UNITED
STATES SECURITIES AND EXCHANGE COMMISSION




WASHINGTON
D.C. 20549




FORM
10-Q




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




FOR
THE QUARTERLY PERIOD ENDED MARCH 31, 2009


or




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




COMMISSION
FILE NUMBER:   000-28271




THE
KNOT, INC.


(Exact
Name of Registrant as Specified in its Charter)




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




462
Broadway, 6th
Floor


New
York, New York 10013


(Address
of Principal Executive Officer and Zip Code)




(212)
219-8555


(Registrant’s
Telephone Number, Including Area Code)




Indicate
by check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes x No
 ̈





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




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




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




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




As of May
6, 2009, there were 33,724,401 shares of the registrant’s common stock
outstanding.




1


Page
              NumberPART
      I – FINANCIAL INFORMATIONITEM
      1:
            Financial
      Statements (Unaudited):Condensed
      Consolidated Balance Sheets as of March 31, 2009 and December 31,
      2008
            4Condensed
      Consolidated Statements of Operations for the three months ended March 31,
      2009 and 2008
            5Condensed
      Consolidated Statements of Cash Flows for the three months ended March 31,
      2009 and 2008
            6Notes
      to Condensed Consolidated Financial Statements
            7ITEM
      2:
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            18ITEM
      3:
            Quantitative
      and Qualitative Disclosures About Market Risk
            26ITEM
      4:
            Controls
      and Procedures
            27PART
      II – OTHER INFORMATIONITEM
      1:
            Legal
      Proceedings
            28ITEM1A:
            Risk
      Factors
            28ITEM
      2:
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            29ITEM
      6:
            Exhibits
            29SIGNATURES
            
            30




2




SPECIAL
NOTE ON FORWARD-LOOKING STATEMENTS




This
report contains forward-looking statements relating to future events and the
future performance of The Knot, Inc. based on our current expectations,
assumptions, estimates and projections about us and our
industry.  These forward-looking statements involve risks and
uncertainties.  Actual results or events could differ materially from
those anticipated in such forward-looking statements as a result of certain
factors, as more fully described in Item 1A (Risk Factors) in each of our most
recent Annual Report on Form 10-K  and Part II of this report, and
elsewhere in this report.  We undertake no obligation to update
publicly any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.





WHERE
YOU CAN FIND MORE INFORMATION





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




Unless the context otherwise
indicates, references in this report to the terms “The Knot,” “we,” “our” and
“us” refer to The Knot, Inc., its divisions and its subsidiaries.


3




PART
I – FINANCIAL INFORMATION




ITEM
      1.
            Financial
      Statements






THE
      KNOT, INC.CONDENSED
      CONSOLIDATED BALANCE SHEETS(amounts
      in thousands, except for share and per share data)March
      31,
              
              
              December
      31,2009
              
              
              2008(unaudited)ASSETSCurrent
    assets:Cash and cash
      equivalents
              
              $
              71,692
              
              
              $
              61,488Short-term
      investments
              
              
              2,999
              
              
              
              12,987Accounts
      receivable, net of allowances of $2,723 and $1,161 at March 31, 2009 and
      December 31, 2008, respectively
              
              
              9,371
              
              
              
              9,381Accounts
      receivable from affiliate
              
              
              967
              
              
              
              351Inventories
              
              
              2,429
              
              
              
              2,087Deferred production and marketing
      costs
              
              
              491
              
              
              
              519Deferred tax assets, current
      portion
              
              
              2,322
              
              
              
              2,310Other current
      assets
              
              
              2,453
              
              
              
              2,270Total current
      assets
              
              
              92,724
              
              
              
              91,393Long-term
      investments
              
              
              47,834
              
              
              
              48,974Property and equipment,
      net
              
              
              7,489
              
              
              
              8,331Intangible assets,
      net
              
              
              22,464
              
              
              
              23,686Goodwill
              
              
              37,864
              
              
              
              34,607Deferred tax
      assets
              
              
              21,737
              
              
              
              22,160Other
assets
              
              
              197
              
              
              
              201Total
assets
              
              $
              230,309
              
              
              $
              229,352LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent
      liabilities:Accounts payable and accrued
      expenses
              
              $
              9,001
              
              
              $
              8,648Deferred
      revenue
              
              
              12,863
              
              
              
              11,760Total current
      liabilities
              
              
              21,864
              
              
              
              20,408Deferred tax
      liabilities
              
              
              9,522
              
              
              
              10,236Other
      liabilities
              
              
              330
              
              
              
              360Total
      liabilities
              
              
              31,716
              
              
              
              31,004Stockholders’
      equity:Common stock, $.01 par value;
      100,000,000 shares authorized and  33,727,071 and 32,341,172
      shares issued and outstanding at March 31, 2009 and December 31, 2008,
      respectively
              
              
              337
              
              
              
              323Additional
      paid-in-capital
              
              
              202,344
              
              
              
              200,822Accumulated
      deficit
              
              
              (4,088
              )
              
              
              (2,797
              )Total stockholders’
      equity
              
              
              198,593
              
              
              
              198,348Total liabilities and
      stockholders’ equity
              
              $
              230,309
              
              
              $
              229,352
 
 See
      accompanying Notes to Condensed Consolidated Financial
      Statements
 
 4
  THE
      KNOT, INC.CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(amounts
      in thousands, except for per share data)(unaudited)Three
      Months Ended March 31,2009
                
                
                2008Net
    revenues:Online sponsorship and
      advertising
                
                $
                12,823
                
                
                $
                12,910Registry
      services
                
                
                1,718
                
                
                
                1,778Merchandise
                
                
                5,166
                
                
                
                4,594Publishing and
      other
                
                
                4,010
                
                
                
                4,519Total net
      revenues
                
                
                23,717
                
                
                
                23,801Cost of
      revenue:Online sponsorship and
      advertising
                
                
                675
                
                
                
                523Merchandise
                
                
                2,451
                
                
                
                2,104Publishing and
      other
                
                
                1,732
                
                
                
                1,844Total cost of
      revenues
                
                
                4,858
                
                
                
                4,471Gross
profit
                
                
                18,859
                
                
                
                19,330Operating
      expenses:Product and content
      development
                
                
                5,173
                
                
                
                4,952Sales and
      marketing
                
                
                7,956
                
                
                
                7,579General and
      administrative
                
                
                5,405
                
                
                
                4,809Depreciation and
      amortization
                
                
                2,646
                
                
                
                2,201Total operating
      expenses
                
                
                21,180
                
                
                
                19,541Loss from
      operations
                
                
                (2,321
                )
                
                
                (210
                )Interest and other income,
      net
                
                
                303
                
                
                
                1,202(Loss) income before income
      taxes
                
                
                (2,018
                )
                
                
                992(Benefit) provision for income
      taxes
                
                
                (727
                )
                
                
                413Net (loss)
      income
                
                $
                (1,291
                )
                
                $
                579Net
      (loss) earnings per share:Basic
                
                $
                (0.04
                )
                
                $
                0.02Diluted
                
                $
                (0.04
                )
                
                $
                0.02Weighted
      average number of shares used in calculating net earnings per
      shareBasic
                
                
                31,878
                
                
                
                31,252Diluted
                
                
                31,878
                
                
                
                32,613
 
 See
      accompanying Notes to Condensed Consolidated Financial
      Statements
 
 5
 
 THE
      KNOT, INC.CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(amounts
      in thousands)(unaudited)Three
      Months Ended March 31,2009
                
                
                2008CASH FLOWS FROM OPERATING
      ACTIVITIESNet (loss)
      income
                
                $
                (1,291
                )
                
                $
                579Adjustments to reconcile net
      (loss) income to net cash provided by operating
      activities:Depreciation and
      amortization
                
