U.S. SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON,
D.C. 20549

FORM 10-Q

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

FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006

or

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

FOR
THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION
FILE NUMBER: 000-28271

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

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

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

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

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

Yes x          No
o

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

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

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

Yes o
          No x

As of November
3, 2006, there were 30,985,849 shares of the registrants common stock
outstanding.

---



|         |                                                                                                                          |              
|-------- | ------------------------------------------------------------------------------------------------------------------------ | -------------
|         |                                                                                                                          | Page
  Number
|         |                                                                                                                          |              
|         |                                                                                                                          |              
|PART I   | FINANCIAL INFORMATION                                                                                                    |              
|         |                                                                                                                          |              
|Item 1:  | Financial Statements (Unaudited):                                                                                        |              
|         |                                                                                                                          |              
|         | Condensed Consolidated Balance Sheets as of September 30, 2006 and
  December 31, 2005                                   | 3            
|         |                                                                                                                          |              
|         | Condensed Consolidated Statements of Operations for the three months
  and nine months ended September 30, 2006 and 2005 | 4            
|         |                                                                                                                          |              
|         | Condensed Consolidated Statements of Cash Flows for the nine months
  ended September 30, 2006 and 2005                  | 5            
|         |                                                                                                                          |              
|         | Notes to Condensed Consolidated Financial Statements                                                                     | 6            
|         |                                                                                                                          |              
|Item 2:  | Managements Discussion and Analysis of Financial Condition and
  Results of Operations                                  | 17           
|         |                                                                                                                          |              
|Item 3:  | Quantitative and Qualitative Disclosures About Market Risk                                                               | 27           
|         |                                                                                                                          |              
|Item 4:  | Controls and Procedures                                                                                                  | 27           
|         |                                                                                                                          |              
|PART II  | OTHER INFORMATION                                                                                                        |              
|         |                                                                                                                          |              
|Item 1:  | Legal Proceedings                                                                                                        | 27           
|         |                                                                                                                          |              
|Item 1A: | Risk Factors                                                                                                             | 27           
|         |                                                                                                                          |              
|Item 6:  | Exhibits                                                                                                                 | 31           

2

---



Item 1. Financial
Statements (Unaudited)

