, and the loss of any of these persons may prevent us from
implementing our combined business plan in an effective and timely manner.

Our
success depends, and the success of the combined company will depend, largely
upon the continued services of our executive officers and other key personnel,
including operational and information technology executives. Any loss or
interruption of the services of one or more of our executive officers or these
key personnel could result in our inability to manage our operations
effectively and/or pursue our business strategy.

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The operating results of the combined company may fluctuate
due to seasonality.

Seasonal
and cyclical patterns may affect our revenues. Commissions from the sale of
registry products and revenues from the sale of wedding-related merchandise are
generally higher in the second and third quarters of each year. As a result of
these factors, we may experience fluctuations in our revenues from quarter to
quarter.

The Merger may adversely affect our financial results.

We
are accounting for the Merger using purchase accounting. As a result, we expect
to take a charge against our earnings for amortization of intangibles with a
finite life, and we may be required to take other non-recurring charges,
including writedowns of significant amounts of intangible assets with
indefinite lives or goodwill. Our business, results of operations and financial
condition may be harmed by such charges.

Future sales of shares of our common stock, or the
perception that these shares might be sold, could cause the market price of our
common stock to drop significantly.

If
  we complete the Follow-On Offering, we will have approximately 28,383,664 shares
  of our common stock outstanding (which includes the 2,750,000 shares of common
  stock issued in our recently completed Private Placement). Only certain of these
  shares are subject to lock-up restrictions with the underwriters of the Follow-On
  Offering, and these lock-up restrictions will expire 90 days following the date
  of the pricing of the Follow-On Offering. In addition, we will issue 1,150,000
  shares of our common stock as part of the consideration paid to stockholders
  of WeddingChannel upon the completion of the Merger, and most of those shares
  will be freely tradeable following the closing of the Merger.

On
  July 20, 2006, The Knot first filed a shelf registration statement covering
  resales of the 2,750,000 shares of common stock by the institutional investors
  who purchased shares in the Private Placement. Those shares are freely tradeable.

Contingent
upon the closing of the Merger, The Knot will grant to Federated registration
rights for as long as it owns at least 5% of the outstanding common stock of
The Knot, which rights will be exercisable commencing one year from the date on
which the Merger is consummated. Certain other holders of our securities have,
and certain future holders may be granted, rights to participate in, or require
us to file, registration statements with the SEC for resales of common stock.

We
cannot predict the effect, if any, that future sales of shares of our common
stock into the market, or the availability of shares of common stock for future
sale, will have on the market price of our common stock. Sales of substantial
amounts of common stock (including shares issued upon the exercise of
outstanding stock options), or the perception that such sales could occur, may
materially and adversely affect prevailing market prices for our common stock.

In the event that the Merger is not consummated, it is
likely that our litigation with WeddingChannel will resume.

As
previously disclosed, in September 2003, WeddingChannel filed a complaint
against us alleging, among other claims, that we have violated their U.S.
Patent 6,618,753 (Systems and Methods for Registering Gift Registries and for
Purchasing Gifts), and further alleging that certain actions of The Knot give
rise to various federal statute, state statute and common law causes of
actions. WeddingChannel is seeking, among other things, damages and injunctive
relief. If we are found to have willfully infringed the patent-in-suit,
enhanced damages may be awarded.

We
have filed an answer and counterclaims against WeddingChannel. Our answer
raises various defenses to the counts alleged by WeddingChannel. Additionally,
we have brought counterclaims including a request that the court declare that
the patent-in-suit is invalid, unenforceable and not infringed.

On
January 17, 2006, a stay was entered in the litigation between The Knot and
WeddingChannel for a period of not less than 60 days, upon the joint request of
the parties. Based on the pending Merger, we expect that the litigation will be
withdrawn effective as of the closing of the Merger and, therefore, that we
will not suffer any harm to our business, results of operations or financial
condition relating to this litigation.

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If,
however, the Merger is not consummated, it is likely that the stay will be
lifted and that the litigation will resume. In such an event, if our motions
are unsuccessful and all or a portion of WeddingChannels patent infringement
claims remain, the case may go to trial in the second half of 2006. We cannot
assure you that our answer or counterclaims against WeddingChannel will be
successful. If our answer and our defenses do not succeed or if our
counterclaims are found to be without merit, or if we determine to settle this
litigation at a later date, we could suffer harm to our business and a material
adverse effect to our financial condition and results of operations.

Our
general and administrative expenses increased to $14.5 million for the year
ended December 31, 2005, from $11.1 million for the year ended December 31,
2004 and $7.5 million for the year ended December 31, 2003. These expenses
include legal fees related to the litigation with WeddingChannel of $4.8
million, $3.1 million and $136,000, respectively. Our general and
administrative expenses were $3.3 million for the three months ended March 31,
2006 as compared to $3.1 million for the three months ended March 31, 2005,
which include legal fees relating to the litigation with WeddingChannel of
$180,000 and $683,000, respectively. We cannot predict at this time the amount
of additional legal fees that we may incur. There can be no assurance that we
will not incur substantial legal fees in 2006 or beyond in connection with this
litigation, at levels equal to or greater than the amount of fees incurred in
2005.

Risks
Related to the Securities Markets

Our stock price has been highly volatile and is likely to
experience significant price and volume fluctuations in the future, which could
result in substantial losses for our stockholders and subject us to litigation.