                
                1,425
                
                
                
                1,254Amortization of
      intangibles
                
                
                1,221
                
                
                
                928Stock-based
      compensation
                
                
                1,018
                
                
                
                747Deferred income
      taxes
                
                
                (727
                )
                
                
                255Excess tax benefits from
      stock-based awards
                
                
                425
                
                
                
                -Reserve for
      returns
                
                
                1,077
                
                
                
                1,807Realized gain on value of auction
      rate securities
                
                
                (64
                )
                
                
                -Allowance for doubtful
      accounts
                
                
                519
                
                
                
                107Other non-cash
      charges
                
                
                (79
                )
                
                
                (19
                )Changes in operating assets and
      liabilities:Increase in accounts
      receivable
                
                
                (1,586
                )
                
                
                (1,100
                )(Increase) decrease in accounts
      receivable from affiliate
                
                
                (615
                )
                
                
                73Increase
      in inventories
                
                
                (266
                )
                
                
                (193
                )Decrease
      (increase) in deferred production and marketing costs
                
                
                28
                
                
                
                (69
                )Increase in other current
      assets
                
                
                (183
                )
                
                
                (251
                )Decrease in other
      assets
                
                
                4
                
                
                
                17Increase (decrease) in accounts
      payable and accrued expenses
                
                
                297
                
                
                
                (14
                )Increase in deferred
      revenue
                
                
                1,103
                
                
                
                1,895Decrease in other
      liabilities
                
                
                (31
                )
                
                
                (22
                )Net cash provided by operating
      activities
                
                
                2,275
                
                
                
                5,994CASH FLOWS FROM
      INVESTING ACTIVITIESPurchases of property and
      equipment
                
                
                (575
                )
                
                
                (2,377
                )Purchases of short-term
      investments
                
                
                -
                
                
                
                (64
                )Proceeds from sales/maturities of
      short-term investments
                
                
                9,992
                
                
                
                13,937Redemptions (purchases) of
      long-term investments
                
                
                1,200
                
                
                
                (39,600
                )Proceeds from sales/maturities of
      long-term investments
                
                
                -
                
                
                
                39,375Acquisition
      of business, net of cash acquired
                
                
                (3,206
                )
                
                
                (1,354
                )Net cash provided by investing
      activities
                
                
                7,411
                
                
                
                9,917CASH FLOWS FROM
      FINANCING ACTIVITIESProceeds
      from issuance of common stock
                
                
                149
                
                
                
                218Proceeds
      from exercise of stock options
                
                
                846
                
                
                
                666Excess
      tax benefits from stock-based awards
                
                
                (425
                )
                
                
                -Repurchase
      of common stock
                
                
                (52
                )
                
                
                (53
                )Net cash provided by financing
      activities
                
                
                518
                
                
                
                831Increase
      in cash and cash equivalents
                
                
                10,204
                
                
                
                16,742Cash
      and cash equivalents at beginning of period
                
                
                61,488
                
                
                
                33,127Cash
      and cash equivalents at end of period
                
                $
                71,692
                
                
                $
                49,869Supplemental
      information:Cash
      paid for interest
                
                $
                -
                
                
                $
                1Cash
      paid for income taxes
                
                $
                176
                
                
                $
                355Cash
      paid for acquisitions
                
                $
                (3,206
                )
                
                $
                (1,362
                )Cash
      acquired in acquisitions
                
                
                -
                
                
                
                8$
                (3,206
                )
                
                $
                (1,354
                )
 
 See
      accompanying Notes to Condensed Consolidated Financial
      Statements


6




THE
KNOT, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)




1.
            Organization and Basis of
      Presentation




The
accompanying unaudited condensed consolidated financial statements include the
accounts of The Knot, Inc. (“The Knot” or the “Company”) and all 100% owned
subsidiaries.  These condensed consolidated financial statements
included in this report have been prepared by the Company pursuant to the rules
and regulations of the SEC.  Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles in the United States have been
condensed or omitted pursuant to such SEC rules and
regulations.  However, the Company believes that the disclosures are
adequate to make the information presented not misleading.  The
financial statements contained herein should be read in conjunction with the
consolidated and combined financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K filed with the SEC for the year ended
December 31, 2008.





In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all normal and recurring adjustments necessary to
present fairly the consolidated financial condition, results of operations and
changes in cash flows of the Company for the interim periods
presented.  The results of operations for the quarter and three months
ended March 31, 2009 are not necessarily indicative of results to be expected
for the entire calendar year.




Segment
Information




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




Recently
Adopted Accounting Pronouncements





On
January 1, 2008, the Company adopted Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value
Measurements (“SFAS 157”), which defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS 157 does not require any new fair value measurements, but provides guidance
on how to measure fair value by providing a fair value hierarchy used to
classify the source of the information. In February 2008, the Financial
Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. 157-2
(“FSP 157-2”) which delayed the effective date of SFAS 157 for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually) until January 1, 2009. The adoption of FSP 157-2 did not have an
impact on the Company’s condensed consolidated results of operations or
financial condition.  In October 2008, the FASB issued FSP No. 157-3
(“FSP 157-3”) which clarifies the application of SFAS 157 as it relates to the
valuation of financial assets in a market that is not active for those financial
assets. FSP 157-3 is effective immediately. FSP 157-3 is applicable to the
valuation of auction rate securities held by the Company for which there was no
active market as of March 31, 2009. The adoption of FSP 157-3 did not have an
impact on the Company’s condensed consolidated results of operations or
financial condition because the Company’s valuation model met the provisions of
FSP 157-3.





On
January 1, 2008 the Company adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities — including an Amendment of FASB Statement No.
115 (“SFAS 159”), which allows an entity to choose to measure certain
financial instruments and liabilities at fair value. Subsequent measurements for
the financial instruments and liabilities an entity elects to fair value will be
recognized in earnings. SFAS 159 also establishes additional disclosure
requirements. Through March 31, 2009, the Company elected the use of the fair
value option to account for the acceptance of an offer from UBS AG (“UBS”), one
of the Company’s investment providers, entitling the Company to sell at par
value its entire portfolio of ARS to UBS at anytime during a two-year period
from June 30, 2010 through July 2, 2012. See Note 2 for a discussion of the
application of SFAS 159.





7


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





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





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





New
Accounting Pronouncements





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





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





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





8




2.
            Fair Value
      Measurements





Cash and
cash equivalents and investments consist of the following:




March
      31,
              
              
              December
      31,2009
              
              
              2008(in
      thousands)Cash and cash
      equivalentsCash
              
              $
              7,775
              
              
              $
              3,623Money market
      funds
              
              
              7,457
              
              
              
              13,023US Treasury
      bill
              
              
              9,999
              
              
              
              -Commercial
      paper
              
              
              46,461
              
              
              
              44,842Subtotal cash and cash
      equivalents
              
              
              71,692
              
              
              
              61,488Short-term
      investmentsAuction rate
      securities
              
              
              2,999
              
              
              
              2,995US Treasury
      bill
              
              
              -
              
              
              
              9,992Subtotal short-term
      investments
              
              
              2,999
              
              
              
              12,987Long-term
      investmentsAuction rate
      securities
              
              
              47,834
              
              
              
              48,974Total cash and cash equivalents
      and investments
              
              $
              122,525
              
              
              $
              123,449




The
Company’s investments in commercial paper at March 31, 2009, consisted of P1/A1
rated corporate debt securities.





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





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





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





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





As of
March 31, 2009, the Company’s investment in cash and cash equivalents of $71.7
million was measured at fair value using Level 1 inputs.