THE KNOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

|                                                                                                                                                                                           |  |                                      |             |                                  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------ | ----------- | -------------------------------- | - | ----------- | -
|                                                                                                                                                                                           |  | September
  30,
  2006
  (Unaudited) |             | December
  31,
  2005
  (Note 1) |  
|                                                                                                                                                                                           |  |                                      |             |                                  |  
|ASSETS                                                                                                                                                                                     |  |                                      |             |                                  |   |             |  
|Current assets:                                                                                                                                                                            |  |                                      |             |                                  |   |             |  
|Cash and cash equivalents                                                                                                                                                                  |  | $                                    | 70,651,802  |                                  | $ | 17,685,067  |  
|Short-term investments                                                                                                                                                                     |  |                                      | 7,000,000   |                                  |   | 11,550,000  |  
|Accounts receivable, net of allowances of
  $1,681,188 and $379,464 at September 30, 2006 and December 31, 2005,
  respectively                                                            |  |                                      | 8,901,442   |                                  |   | 4,804,581   |  
|Inventories                                                                                                                                                                                |  |                                      | 1,913,075   |                                  |   | 1,622,056   |  
|Deferred production and marketing costs                                                                                                                                                    |  |                                      | 540,897     |                                  |   | 419,555     |  
|Other current assets                                                                                                                                                                       |  |                                      | 1,571,314   |                                  |   | 881,114     |  
|                                                                                                                                                                                           |  |                                      |             |                                  |   |             |  
|Total current assets                                                                                                                                                                       |  |                                      | 90,578,530  |                                  |   | 36,962,373  |  
|Property and equipment, net                                                                                                                                                                |  |                                      | 10,018,106  |                                  |   | 2,986,354   |  
|Intangible assets, net                                                                                                                                                                     |  |                                      | 45,522,186  |                                  |   | 205,555     |  
|Goodwill                                                                                                                                                                                   |  |                                      | 38,785,704  |                                  |   | 8,904,714   |  
|Deferred tax assets                                                                                                                                                                        |  |                                      | 11,860,000  |                                  |   |            |  
|Other assets                                                                                                                                                                               |  |                                      | 505,568     |                                  |   | 325,927     |  
|                                                                                                                                                                                           |  |                                      |             |                                  |   |             |  
|Total assets                                                                                                                                                                               |  | $                                    | 197,270,094 |                                  | $ | 49,384,923  |  
|                                                                                                                                                                                           |  |                                      |             |                                  |   |             |  
|LIABILITIES AND STOCKHOLDERS
EQUITY                                                                                                                                                       |  |                                      |             |                                  |   |             |  
|Current liabilities:                                                                                                                                                                       |  |                                      |             |                                  |   |             |  
|Accounts payable and accrued expenses                                                                                                                                                      |  | $                                    | 11,162,426  |                                  | $ | 5,574,078   |  
|Deferred revenue                                                                                                                                                                           |  |                                      | 11,448,840  |                                  |   | 7,816,435   |  
|Current portion of long-term debt                                                                                                                                                          |  |                                      | 46,651      |                                  |   | 46,651      |  
|                                                                                                                                                                                           |  |                                      |             |                                  |   |             |  
|Total current liabilities                                                                                                                                                                  |  |                                      | 22,657,917  |                                  |   | 13,437,164  |  
|Deferred tax liabilities                                                                                                                                                                   |  |                                      | 18,401,000  |                                  |   |            |  
|Long term debt                                                                                                                                                                             |  |                                      | 105,906     |                                  |   | 105,906     |  
|Other liabilities                                                                                                                                                                          |  |                                      | 811,306     |                                  |   | 504,565     |  
|                                                                                                                                                                                           |  |                                      |             |                                  |   |             |  
|Total liabilities                                                                                                                                                                          |  |                                      | 41,976,129  |                                  |   | 14,047,635  |  
|Commitments and contingencies                                                                                                                                                              |  |                                      |             |                                  |   |             |  
|Stockholders equity:                                                                                                                                                                      |  |                                      |             |                                  |   |             |  
|Preferred stock, $0.001 par value;
  5,000,000 shares authorized; no shares issued and outstanding                                                                                         |  |                                      |            |                                  |   |            |  
|Common stock, $.01 par value; 100,000,000
  shares, authorized; 30,972,265 shares and 23,049,416 shares issued and
  outstanding at September 30, 2006 and December 31, 2005, respectively |  |                                      | 309,723     |                                  |   | 230,494     |  
|Additional paid-in capital                                                                                                                                                                 |  |                                      | 188,372,615 |                                  |   | 77,550,250  |  
|Deferred compensation                                                                                                                                                                      |  |                                      |            |                                  |   | (221,034    | )
|Accumulated deficit                                                                                                                                                                        |  |                                      | (33,388,373 | )                                |   | (42,222,422 | )
|                                                                                                                                                                                           |  |                                      |             |                                  |   |             |  
|Total stockholders equity                                                                                                                                                                 |  |                                      | 155,293,965 |                                  |   | 35,337,288  |  
|                                                                                                                                                                                           |  |                                      |             |                                  |   |             |  
|Total liabilities and stockholders
equity                                                                                                                                                 |  | $                                    | 197,270,094 |                                  | $ | 49,384,923  |  
|                                                                                                                                                                                           |  |                                      |             |                                  |   |             |  

See accompanying notes.