The
equity trading markets may experience periods of volatility, which could result
in highly variable and unpredictable pricing of equity securities. The market
price of our common stock could change in ways that may or may not be related
to our business, our industry or our operating performance and financial
condition. In addition, the trading volume in our common stock may fluctuate
and cause significant price variations to occur. Our common stock has
experienced significant volume and price fluctuations in the past. For example,
from July 1, 2005 through June 30, 2006, the market price of our common stock
tripled, increasing from $6.95 to $20.93. Our current market price and
valuation may not be sustainable. If the market price of our common stock
declines significantly, you may be unable to resell your common stock at or
above your purchase price. In the past, companies that have experienced
volatility in the market price of their stock have been the object of
securities class action litigation. If we were to become the subject of
securities class action litigation, we could face substantial costs and be
negatively affected by diversion of our managements attention and resources.
We cannot assure you that the market price of our common stock will not
fluctuate or decline significantly, including a decline below your purchase
price, in the future. In addition, the stock markets in general can experience
considerable price and volume fluctuations, which could result in substantial
losses for our stockholders.

Provisions in our articles of incorporation, bylaws and
Delaware law may make it more difficult to effect a change in control, which
could adversely affect the price of our common stock.

Provisions
of our certificate of incorporation, bylaws and Delaware law could make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. We may issue shares of preferred stock in the future
without stockholder approval and upon such terms as our board of directors may
determine. Our issuance of this preferred stock could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third
party from acquiring, a majority of our outstanding stock and potentially
prevent the payment of a premium to stockholders in an acquisition. In
addition, our certificate of incorporation includes provisions giving the board
the exclusive right to fill all board vacancies, providing for a classified
board of directors and permitting removal of directors only for cause and with
a super-majority vote of the stockholders.

These
provisions also could discourage proxy contests and make it more difficult for
you and other stockholders to elect directors and take other corporate actions.
As a result, these provisions could make it more difficult for a third party to
acquire us, even if doing so would benefit our stockholders, and may limit the
price that investors are willing to pay in the future for shares of our common
stock.

We
are also subject to provisions of the Delaware General Corporation Law that
prohibit business combinations with persons owning 15% or more of the voting
shares of a corporations outstanding stock for three years following the date
that person became an interested stockholder, unless the combination is
approved by the board of directors

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prior to the person owning 15% or more of the stock,
after which the business combination would be subject to special stockholder
approval requirements. This provision could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of a sale of
our company or may otherwise discourage a potential acquiror from attempting to
obtain control from us, which in turn could have a material adverse effect on
the market price of our common stock.

We have not paid cash dividends on our common stock and do
not anticipate paying any dividends on our common stock in the foreseeable
future.

We
anticipate that we will retain all future earnings and other cash resources for
the future operation and development of our business. As a result, we do not
intend to declare or pay any cash dividends on our common stock in the
foreseeable future. Payment of any future dividends will be at the discretion
of our board of directors after taking into account many factors, including our
operating results, financial conditions, current and anticipated cash needs and
plans for expansion. Accordingly, investors must rely on sales of their common
stock after price appreciation, which may not occur, as the only way to realize
any future gains on their investment. Investors seeking cash dividends should
not purchase our common stock.

Our executive officers, directors and principal stockholders
exercise significant control over all matters requiring a stockholder vote.

As
of August 7, 2006, our executive officers and directors and 5% stockholders,
and their affiliates, in the aggregate, beneficially owned approximately 61.4%
of our outstanding common stock. As a result, if some or all of these
stockholders act as a group, they would be able to exercise control over all
matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions. This
concentration of ownership could also have the effect of delaying or preventing
a change in control.

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

The
Company held its Annual Meeting of Stockholders on May 24, 2006.

The
stockholders elected Ann Winblad and Matthew Strauss to the class of directors
whose terms expire at the 2009 Annual Meeting of Stockholders or until their successors
are elected and have qualified.

The
stockholders ratified the appointment of Ernst & Young LLP as the Companys
independent registered public accounting firm for the calendar year ending
December 31, 2006.

Shares
of common stock were voted as follows:

|                             |  |  |            |  |  |                  |  |  |             |  |  |                       | 
|---------------------------- |  |  | ---------- |  |  | ---------------- |  |  | ----------- |  |  | --------------------- | 
|Director Nominee or Proposal |  |  | For        |  |  | Against/Withheld |  |  | Abstentions |  |  | Broker
  Non-
  Votes | 
|                             |  |  |            |  |  |                  |  |  |             |  |  |                       | 
|Ann Winblad                  |  |  | 21,567,443 |  |  | 46,430           |  |  | 0           |  |  | 154,142               | 
|Matthew Strauss              |  |  | 21,564,752 |  |  | 49,121           |  |  | 0           |  |  | 154,142               | 
|Ratification of Auditors     |  |  | 21,563,205 |  |  | 46,291           |  |  | 4,376       |  |  | 154,143               | 

Item 6. Exhibits

| |      |                                                                                                                                                                         
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 Executive Officer
  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.           

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| |      |                                                                                                                                                       
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

SIGNATURES

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

|                      |                |                                                                                    
|--------------------- | -------------- | -----------------------------------------------------------------------------------
|Date: August 14, 2006 | THE KNOT, INC.
|                      |               
|                      | By:            | /s/ Richard Szefc                                                                  
|                      |                |                                                                                    
|                      |                | Richard Szefc                                                                      
|                      |                | Chief Financial Officer (Principal Financial Officer
  and Duly Authorized Officer)

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EXHIBIT
INDEX

|                   |                                                                                                                                                                          | 
|------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|Number Description |                                                                                                                                                                         
|                   |                                                                                                                                                                         
|                   |                                                                                                                                                                         
|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.                  

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