All of
the auction rate securities (“ARS”) are classified as Level 3 instruments. At
March 31, 2009, we held $50.8 million of investments in ARS. $3.0 million of
these investments were classified as short-term investments, while $47.8 million
were classified as long-term investments. ARS are variable interest rate debt
securities which have student loans as the underlying collateral. Approximately
87% of such collateral, in the aggregate, is guaranteed by the United States
government under the Federal Family Education Loan Program. $3.0 million of
these securities have an underlying maturity date of November 1, 2009 while the
remaining securities have maturity dates ranging from March 1, 2022 through
December 1, 2041.The interest rates for the ARS are set at monthly auctions. In
February 2008 these auctions began to fail and all but one auction since then
has failed. Consequently, the investments are not currently liquid. Typically,
the fair value of ARS investments approximates par value due to the frequent
interest rate resets associated with the auction process. As a result of the
auction market cessation, the Company continues to earn interest on our ARS
investments at the “penalty” or “maximum” rate. Currently, there is not an
active market for these securities, and therefore they do not have a readily
determinable market value. Accordingly, the estimated fair value of the ARS no
longer approximates par value. At March 31, 2009, the Company prepared a
valuation for the ARS investments utilizing a discounted cash flow approach.
Based on this Level 3 valuation, the Company valued its long-term ARS
investments at $46.2 million, which represents a decline in value of $1.7
million from par. In addition, based on the same Level 3 valuation, the Company
valued its short-term ARS investments at $2.9 million, which represents a
decline in value of $44,000. The Company’s short-term ARS investments are
classified as short-term investments on the Company’s consolidated balance sheet
and mature on November 1, 2009. The assumptions used in preparing the discounted
cash flow model were based on data available as of March 31, 2009 and included
estimates of interest rates, timing and amount of cash flows, credit and
liquidity premiums, and expected holding periods of the ARS. Given the current
market environment, these assumptions are volatile and subject to change, and
thereby could result in significant changes to the fair value of the
ARS.





9


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





The
enforceability of the Right results in a separate freestanding instrument that
is accounted for separately from the ARS portfolio. The Company elected to
account for this security at fair value under SFAS 159. The Company valued the
security using a discounted cash flow approach based on data available as of
March 31, 2009, which included estimates of interest rates, timing and amount of
cash flow, and an adjustment for any bearer risk associated with UBS’s financial
ability to repurchase the ARS beginning June 30, 2010. Any change in these
assumptions and market conditions would affect the value of this Right. The
value of the long-term right was determined to be $1.7 million as of March 31,
2009, while the value of the short-term right was determined to be $43,000. The
resulting gain largely offsets the realized loss on the ARS portfolio. The
$64,000 difference between the loss on the ARS portfolio and the resulting gain
from the Rights was accounted for in Interest and Other Income, net. The Company
believes that subsequent changes in the value of the Rights will largely offset
the subsequent fair value movements of the ARS, subject to the continued
expected performance by the financial institution of its obligations under the
agreement. The Company is entitled to receive the par value of its entire ARS
portfolio beginning on June 30, 2010. Assuming the complete performance of UBS
of its obligations related to the Right, the Company will recover the
accumulated losses recognized from the difference in the fair value movements of
the ARS and the offsetting fair value movements of the Right.





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




Amount(in
      thousands)Balance at December 31,
      2008
              
              $
              51,969Redemptions, at
      par
              
              
              (1,200
              )Change in fair value of ARS
      portfolio
              
              
              1,850Change in fair value of ARS
      Right
              
              
              (1,786
              )Balance at March 31,
      2009
              
              $
              50,833




10




3.
            Stock-BasedCompensation





The Company maintains several
stock-based compensation plans which are more fully described below. Total
stock-based compensation expense related to all of the Company’s stock awards
was included in various operating expense categories for the three months ended
March 31, 2009 and 2008, as follows:





Three
      Months Ended March 31,2009
              
              
              2008(in
      thousands)Product and content
      development
              
              $
              307
              
              
              $
              177Sales and
      marketing
              
              
              262
              
              
              
              190General and
      administrative
              
              
              449
              
              
              
              380Total stock-based
      compensation
              
              $
              1,018
              
              
              $
              747


The
Knot Stock-Based Incentive 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 March 31, 2009, an additional 3,736,695 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). Awards may be granted to
such non-employee directors, officers, employees and consultants of the Company
as the Compensation Committee of Board of Directors shall in its discretion
select. Only employees of the Company are eligible to receive grants of
incentive stock options. Options are granted at the fair market value of the
stock on the date of grant. Options vest over periods up to four years and have
terms not to exceed 10 years. Restricted stock awards vest over periods ranging
from one to five years.





The 2000 Non-Officer Stock Incentive
Plan (the “2000 Plan”) was approved by the Board of Directors in June 2000.
Under the terms of the 2000 Plan, 435,000 shares of common stock of the Company
have been reserved for nonqualified stock options, stock issuances (which may be
restricted stock) or any combination thereof. Awards may be granted to employees
(other than officers or directors of the Company) and consultants and other
independent advisors who provide services to the Company. Options are granted at
the fair market value of the stock on the date of grant. Generally, options have
vested over a four-year period and have terms not to exceed 10 years. Currently,
there are no unvested options outstanding under the 2000
Plan.





11




The
following table represents a summary of the Company’s stock option activity
under the 1999 and 2000 Plans and related information, without regard for
estimated forfeitures, for the three months ended March 31, 2009:





Shares
              
              
              Weighted
      Average Exercise Price(in
      thousands)Options outstanding at December
      31, 2008
              
              
              1,496
              
              
              $
              6.04Options
      exercised
              
              
              (408
              )
              
              
              2.87Options
      canceled
              
              
              (43
              )
              
              
              17.74Options outstanding at March 31,
      2009
              
              
              1,045
              
              
              $
              6.80


There were no options that vested
during the three months ended March 31, 2009. During the three months ended
March 31, 2008 the weighted average fair value of options that vested was $2.08.
The intrinsic value of options exercised during the three months ended March 31,
2009 and 2008 was $1.8 million and $1.7 million, respectively.





The
following table summarizes information about options outstanding at March 31,
2009:





Options
      Outstanding
              
              
              Options
      ExercisableRange
      of
                Exercise
      Price
              
              
              Number
                Outstanding
      as of March 31, 2009
              
              
              Weighted
                Average
                Remaining
      Contractual
                Life
      (in Years)
              
              
              Weighted
                Average
                Exercise
      Price
              
              
              Number
                Exercisable
                as
      of
                March
      31, 2009
              
              
              Weighted
                Average
                Exercise
      Price(in
      thousands)
              
              
              
              
              
              
              
              
              (in
      thousands)$0.42
      to $1.03
              
              
              
              256
              
              
              
              1.82
              
              
              $
              0.94
              
              
              
              256
              
              
              $
              0.94$1.37 to
    $4.10
              
              
              
              504
              
              
              
              4.32
              
              
              
              3.30
              
              
              
              504
              
              
              
              3.30$18.26
              
              
              
              285
              
              
              
              3.16
              
              
              
              18.26
              
              
              
              95
              
              
              
              18.261,045
              
              
              
              3.39
              
              
              $
              6.80
              
              
              
              855
              
              
              $
              4.25


The weighted average remaining
contractual life of options exercisable as of March 31, 2009 was 3.44
years.





As of March 31, 2009, there were
2,167,535 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 March 31, 2009 was $4.3 million, all of which relates to
vested awards. The intrinsic value for stock options is calculated based on the
exercise price of the underlying awards and the quoted price of the Company’s
common stock as of March 31, 2009.