3

---



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

|                                                       |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 
|------------------------------------------------------ |  | ---------------------------------- | ---------- | --------------------------------- | - | ---------- |  | ---- | ---------- |  | - | ---------- | 
|                                                       |  | Three
  Months Ended September 30, |            | Nine
  Months Ended September 30, |  
|                                                       |  |                                    |            |                                   |  
|                                                       |  | 2006                               |            | 2005                              |   | 2006       |  | 2005 |           
|                                                       |  |                                    |            |                                   |   |            |  |      |           
|Net revenues:                                          |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 
|Online sponsorship and advertising                     |  | $                                  | 9,379,888  |                                   | $ | 6,686,531  |  | $    | 25,533,198 |  | $ | 18,516,008 | 
|Registry services                                      |  |                                    | 954,965    |                                   |   | 63,199     |  |      | 1,097,880  |  |   | 210,295    | 
|Merchandise                                            |  |                                    | 4,273,656  |                                   |   | 3,274,848  |  |      | 12,165,753 |  |   | 10,580,706 | 
|Publishing and other                                   |  |                                    | 3,897,744  |                                   |   | 3,092,309  |  |      | 12,189,710 |  |   | 9,308,916  | 
|                                                       |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 
|Total net revenues                                     |  | $                                  | 18,506,253 |                                   | $ | 13,116,887 |  | $    | 50,986,541 |  | $ | 38,615,925 | 
|Cost of revenues:                                      |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 
|Online sponsorship and advertising                     |  | $                                  | 320,854    |                                   | $ | 221,623    |  | $    | 928,621    |  | $ | 533,172    | 
|Registry services                                      |  |                                    |           |                                   |   |           |  |      |           |  |   |           | 
|Merchandise                                            |  |                                    | 2,160,277  |                                   |   | 1,655,477  |  |      | 6,048,440  |  |   | 5,115,414  | 
|Publishing and other                                   |  |                                    | 1,719,472  |                                   |   | 1,170,590  |  |      | 4,410,451  |  |   | 3,186,006  | 
|                                                       |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 
|Total cost of revenues                                 |  | $                                  | 4,200,603  |                                   | $ | 3,047,690  |  | $    | 11,387,512 |  | $ | 8,834,592  | 
|                                                       |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 
|Gross profit                                           |  |                                    | 14,305,650 |                                   |   | 10,069,197 |  |      | 39,599,029 |  |   | 29,781,333 | 
|Operating expenses:                                    |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 
|Product and content development                        |  |                                    | 2,170,369  |                                   |   | 1,742,612  |  |      | 5,784,068  |  |   | 5,197,094  | 
|Sales and marketing                                    |  |                                    | 4,657,215  |                                   |   | 3,516,504  |  |      | 13,739,820 |  |   | 10,673,774 | 
|General and administrative                             |  |                                    | 4,232,411  |                                   |   | 3,916,656  |  |      | 10,820,420 |  |   | 10,891,119 | 
|Depreciation and amortization                          |  |                                    | 975,106    |                                   |   | 340,826    |  |      | 1,799,908  |  |   | 901,444    | 
|                                                       |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 
|Total operating expenses                               |  |                                    | 12,035,101 |                                   |   | 9,516,598  |  |      | 32,144,216 |  |   | 27,663,431 | 
|                                                       |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 
|Income from operations                                 |  |                                    | 2,270,549  |                                   |   | 552,599    |  |      | 7,454,813  |  |   | 2,117,902  | 
|Interest and other income, net                         |  |                                    | 1,082,226  |                                   |   | 206,796    |  |      | 1,745,687  |  |   | 504,133    | 
|                                                       |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 
|Income before income taxes                             |  |                                    | 3,352,775  |                                   |   | 759,395    |  |      | 9,200,500  |  |   | 2,622,035  | 
|Provision for income taxes                             |  |                                    | 90,199     |                                   |   | 36,934     |  |      | 366,451    |  |   | 150,857    | 
|                                                       |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 
|Net income                                             |  | $                                  | 3,262,576  |                                   | $ | 722,461    |  | $    | 8,834,049  |  | $ | 2,471,178  | 
|                                                       |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 
|Net earnings per sharebasic                           |  | $                                  | 0.12       |                                   | $ | 0.03       |  | $    | 0.36       |  | $ | 0.11       | 
|                                                       |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 
|Net earnings per sharediluted                         |  | $                                  | 0.11       |                                   | $ | 0.03       |  | $    | 0.33       |  | $ | 0.10       | 
|                                                       |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 
|Weighted average number of common shares
  outstanding |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 
|Basic                                                  |  |                                    | 27,472,080 |                                   |   | 22,802,123 |  |      | 24,592,760 |  |   | 22,623,619 | 
|                                                       |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 
|Diluted                                                |  |                                    | 29,766,300 |                                   |   | 25,085,676 |  |      | 27,059,012 |  |   | 24,701,236 | 
|                                                       |  |                                    |            |                                   |   |            |  |      |            |  |   |            | 

See accompanying notes.

4

---



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

|                                                                                    |  |                                   |             |      |   |             |  
|----------------------------------------------------------------------------------- |  | --------------------------------- | ----------- | ---- | - | ----------- | -
|                                                                                    |  | Nine
  Months Ended September 30, |            
|                                                                                    |  |                                   |            
|                                                                                    |  | 2006                              |             | 2005 |  
|                                                                                    |  |                                   |             |      |  
|Operating activities                                                                |  |                                   |             |      |   |             |  
|Net income                                                                          |  | $                                 | 8,834,049   |      | $ | 2,471,178   |  
|Adjustments to reconcile net income to net
  cash provided by operating activities: |  |                                   |             |      |   |             |  
|Depreciation and amortization                                                       |  |                                   | 1,386,619   |      |   | 790,999     |  
|Amortization of intangibles                                                         |  |                                   | 413,289     |      |   | 110,445     |  
|Stock-based compensation                                                            |  |                                   | 1,077,270   |      |   | 23,750      |  
|Non-cash services expense                                                           |  |                                   | 445,833     |      |   | 531,825     |  
|Reserve for returns                                                                 |  |                                   | 2,400,954   |      |   | 1,993,900   |  
|Allowance for doubtful accounts                                                     |  |                                   | 123,646     |      |   | (93,589     | )
|Other non-cash charges                                                              |  |                                   | 97,937      |      |   | (45,308     | )
|Changes in operating assets and liabilities
  (net of businesses acquired):         |  |                                   |             |      |   |             |  
|Accounts receivable                                                                 |  |                                   | (2,710,922  | )    |   | (2,673,223  | )
|Inventories                                                                         |  |                                   | (16,814     | )    |   | (326,475    | )
|Deferred production and marketing costs                                             |  |                                   | (121,342    | )    |   | (28,250     | )
|Other current assets                                                                |  |                                   | (98,806     | )    |   | 163,514     |  
|Other assets                                                                        |  |                                   | (76,596     | )    |   | 10,391      |  
|Accounts payable and accrued expenses                                               |  |                                   | (37,969     | )    |   | 229,883     |  
|Deferred revenue                                                                    |  |                                   | 1,854,964   |      |   | 1,760,612   |  
|Other liabilities                                                                   |  |                                   | 56,741      |      |   | 10,866      |  
|                                                                                    |  |                                   |             |      |   |             |  
|Net cash provided by operating
activities                                           |  |                                   | 13,628,853  |      |   | 4,930,518   |  
|                                                                                    |  |                                   |             |      |   |             |  
|Investing activities                                                                |  |                                   |             |      |   |             |  
|Purchases of property and equipment                                                 |  |                                   | (3,059,165  | )    |   | (1,397,220  | )
|Purchases of short-term investments                                                 |  |                                   | (9,300,000  | )    |   | (15,050,000 | )
|Proceeds from sales of short-term
  investments                                     |  |                                   | 13,850,000  |      |   | 24,600,000  |  
|Acquisition of businesses, net of cash
  acquired                                   |  |                                   | (53,313,362 | )    |   | (621,105    | )
|                                                                                    |  |                                   |             |      |   |             |  
|Net cash (used in) provided by investing
  activities                               |  |                                   | (51,822,527 | )    |   | 7,531,675   |  
|                                                                                    |  |                                   |             |      |   |             |  
|Financing activities                                                                |  |                                   |             |      |   |             |  
|Financing costs                                                                     |  |                                   | (5,285,741  | )    |   |            |  
|Proceeds from issuance of common stock                                              |  |                                   | 95,403,788  |      |   | 126,783     |  
|Proceeds from exercise of stock options                                             |  |                                   | 1,042,362   |      |   | 1,096,041   |  
|                                                                                    |  |                                   |             |      |   |             |  
|Net cash provided by financing
activities                                           |  |                                   | 91,160,409  |      |   | 1,222,824   |  
|                                                                                    |  |                                   |             |      |   |             |  
|Increase in cash and cash equivalents                                               |  |                                   | 52,966,735  |      |   | 13,685,017  |  
|Cash and cash equivalents at beginning of
  period                                  |  |                                   | 17,685,067  |      |   | 3,487,818   |  
|                                                                                    |  |                                   |             |      |   |             |  
|Cash and cash equivalents at end of period                                          |  | $                                 | 70,651,802  |      | $ | 17,172,835  |  
|                                                                                    |  |                                   |             |      |   |             |  

See accompanying notes.