12




The
following table summarizes nonvested stock option activity for the three months
ended March 31, 2009:





Shares
              
              
              Weighted
      Average Exercise Price(in
      thousands)Nonvested options outstanding at
      December 31, 2008
              
              
              190
              
              
              $
              18.26Vested
              
              
              -
              
              
              
              -Canceled
              
              
              -
              
              
              
              -Nonvested options outstanding at
      March 31, 2009
              
              
              190
              
              
              $
              18.26


As of March 31, 2009 and
2008, there were1,646,674and460,176service-based restricted stock awards
outstanding, respectively. During thethree months ended March 31, 2009 and
2008,1,011,500and75,000 shares, respectively, of restricted
stock were awarded at weighted average grant-date fair values of $6.91and $13.24, respectively. During the three months ended March 31,
2009,21,001shares of restricted stock vested,8,792shares of restricted stock were
canceled and8,855restricted shares were
repurchased by the Company in connection with the surrender of these shares by
employees to satisfy tax withholding obligations related to the vesting of the stockawards. The aggregate intrinsicvalue of restricted shares at March 31,
2009was $13.5million. The intrinsic value for
restricted shares is calculated based on the par value of the underlying shares
and the quoted price of the Company’scommon stock as of March 31,
2009.





As of
March 31, 2009, there was $10.9 million of total unrecognized compensation cost
related to nonvested restricted shares, net of estimated forfeitures, which is
expected to be recognized over a weighted average period of 3.34 years. During
the three months ended March 31, 2009 and 2008, the Company recorded $0.9
million and $0.6 million, respectively, of compensation expense related to
restricted shares.





Employee
Stock Purchase 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% and 15% of compensation. Under the ESPP,
eligible employees of the Company may elect to participate on the start date of
an offering period or subsequent semi-annual entry date, if any, 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%
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 March 31, 2009, 457,663 shares were issued under the ESPP and
432,174 shares were added to the reserve pursuant to the automatic share
increase provision.





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





The intrinsic value of shares purchased
through the ESPP on January 31, 2009 and of outstanding ESPP rights as of March
31, 2009 was $26,000 and $34,000, respectively. The intrinsic value of the
shares 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.




13




As of March 31, 2009, there was
$398,000 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 1.1 years. The fair
value of ESPP rights have been estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:





Three
      Months Ended March 31,2009
              
              2008Weighted average expected
      lives
              
              0.50
      years
              
              0.50
      yearsRisk-free
    rate
              
              0.36%
              
              2.15%Expected
      volatility
              
              44.6%
              
              44.6%Dividend
    yield
              
              0%
              
              0%


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





During the three months ended March 31,
2009 and 2008, the Company recorded $102,000 and $167,000, respectively, of
compensation expense related to options and ESPP rights and received cash from
the exercise of options and ESPP rights of $1.1 million and $884,000,
respectively, for which the Company issued new shares of common
stock.




4.
            Comprehensive
      Loss





Comprehensive loss, net of taxes, is
comprised of the following:




Three Months Ended March
      31,2009
              
              
              2008(in
    thousands)Net
      (loss) income
              
              $
              (1,291
              )
              
              $
              579Unrealized loss on auction rate
      securities
              
              
              -
              
              
              
              (1,067
              )Comprehensive
      loss
              
              $
              (1,291
              )
              
              $
              (488
              )
 14


5.
            Inventory





Inventory
consists of the following:




March
      31,
                2009
              
              
              December
      31,
                2008(in
      thousands)InventoryRaw
    materials
              
              $
              518
              
              
              $
              366Finished
    goods
              
              
              1,911
              
              
              
              1,721Total inventory,
      net
              
              $
              2,429
              
              
              $
              2,087




6.
            Goodwilland OtherIntangible
      Assets





The
change in the carrying amount of goodwill at March 31, 2009 is as
follows:





Amount(in
      thousands)Balance at December 31,
      2008
              
              $
              34,608WedSnap acquisition (see Note 8),
      including foreign exchange impact
              
              
              3,256Balance at March 31,
      2009
              
              $
              37,864




Other
intangible assets consisted of the following:





March
      31, 2009
            
            
            December
      31, 2008Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            
            Net
      Cost
            
            
            Gross
      Carrying Amount
            
            
            Accumulated
      Amortization
            
            
            Net
      Cost(in
      thousands)Indefinite lived intangible
      assets:Tradenames
            
            $
            11,851
            
            
            $
            -
            
            
            $
            11,851
            
            
            $
            11,851
            
            
            $
            -
            
            
            $
            11,851Definite lived intangible
      assets:Customer and advertiser
      relationships
            
            
            5,709
            
            
            
            (2,213
            )
            
            
            3,496
            
            
            
            5,709
            
            
            
            (1,769
            )
            
            
            3,940Developed technology and
      patents
            
            
            12,280
            
            
            
            (6,297
            )
            
            
            5,983
            
            
            
            12,280
            
            
            
            (5,683
            )
            
            
            6,597Trademarks and
      tradenames
            
            
            129
            
            
            
            (102
            )
            
            
            27
            
            
            
            129
            
            
            
            (96
            )
            
            
            33Service contracts and
      other
            
            
            3,328
            
            
            
            (2,221
            )
            
            
            1,107
            
            
            
            3,328
            
            
            
            (2,063
            )
            
            
            1,26521,446
            
            
            
            (10,833
            )
            
            
            10,613
            
            
            
            21,446
            
            
            
            (9,611
            )
            
            
            11,835Total
            
            $
            33,297
            
            
            $
            (10,833
            )
            
            $
            22,464
            
            
            $
            33,297
            
            
            $
            (9,611
            )
            
            $
            23,686




15




Definite
lived intangible assets are amortized over their estimated useful lives as
follows:





Customer
      and advertiser relationships
            2
      to 10 yearsDeveloped
      technology and patents
            5
      yearsTrademarks
      and tradenames
            3
      to 5 yearsService
      contracts and other
            1
      to 7 years





Amortization expense was $1.2 million
and $928,000 for the three months ended March 31, 2009 and 2008, respectively.
Estimated annual amortization expense is $4.9 million in 2009, $4.8 million in
2010, $2.0 million in 2011, $36,000 in 2012, $36,000 in 2013 and $73,000,
thereafter.




7.
            Commitments
      and Contingencies





On
November 4, 2008, the Company was named as a defendant in a complaint filed in
the United States District Court for the Eastern District of Texas and captioned
Balthaser Online, Inc. v. Network Solutions, LLC, The Knot, Inc., Insider
Guides, Inc., Cyworld Inc., FriendFinder Networks, Inc., Hi5 Networks, Inc.,
Freewebs, Inc., Gaia Interactive Inc., Friendster Inc., Ebaum’s World, Inc.,
Puma International, LLC, Imeem, Inc., Scripps Networks, LLC, Live Journal Inc.,
Nike, Inc., Ning, Inc., Swatchbox Technologies, Inc., Electronic Arts Inc.,
Hookumu Inc., Meredith Corp., and Capcom USA, Inc. The complaint alleges that
the defendants are willfully infringing a patent held by the plaintiff by, among
other things, operating websites covered by one or more claims of the patent
that relate to rich-media Internet applications. The complaint seeks
compensatory damages in an amount to be determined at trial, but in no event
less than a reasonable royalty; an accounting of all sales and revenues derived
in connection with the conduct alleged to infringe the patent; an order that
would treble all damages awarded; an award of costs, interest on damages and
reasonable attorneys’ fees; and a permanent injunction. On January 2, 2009, the
Company filed an answer and counter-claims, in which it denied infringement and
denied that Balthaser is entitled to damages, equitable relief, pre-judgment or
post-judgment interest, an exceptional case award, or to any relief whatsoever.
The Company asserted as its affirmative defenses non-infringement, invalidity,
an adequate remedy other than injunctive relief, and no willful infringement.
The Company asserted counter-claims for declaratory judgments as to
non-infringement and invalidity. While the Company intends to vigorously defend
against the claims asserted and pursue its counter-claims, this case is in the
preliminary stages of litigation and, as a result, the ultimate outcome of this
case and any potential financial impact on the Company are not reasonably
determinable at this time.




As of
March 31, 2009, the Company was engaged in other legal actions arising in the
ordinary course of business and believes that the ultimate outcome of these
actions will not have a material effect on its results of operations, financial
position or cash flows.




8.
            Acquisition





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





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





16




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


This acquisition would not have had a
material impact with respect to the consolidated results of operations for the
three months ended March 31, 2009 and 2008 had the acquisition been consummated
on January 1, 2008.





9.
            Income
      Taxes




As of
March 31, 2009, the Company had approximately $4.3 million in unrecognized tax
benefits related to certain acquired net operating loss carryforwards of
WeddingChannel arising from a tax position taken in the 2006 income tax filings
related to losses associated with the dissolution of a subsidiary. This amount
has been netted against the related deferred tax assets and, if recognized,
would result in a reduction of goodwill. However, a portion of these
unrecognized tax benefits could be subject to a valuation allowance if and when
recognized in a future period.




The
Company is subject to taxation in the United States and various state and local
jurisdictions. In December 2007, the Internal Revenue Service completed its
audit of the Company’s 2005 U.S. federal tax return with no adjustment. As of
March 31, 2009, none of the Company’s other tax returns have been examined by
any income taxing authority. As a result of the ongoing use of tax loss
carryforwards, all of the Company’s U.S. federal tax returns from 1998 through
2004 and 2006, its more significant state and local returns, as well as all tax
returns of WeddingChannel remain subject to examination. Through March 31 2009,
the Company has not recorded any interest and penalties related to uncertain tax
positions.





10.
            Earnings
      Per Share





The Company computes earnings or loss
per share in accordance with SFAS No. 128,Earnings per
Share. Basic earnings or
loss per share is computed by dividing net income or loss 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 convertible
securities, stock options and other potentially dilutive financial instruments,
only in the periods in which such effect is dilutive.  There were no
dilutive securities in the three month period ended March 31, 2009, because the
Company incurred a net loss.  For the three months ended March 31, 2008,
the weighted average number of shares used in calculating diluted earnings per
share includes restricted stock, stock options and warrants to purchase common
stock of 1,361,000.
  For the three months ended March 31,
2009 and March 31, 2008, the calculation of net loss and earnings per share
excludes a weighted average number of restricted stock and options to purchase
common stock of 417,000 and 597,000 because to include them in the calculation
would be antidilutive.


17




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





You should read the following discussion
and analysisof ourfinancial
condition and results of operationsin conjunction withourcondensed consolidatedfinancial statements and related notes
included elsewhere in thisreport.




Overview





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





In order
to sustain growth within the customer group we serve, we focus on our key growth
strategy, which is to expand our position as a leading lifestage media company
providing comprehensive information, services and products to couples from
engagement through pregnancy on multiple platforms that keep in step with the
changing media landscape.  To that end we are focused on the following
objectives:





─
            Upgrade
      our technology to increase our operational efficiency so that we can
      access a greater market share of advertising dollars and commerce revenue
      in the weddings portion of our business. We developed a new content
      management system that allows us to more efficiently maintain and organize
      information on our websites. Our new local contract entry system and
      surrounding support applications under development will allow greater
      pricing flexibility, which we believe will allow us to expand our local
      vendor base, as well as achieve operational efficiencies, providing
      additional time for our local sales force to pursue new
      accounts.  In addition to the new contract entry system, we are
      in the process of converting our existing local art management application
      off of our legacy AS/400 system. We currently believe that these local
      systems projects will be completed and rolled out across the local markets
      we serve through the end of 2009.  We then expect to proceed
      with further projects involving a self-service platform that will allow
      local vendors to automatically select their advertising programs and an
      auction-based platform for selling featured vendor positions in the local
      areas on our websites. We are working to enhance the functionality of our
      patented wedding gift registry application to encompass a wide selection
      of items and retailers improving the ability of our users to seamlessly
      add items from multiple retailers to their wish list and complete
      transactions. We expect that these new programs will allow us to more
      effectively scale our local and registry business and drive further growth
      for local online and registry
revenue.





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





─
            Increase
      awareness of our brands and products.  We believe that we have
      generally excelled at marketing to our consumers with compelling brands,
      engaging content and products and a highly successful consumer public
      relations program, but we have not aggressively marketed our media
      offerings to advertisers.  Accordingly, in 2008, we established
      a new marketing team to develop trade marketing programs and supporting
      research aimed at the local vendor community and national advertising
      marketplace as a foundation to drive further national and local
      advertising revenue growth. This team will also be involved in launching
      programs to increase registry searches and transactions from which we
      would derive commission revenue, as well as to increase revenue of our
      wedding supplies business through opportunistic acquisitions and improved
      conversion of our members to customers of our online
    stores.




18




─
            Expand
      our brands internationally.  We are focused on identifying
      opportunities in large international markets where we can use our brand
      recognition and editorial authority on the key lifestages of engagement,
      newlywed and first-time pregnancy to drive further
  growth.





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




First
Quarter 2009




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




·
            Total
      net revenues decreased 0.4% to $23.7
million.





·
            National
      online advertising revenue decreased 9.3% to $4.2
  million.





·
            Local
      online advertising revenue increased 4.2% to $8.6
  million.





·
            Merchandise
      revenue increased 12.4% to $5.2
million.





·
            Publishing
      and other revenue and registry services revenue and declined by 11.3% and
      3.4% to $4.0 million and $1.7 million,
  respectively.





·
            Total
      operating expenses increased by 8.4% to $21.2 million.  The
      increase in operating expenses is primarily related to employee
      compensation associated with headcount increases in mid-2008, operating
      expenses associated with both the Breastfeeding.com and WedSnap
      acquisitions, transaction expenses related to the acquisition of WedSnap,
      bad debt expense and accelerated amortization of the Macy’s relationship
      intangible asset.





·
              Stock-based
      compensation expense increased 36.3% to $1.0 million. The increase was
      primarily due to restricted stock awards granted over the past twelve
      months.·
              Interest
      income declined by $900,000 this quarter from the first quarter of 2008
      due to lower interest rates earned on our cash and
  investments.





·
            Net
      loss for the first quarter was $1.3 million, or $0.04 per basic and per
      diluted share, compared to net income of $579,000, or $0.02 per basic and
      diluted share in the first quarter of
  2008.





·
            At
      March 31, 2009 we had total cash, cash equivalents, and investments of
      $122.5 million. Cash and cash equivalents were $71.7 million, short-term
      investments were $3.0 million and long-term investments were $47.8
      million. Investments consisted entirely of auction rate
      securities.





·
            At
      March 31, 2009 we had no debt.