5

---



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

1.
BASIS OF PRESENTATION AND NATURE OF OPERATIONS

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

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

The
Company has only achieved operating income in recent periods and has an accumulated
deficit of $33,388,373 as of September 30, 2006.  The Company believes that its current cash and cash equivalents
will be sufficient to fund its working capital and capital expenditure
requirements for the foreseeable future.
This expectation is primarily based on internal estimates of revenue
growth, as well as continuing emphasis on controlling operating expenses.  However, there can be no assurance that
actual costs will not exceed amounts estimated, that actual revenues will equal
or exceed estimated amounts, or that the Company will sustain profitable
operations, due to significant uncertainties surrounding its estimates and
expectations.

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF
CONSOLIDATION

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

USE OF ESTIMATES

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

EARNINGS PER SHARE

The
Company computes earnings per share in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings per Share. Basic earnings per
share is computed by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted earnings per share adjusts
basic earnings per share for the effects of stock options, restricted common
stock, warrants and other potentially dilutive financial instruments, only in
the periods in which the effects are dilutive.
For the three months ended September 30, 2006 and 2005, the weighted
average number of shares used in calculating diluted earnings per share
includes stock options, restricted common stock and warrants to purchase common
stock of 2,294,220 and 2,283,553, respectively.  For the nine months ended September 30, 2006 and 2005, the
weighted average number of shares used in calculating diluted earnings per
share includes stock options, restricted common stock and warrants to purchase
common stock of 2,466,252 and 2,077,617, respectively.  The calculation of earnings per share for
the three and nine months ended September 30, 2005 excludes a weighted average
number of stock options of 16,000 and 43,000, respectively, because to include
them in the calculation would be antidilutive.

SEGMENT INFORMATION

6

---



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

CONCENTRATION OF CREDIT RISK

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

For
the three and nine months ended September 30, 2006, no customer accounted for
more than 5% and 3% of net revenues, respectively.  For the three and nine months ended September 30, 2005, no
customer accounted for more than 2% of net revenues.  As of September 30, 2006, one customer accounted for 19% of
accounts receivable.  At December 31,
2005, no single customer accounted for more than 7% of accounts receivable.

STOCK-BASED COMPENSATION

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

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

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

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

7

---



effective
January 1, 2006.

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

|                                       |  |                            |         |                            |   |           | 
|-------------------------------------- |  | -------------------------- | ------- | -------------------------- | - | --------- | 
|                                       |  | Three Months
        Ended |         | Nine Months
        Ended  |  
|                                       |  |                            |         |                            |  
|                                       |  | September 30,
        2006 |         | September 30,
        2006 |  
|                                       |  |                            |         |                            |  
|                                       |  |                            |         |                            |   |           | 
|Product and content development        |  | $                          | 62,000  |                            | $ | 116,000   | 
|Sales and marketing                    |  |                            | 62,000  |                            |   | 183,000   | 
|General and administrative             |  |                            | 264,000 |                            |   | 778,000   | 
|                                       |  |                            |         |                            |   |           | 
|Total stock-based compensation expense |  | $                          | 388,000 |                            | $ | 1,077,000 | 
|                                       |  |                            |         |                            |   |           | 

The
adoption of SFAS No. 123(R) resulted in an increase to stock-based compensation
and a decrease to net income of $111,000 and $383,000 for the three and nine
months ended September 30, 2006, respectively, and a related reduction in basic
and diluted earnings per share of $0.02 and $0.01, respectively, for the nine
months ended September 30, 2006. There was no impact on basic and diluted
earnings per share for the three months ended September 30, 2006.