19





Results
of Operations




Three
Months Ended March 31, 2009 Compared to Three Months Ended March 31,
2008




The following table summarizes results
of operations for 2009 compared to 2008:




Three
      Months Ended March 31,2009
              
              
              2008Amount
              
              
              %
      of Net Revenue
              
              
              Amount
              
              
              %
      of Net Revenue(in
      thousands, except for per share data)Net
revenues
              
              $
              23,717
              
              
              
              100.0
              %
              
              $
              23,801
              
              
              
              100.0
              %Cost of
      revenues
              
              
              4,858
              
              
              
              20.5
              
              
              
              4,471
              
              
              
              18.8Gross
profit
              
              
              18,859
              
              
              
              79.5
              
              
              
              19,330
              
              
              
              81.2Operating
      expenses
              
              
              21,180
              
              
              
              89.3
              
              
              
              19,540
              
              
              
              82.1Loss from
      operations
              
              
              (2,321
              )
              
              
              (9.8
              )
              
              
              (210
              )
              
              
              (0.9
              )Interest and other income,
      net
              
              
              303
              
              
              
              1.3
              
              
              
              1,202
              
              
              
              5.1(Loss) income before income
      taxes
              
              
              (2,018
              )
              
              
              (8.5
              )
              
              
              992
              
              
              
              4.2(Benefit) provision for income
      taxes
              
              
              (727
              )
              
              
              (3.1
              )
              
              
              413
              
              
              
              1.8Net (loss)
      income
              
              $
              (1,291
              )
              
              
              (5.4
              )%
              
              $
              579
              
              
              
              2.4
              %Net
      (loss) earnings per share:Basic
              
              $
              (0.04
              )
              
              
              
              
              
              $
              0.02Diluted
              
              $
              (0.04
              )
              
              
              
              
              
              $
              0.02




20





Net
Revenues




Net revenuesdecreasedto $23.7million for the three months ended March 31,
2009, from $23.8million for the three months ended March 31,
2008.




Three
      Months Ended March 31,Net
      Revenue
              
              
              
              
              
              Percentage
      of
                Total
      Net Revenue2009
              
              
              2008
              
              
              Percentage
      Increase/
                (Decrease)
              
              
              2009
              
              
              2008(in
      thousands)National online sponsorship andadvertising
              
              $
              4,231
              
              
              $
              4,665
              
              
              
              (9.3
              )
       %
              
              
              17.8
              %
              
              
              19.6
              %Local online sponsorship andadvertising
              
              
              8,592
              
              
              
              8,245
              
              
              
              4.2
              
              
              
              36.3
              
              
              
              34.6Total online sponsorship andadvertising
              
              
              12,823
              
              
              
              12,910
              
              
              
              (0.7
              )
              
              
              54.1
              
              
              
              54.2Registry
      services
              
              
              1,718
              
              
              
              1,778
              
              
              
              (3.4
              )
              
              
              7.2
              
              
              
              7.5Merchandise
              
              
              5,166
              
              
              
              4,594
              
              
              
              12.4
              
              
              
              21.8
              
              
              
              19.3Publishing and
      other
              
              
              4,010
              
              
              
              4,519
              
              
              
              (11.3
              )
              
              
              16.9
              
              
              
              19.0Total net
      revenues
              
              $
              23,717
              
              
              $
              23,801
              
              
              
              (0.4
              )
       %
              
              
              100.0
              %
              
              
              100.0
              %


Online sponsorship and
advertising - Net revenues decreased 0.7% driven by decreased revenue
from national advertising programs offset by increased local vendor online
advertising programs.  National online sponsorship and advertising
revenue decreased 9.3%, driven by the loss of key accounts and less spending by
national advertisers. Local online sponsorship and advertising revenue increased
4.2%, driven by an increased number of local vendor clients.  As of
March 31, 2009 we had nearly 15,000 local vendors who display over 18,000
profiles compared to 13,000 vendors who displayed 16,000 profiles as of March
31, 2008.




Registry services – Net
revenues decreased 3.4%, driven by a net decrease in sales by our WeddingChannel
retail partners resulting in lower commissions earned.




Merchandise – Net revenues
increased 12.4%, driven by increased revenues from The Knot Wedding
Shop.  The increase wasattributable to 2008 initiatives focused on product redesigns and new
product introductions, as well as improving e-mail technology.These initiatives helped
drive increased order and customer count.  This increase was offset,
in part, by declines in revenue from the WeddingChannel store and The Nest Baby
shop.





Publishing and other – Net
revenues decreased 11.3% driven by declines in advertising revenue related to
The Knot Best of
Weddings and The Knot
Weddingsmagazines of approximately $330,000 and $101,000
respectively.  We had lower national print profiles revenue of
$155,000.  There was decreased advertising revenues from our regional
magazines of $81,000.  The decrease was driven by our New York
and Minnesota markets. We also had lower advertising revenues from The Nest magazine of $52,000.  These
decreases were partially offset by advertising revenues from The Bumpmagazines.  We acquired
The Bump Media in February 2008 and did not have any publications during the
first quarter of 2008.





21





Gross
Profit/Gross Margin




The
following table presents the components of gross profit and gross margin for
March 31, 2009 compared to March 31, 2008:




Three
      Months Ended March 31,2009
              
              
              2008
              
              
              Increase/(Decrease)Gross
      Profit
              
              
              Gross
                Margin
      %
              
              
              Gross
      Profit
              
              
              Gross
                Margin
      %
              
              
              Gross
      Profit
              
              
              Gross
                Margin
      %(in
      thousands)Online sponsorship andadvertising (national &local)
              
              $
              12,209
              
              
              
              95.2
              %
              
              $
              12,388
              
              
              
              96.0
              %
              
              $
              (179
              )
              
              
              (0.8
              )
       %Registry
              
              
              1,718
              
              
              
              100.0
              
              
              
              1,778
              
              
              
              100.0
              
              
              
              (60
              )
              
              
              -Merchandise
              
              
              2,715
              
              
              
              52.6
              
              
              
              2,490
              
              
              
              54.2
              
              
              
              225
              
              
              
              (1.6
              )Publishing and
      other
              
              
              2,217
              
              
              
              55.3
              
              
              
              2,674
              
              
              
              59.2
              
              
              
              (457
              )
              
              
              (3.9
              )Total gross
      profit
              
              $
              18,859
              
              
              
              79.5
              %
              
              $
              19,330
              
              
              
              81.2
              %
              
              $
              (471
              )
              
              
              (1.7
              )
       %


The
decrease in gross margin was driven by lower gross margins in publishing, online
sponsorship and advertising and wedding supplies. The decrease in publishing
gross margin was driven by lower advertising sold in our
publications.  The decrease in wedding supplies gross margin was due
to lower product margins from the WeddingChannel Shop related to increased
promotion to help drive sales and increased inbound shipping charges, primarily
due to expediting backordered items.  The decrease in online
sponsorship and advertising gross margin was due to increased headcount in those
responsible for online media advertising coupled with slightly lower revenues
year over year.





Operating
Expenses





Operating
expenses increased 8.4% to $21.2 million, compared to $19.5 million in 2008,
driven primarily by investments in our information technology infrastructure and
marketing and national sales support staffthat occurred in
mid-2008, increased bad debt expense and accelerated amortization of the Macy’s
relationship intangible asset.  As a percentage of net revenue,
operating expenses were 89.3% and 82.1% during 2009 and 2008,
respectively.




22




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




Three
      Months Ended March 31,Operating
      Expenses
              
              
              
              
              
              Percentage
      of
                Total
      Net Revenue2009
              
              
              2008
              
              
              Percentage
      Increase/
                (Decrease)
              
              
              2009
              
              
              2008(in
      thousands)Product and content
      development
              
              $
              5,173
              
              
              $
              4,952
              
              
              
              4.5
              %
              
              
              21.8
              %
              
              
              20.8
              %Sales and
      marketing
              
              
              7,956
              
              
              
              7,579
              
              
              
              5.0
              
              
              
              33.5
              
              
              
              31.8General and
      administrative
              
              
              5,405
              
              
              
              4,809
              
              
              
              12.4
              
              
              
              22.8
              
              
              
              20.2Depreciation and
      amortization
              
              
              2,646
              
              
              
              2,201
              
              
              
              20.2
              
              
              
              11.2
              
              
              
              9.3Total operating
      expenses
              
              $
              21,180
              
              
              $
              19,541
              
              
              
              8.4
              %
              
              
              89.3
              %
              
              
              82.1
              %


Product and Content
Development –The increase in these expenseswas primarily due to
increased headcount in our information technology and editorial departments to
support our growth initiatives.  The added headcount resulted in
increased employee related costs of $509,000.  There was increased
stock-based compensation cost of $130,000 related to restricted stock awards
granted over the past twelve months.  We had incremental operating
expenses from our acquisitions of Breastfeeding.com and WedSnap of
$94,000.  There was increased production cost due to the timing of The
Knot TV and The Nest TV program launches of $90,000.  These unfavorable
variances were partially offset by lower consulting fees of $251,000, lower
recruiting fees of $195,000 and decreased computer hardware and software cost of
$135,000.