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

|                                                                                                              |  |                    |          |                    |   |           |  
|------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | ------------------ | - | --------- | -
|                                                                                                              |  | Three Months Ended |          | Nine Months Ended  |  
|                                                                                                              |  |                    |          |                    |  
|                                                                                                              |  | September 30, 2005 |          | September 30, 2005 |  
|                                                                                                              |  |                    |          |                    |  
|                                                                                                              |  |                    |          |                    |   |           |  
|Net income, as reported                                                                                       |  | $                  | 722,461  |                    | $ | 2,471,178 |  
|Add: Total stock-based
  employee compensation expense included in reported net income                        |  |                    | 23,750   |                    |   | 23,750    |  
|Deduct: Total stock-based
  employee compensation expense determined under fair value method for all
  awards |  |                    | (305,621 | )                  |   | (766,850  | )
|                                                                                                              |  |                    |          |                    |   |           |  
|Net income, pro forma                                                                                         |  | $                  | 440,590  |                    | $ | 1,728,078 |  
|                                                                                                              |  |                    |          |                    |   |           |  
|Basic earnings per share, as
  reported                                                                       |  | $                  | 0.03     |                    | $ | 0.11      |  
|                                                                                                              |  |                    |          |                    |   |           |  
|Basic earnings per share, pro
  forma                                                                         |  | $                  | 0.02     |                    | $ | 0.08      |  
|                                                                                                              |  |                    |          |                    |   |           |  
|Diluted earnings per share,
  as reported                                                                     |  | $                  | 0.03     |                    | $ | 0.10      |  
|                                                                                                              |  |                    |          |                    |   |           |  
|Diluted earnings per share,
  pro forma                                                                       |  | $                  | 0.02     |                    | $ | 0.07      |  
|                                                                                                              |  |                    |          |                    |   |           |  

RECLASSIFICATION

The
Company has reclassified goodwill from intangibles as of December 31, 2005 in
the accompanying condensed consolidated balance sheet and reclassified registry
services revenue from merchandise revenue in the accompanying condensed
consolidated statements of operations for the three and nine months ended
September 30, 2005 to conform to the current presentation.

3.  ACQUISITIONS

WeddingChannel

On
September 8, 2006, the Company completed the acquisition of WeddingChannel.com,
Inc. (WeddingChannel), through the merger of IDO Acquisition Corporation, a
wholly-owned subsidiary of the Company, with and into WeddingChannel (the
Merger). The Merger will increase the Companys market share and provide the
Company additional opportunities to leverage its core assets including its
audience and local and national sales forces.
WeddingChannels registry offerings will also enhance the services the
Company is able to provide engaged couples and their wedding guests.  The aggregate estimated purchase price for
all of the capital stock and stock options of WeddingChannel was approximately
$82.7 million, representing cash paid of $61.7 million, including an estimated
working capital adjustment of $3.8 million, the issuance of 1,149,876 shares of
common stock valued at $18.7 million and direct transaction costs of $2.3
million. The value of the common stock portion of the purchase price was
determined based on the market price of the Companys common stock at the time
the Company made its determination to pay the primary consideration, as defined
in the merger agreement, which fixed the consideration for

8

---



the
outstanding capital stock and stock options of WeddingChannel. The purchase
price is subject to adjustment based upon a final determination of the working
capital of WeddingChannel, as defined, as of September 8, 2006. In addition,
approximately $6.7 million in cash and 115,000 shares of common stock included
in the purchase price are held in an escrow account and are subject to certain
deductions in the event there are changes to the working capital adjustment or
indemnification claims are successfully asserted by the Company pursuant to the
merger agreement.

In
connection with this acquisition, the Company has also recorded estimated
liabilities of $1.3 million, primarily for costs resulting from a plan to
involuntarily terminate certain employees of WeddingChannel and for the net
present value of remaining lease obligations for acquired facilities to be
closed or for acquired space leased which exceeds the Companys current or
projected needs due to staff reductions.

The
estimated cost of the acquisition has been allocated to the assets acquired and
liabilities assumed of WeddingChannel based on a preliminary determination of
their fair values.  These fair values
are subject to change based on the Companys final analysis.