Sales and Marketing–The
increase in these expenses was primarily due to increased headcount in national
sales and sales support staff departments to support our growth
initiatives.  The added headcount resulted in increased employee
related costs of $233,000.  We also had increased stock-based
compensation cost of $72,000 related to restricted stock awards granted over the
past twelve months. The remaining increase was due primarily to additional
marketing expenses to support research programs, analytics and other promotional
efforts to raise awareness of our brands and products within the local vendor
community and national advertising marketplace, to develop programs designed to
promote registry searches from which we derive commission revenue and to improve
the conversion rate of our membership base to customers of our online stores for
wedding supplies.





General and Administrative
–The increase in these
expenses was primarily due to higher bad debt expense of approximately $410,000
related to increased reserves, given the current state of the
economy.  We had increased employee related costs of $157,000 to
support our overall growth.  There was increased stock-based
compensation cost of $69,000 related to restricted stock awards granted
over the past twelve months.  We also had increased rent expense of
$58,000 related to our new office space in Brooklyn, New
York.   These unfavorable variances were partially offset by a
net decrease in legal fees of $150,000.  In 2008 we had legal fees of
approximately $467,000 related to the putative class action complaint captioned
Haslam v. Macy’s Inc., The Knot, Inc., WeddingChannel.com, Inc. and Does 1-100.
In May 2008, an order was entered dismissing the complaint with
prejudice.  The non-recurrence of these legal fees associated with
this case was partially offset by legal fees of approximately $317,000 related
to acquisition activity during the first quarter of 2009.





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




Interest
and Other Income




Interest
and other income, net was $303,000 for the three months ended March 31, 2009 as
compared to $1.2 million for three months ended March 31, 2008. The decrease was
due to the impact of lower interest rates on our entire portfolio of cash,
commercial paper, treasuries and auction rate securities.




23




Provision
for Taxes on Income




The effective tax rate for the three
months ended March 31, 2009, was approximately 36% as compared to 42% for the
three months ended March 31, 2008.




Liquidity
and Capital Resources





Cash
Flow




Cash and
cash equivalents consist of cash and highly liquid investments with maturities
of 90 days or less at the date of acquisition.  At March 31, 2009, we
had $71.7 million in cash and cash equivalents compared to $49.9 million at
March 31, 2008.




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




For
      the Three Months Ended
                March
      31,2009
              
              
              2008(in
      thousands)Net cash provided by operating
      activities
              
              $
              2,275
              
              
              $
              5,994Net cash provided by investing
      activities
              
              
              7,411
              
              
              
              9,917Net cash provided by financing
      activities
              
              
              518
              
              
              
              831Increase in cash and cash
      equivalents
              
              $
              10,204
              
              
              $
              16,742




Operating
Activities




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




Net cash
provided by operating activities was $6.0 million for the three months ended
March 31, 2008. This resulted primarily from the net income for the period of
$579,000, depreciation, amortization, stock-based compensation and deferred
income taxes of $3.2 million and an increase in deferred revenue, net of
accounts receivable of $2.8 million due to relatively stronger collections from
both national and local accounts during the period. These sources of cash were
offset, in part, by an increase in inventory of $193,000 in anticipation of
higher seasonal sales of wedding supplies in the second and third quarters
and an increase in other current assets of $251,000.




Investing
Activities




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




Net cash
provided by investing activities was $9.9 million for the three months ended
March 31, 2008, primarily due to proceeds from sales of short-term investments,
net of purchases, of $13.9 million offset, in part, by capital expenditures of
$2.4 million and cash paid in connection with the acquisition ofThe Bump Media of $1.4
million.




Financing
Activities




Net cash
provided by financing activities was $518,000 and $831,000 for the three months
ended March 31, 2009 and 2008, 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 and excess tax benefits for stock-based
awards.




24




Off-Balance
Sheet Arrangements




As of
March 31, 2009, we did not have any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as structured
finance or special purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other contractually
narrow or limited purposes.




Seasonality




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




Critical
Accounting Policies





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




The
accounting policies and related risks described in our Annual Report on Form
10-K for the year ended December 31, 2008 are those that depend most heavily on
these judgments and estimates.  As of March 31, 2009, there have been
no material changes to any of the critical accounting policies contained
therein.




Recently
Adopted Accounting Pronouncements





On
January 1, 2008, we adopted Statement of Financial Accounting Standards (“SFAS”)
No. 157, Fair Value
Measurements (“SFAS 157”), which defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS 157 does not require any new fair value measurements, but provides guidance
on how to measure fair value by providing a fair value hierarchy used to
classify the source of the information. In February 2008, the Financial
Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. 157-2
(“FSP 157-2”) which delayed the effective date of SFAS 157 for all nonfinancial
assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually) until January 1, 2009.  The adoption of FSP 157-2 did
not have an impact on our condensed consolidated results of operations or
financial condition.   In October 2008, the FASB issued FSP No.
157-3 (“FSP 157-3”) which clarifies the application of SFAS 157 as it relates to
the valuation of financial assets in a market that is not active for those
financial assets. FSP 157-3 is effective immediately. FSP 157-3 is applicable to
the valuation of auction rate securities held by us for which there was no
active market as of March 31, 2009. The adoption of FSP 157-3 did not have an
impact on our condensed consolidated results of operations or financial
condition because our valuation model met the provisions of FSP
157-3.





On
January 1, 2008 we adopted SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities — including an Amendment of FASB Statement No.
115 (“SFAS 159”), which allows an entity to choose to measure certain
financial instruments and liabilities at fair value. Subsequent measurements for
the financial instruments and liabilities an entity elects to fair value will be
recognized in earnings. SFAS 159 also establishes additional disclosure
requirements. Through March 31, 2009, we elected the use of the fair value
option to account for the acceptance of an offer from UBS AG (“UBS”), one of our
investment providers, entitling us to sell at par value its entire
portfolio of ARS to UBS at anytime during a two-year period from June 30, 2010
through July 2, 2012.  See Note 2 to our condensed consolidated
financial statements contained herein for a discussion of the application
of SFAS 159.




25




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





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





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




New
Accounting Pronouncements





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





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





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





ITEM
3. Quantitative
and Qualitative Disclosures About Market Risk




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





We are
exposed to some market risk through interest rates related to the investment of
our current cash and cash equivalents of $71.7 million as of March 31, 2009.
These funds are generally invested in highly liquid debt instruments. As such
instruments mature and the funds are re-invested, we are exposed to changes in
market interest rates. This risk is not considered material, and we manage such
risk by continuing to evaluate the best investment rates available for
short-term, high quality investments.




26





AtMarch 31,2009we held $50.8 million of investments in auction
rate securities
(“ARS”).  $3.0million of these investments were
classified as short-term investments, while $47.8million were classified as long-term
investments.In February
2008, auctions began to fail for these securities and all but
one auction since then has failed. Consequently, the investments
are not currently liquid and we will not be able to access these funds
until a future auction of these investments is successful, a buyer is found
outside of the auction process or the investments mature, which may be over 20 years. As a result,
our ability to liquidate our investment and fully recover the carrying value of
our investment in the near term may be limited or not
exist.AtMarch 31,2009we prepareda valuationanalysisfor the ARS investmentsutilizinga discounted cash flow
approach.Based
on this Level 3 valuation, we valued the ARS investments at $46.2million, which represents a decline in
value of $1.7 million from
par. The assumptions used in preparing the discounted cash flow model
include estimates of, based
on data available as ofMarch 31,2009interest rates, timing and amount of
cash flows, credit and liquidity premiums, and expected holding periods of the
ARS. These assumptions are volatile and subject to change as the underlying
sources of these
assumptions and market conditions change,andthereby could result in significant
changes to the fair value of ARS.





In November 2008, we accepted an offer
(the “Right”) from UBS AG (“UBS”), one of our investment providers,
entitling us tosell at par
valueour entire portfolio
ofauction-rate securities
at anytime during a two-year period from June 30, 2010 through July 2,
2012. In accepting the Right, we granted UBS the authority to sell or auction
the ARS at par at any time up until the expiration date of the offer and released
UBSfrom any claims relating to the
marketing and sale of ARS. Although we expect to sell our ARS under the Right,
if the Right is not exercised before July 2, 2012 it will expire and UBS
will have no further rightsor obligation to buy our ARS. In lieu of our acceptance of the Right, ARS will
continue to accrue and pay interest as determined by the auction process or the
terms specified in the prospectus of the ARS if the auction process fails. The
value of the Right may largely offset the decline in fair
value of the ARS.




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




ITEM4. Controls and
Procedures




The Company’s management, including the Chief
Executive Officer and Chief Financial Officer, evaluated the effectiveness of
the Company’s disclosure controls and procedures, as
that term is defined in Rule 13a-15(e) promulgated under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), as of March 31,
2009. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective to ensure that information
required to be disclosed by the Company in the reports that the Company files or
submits under the Exchange Act is recorded, processed, summarizedand 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 appropriateto allow timely decisions regarding
required disclosure.




There were no changes in the
Company’s internal control over financial
reporting during thethree
monthsended March 31,
2009identified in connection with the
evaluation thereof by the Company’smanagement, including the Chief
Executive Officer and Chief Financial Officer, thathavematerially affected, orarereasonably likely to materially affect,
the Company’s internal control over financial
reporting.




Management does not expect that our
disclosure controls and
procedures or our internal control over financial reporting will prevent or
detect all error and fraud. Any control system, no matter how well designed and
operated, is based upon certain assumptions and can provide only reasonable,
notabsolute, assurance that its objectives
will be met. Further, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the Company have been detected.The Company’s disclosure controls and procedures are
designed to provide reasonable assurance of achieving their objectives and the
Chief Executive Officer and Chief Financial Officer have concluded that the
disclosure controls and procedures are effective at that reasonable
assurance level.





27




PART II–OTHER INFORMATION




ITEM1. Legal
Proceedings


On
November 4, 2008, The Knot, Inc. was named as a defendant in a complaint filed
in the United States District Court for the Eastern District of Texas and
captioned Balthaser Online, Inc. v. Network Solutions, LLC, The Knot, Inc.,
Insider Guides, Inc., Cyworld Inc., FriendFinder Networks, Inc., Hi5 Networks,
Inc., Freewebs, Inc., Gaia Interactive Inc., Friendster Inc., Ebaum’s World,
Inc., Puma International, LLC, Imeem, Inc., Scripps Networks, LLC, Live Journal
Inc., Nike, Inc., Ning, Inc., Swatchbox Technologies, Inc., Electronic Arts
Inc., Hookumu Inc., Meredith Corp., and Capcom USA, Inc. The complaint alleges
that the defendants are willfully infringing a patent held by the plaintiff by,
among other things, operating websites covered by one or more claims of the
patent that relate to rich-media Internet applications. The complaint seeks
compensatory damages in an amount to be determined at trial, but in no event
less than a reasonable royalty; an accounting of all sales and revenues derived
in connection with the conduct alleged to infringe the patent; an order that
would treble all damages awarded; an award of costs, interest on damages and
reasonable attorneys’ fees; and a permanent injunction. On January 2, 2009, we
filed an answer and counter-claims, in which we denied infringement and denied
that Balthaser is entitled to damages, equitable relief, pre-judgment or
post-judgment interest, an exceptional case award, or to any relief whatsoever.
We asserted as our affirmative defenses non-infringement, invalidity, an
adequate remedy other than injunctive relief, and no willful infringement. We
asserted counter-claims for declaratory judgments as to non-infringement and
invalidity. While we intend to vigorously defend against the claims asserted and
pursue our counter-claims, this case is in the preliminary stages of litigation
and, as a result, the ultimate outcome of this case and any potential financial
impact on us are not reasonably determinable at this time.




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




ITEM 1A.Risk
Factors




Risks
that could have a negative impact on our business, results of operations and
financial condition include without limitation, (i) our online wedding-related
and other websites may fail to generate sufficient revenues to survive over the
long term, (ii) our history of losses, (iii) the significant fluctuation to
which our quarterly revenues and operating results are subject, (iv) the
seasonality of the wedding industry, (v) our dependence on a limited number of
customers, and in particular, Macy’s, for a significant portion of our revenues,
(vi) the dependence of our registry services business on the continued use of
the WeddingChannel.com website by our retail partners, (vii) the potential for
losses on our investments in auction rate securities or our inability to
liquidate these investments at desired times and in desired amounts, and (viii)
other factors detailed in documents we file from time to time with the SEC. A
more detailed description of each of these and other risk factors can be found
under the caption “Risk Factors” in our most recent Annual Report on Form 10-K,
filed with the SEC on March 13, 2009. There have been no material changes to the
risk factors described in our most recent Annual Report on Form
10-K.





28




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







Issuer Purchases of Equity
Securities




Period
              
              (a)
      Total Number of Shares Purchased
              
              
              (b)
      Average Price Paid per Share
              
              
              (
      c) Total Number of Shares Purchased as Part of Publicly Announced Plans or
      Programs
              
              
              (d)
      Maximum Number of Shares That May Yet Be Purchased Under the Plans or
      ProgramsJanuary
      1 to January 31, 2009
              
              
              24,153
              
              
              $
              7.11
              
              
              
              n/a
              
              
              
              n/aFebruary
      1 to February 28, 2009
              
              
              5,916
              
              
              $
              6.81
              
              
              
              n/a
              
              
              
              n/aMarch
      1 to March 31, 2009
              
              
              19,930
              
              
              $
              8.65
              
              
              
              n/a
              
              
              
              n/aTotal
              
              
              49,999
              
              
              
              
              
              
              
              -
              
              
              
              -




The terms of certain awards granted
under certain of the Company’s stock incentive plans allow
participants to surrender or deliver shares of The Knot’s common stock to the Company to pay for
the exercise price of those awards or to satisfy tax withholding obligations
related to the exercise or vesting of those awards. All of the shares listed in
the table above represent the surrender or delivery of shares to the
Company in connection with such exercise price payments or tax withholding
obligations. For purposes of this table, the “price paid per share”is determined by reference to the
closing sales price per share of The Knot’s common stock on The Nasdaq Global
Market on the date of such surrender or
delivery (or on the last date preceding such surrender or delivery for
which such reported price exists).




ITEM 6.Exhibits




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





29





SIGNATURES




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




Date:  May
      8, 2009
            THE
      KNOT, INC.By:
            /s/ John P. MuellerJohn
      P. Mueller
              Chief
      Financial Officer
              (Principal
      Financial Officer and Duly Authorized Officer)




30




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.




31