The
following table summarizes the preliminary cost allocation at the date of
acquisition:

|                           |  |   |             | 
|-------------------------- |  | - | ----------- | 
|Current
  assets           |  | $ | 17,702,000  | 
|Property and
  equipment   |  |   | 5,430,000   | 
|Intangible
  assets        |  |   | 45,450,000  | 
|Goodwill                   |  |   | 28,064,000  | 
|Deferred tax
  assets      |  |   | 11,935,000  | 
|Other assets               |  |   | 101,000     | 
|                           |  |   |             | 
|Total assets acquired      |  | $ | 108,682,000 | 
|                           |  |   |             | 
|Current
  liabilities      |  | $ | 5,919,000   | 
|Deferred tax
  liabilities |  |   | 18,535,000  | 
|Other
  liabilities        |  |   | 250,000     | 
|                           |  |   |             | 
|Total liabilities acquired |  |   | 24,704,000  | 
|                           |  |   |             | 
|Total estimated cost       |  | $ | 83,978,000  | 
|                           |  |   |             | 

The
Merger with WeddingChannel was a stock transaction for tax purposes, which
results in different book and tax bases.
Accordingly, the purchase price allocation includes $18.5 million of
deferred tax liabilities related to the tax effect of the preliminary
differences in the book and tax bases of property and equipment and acquired
intangibles other than goodwill.  In
addition, a deferred tax asset of $11.9 million, associated with a reduction in
the valuation allowance previously recorded by WeddingChannel with respect to
its net operating carryforwards for federal and state income tax purposes, has
been recorded based on the recognition and timing of reversal of the estimated
deferred tax liabilities. To the extent further reductions in the valuation
allowance are recorded, the offsetting credit would first reduce goodwill and
then other intangible assets.

The
results of operations for WeddingChannel have been included in the Companys
condensed consolidated statements of operations since September 8, 2006.  The following unaudited pro forma financial
information presents a summary of the results of operations assuming the
acquisition of WeddingChannel occurred as of the beginning of the periods
presented:

|                                   |  |                      |            |                      |   |                      |  |                      |            |  |   |            | 
|---------------------------------- |  | -------------------- | ---------- | -------------------- | - | -------------------- |  | -------------------- | ---------- |  | - | ---------- | 
|                                   |  | Three Months Ended   |            | Nine Months Ended    |  
|                                   |  |                      |            |                      |  
|                                   |  | September 30,
  2006 |            | September 30,
  2005 |   | September 30,
  2006 |  | September 30,
  2005 |           
|                                   |  |                      |            |                      |   |                      |  |                      |           
|Net revenues                       |  | $                    | 24,318,817 |                      | $ | 19,188,477           |  | $                    | 70,119,910 |  | $ | 55,340,023 | 
|Net income                         |  | $                    | 2,949,615  |                      | $ | 1,641,819            |  | $                    | 8,149,178  |  | $ | 4,524,026  | 
|Net earnings
  per share - basic   |  | $                    | 0.10       |                      | $ | 0.06                 |  | $                    | 0.30       |  | $ | 0.18       | 
|Net earnings
  per share - diluted |  | $                    | 0.09       |                      | $ | 0.06                 |  | $                    | 0.27       |  | $ | 0.16       | 

Pro
forma adjustments have been made to reflect depreciation and amortization using
asset values recognized after applying purchase accounting adjustments and
related tax effects as well as to eliminate legal fees incurred in connection
with the litigation between the Company and WeddingChannel, which was withdrawn
pursuant to the Merger.  Direct transaction
and other costs related to the merger, a gain on the sale of an investment and
losses from discontinued operations, all of which were recorded by
WeddingChannel prior to September 8, 2006, have been

9

---



eliminated
from the pro forma financial information.
The pro forma earnings per share amounts are based on the pro forma
weighted average number of shares outstanding which include the shares issued
by the Company as a portion of the total consideration for the Merger and the
shares sold on August 15, 2006 by the Company in connection with a follow-on
offering, the net proceeds from which were used to fund a portion of the cash
consideration for the Merger.

The
pro forma consolidated financial information is presented for information
purposes only.  The pro forma
consolidated financial information does not reflect the effects of any
anticipated changes to be made by the Company to the operations of the combined
companies, including synergies and cost savings and does not include one time
charges expected to result from the Merger. The pro forma consolidated
financial information should not be construed to be indicative of results of
operations or financial position that actually would have occurred had the
acquisition been consummated as of the date indicated or the Companys future
results of operations or financial position.

Lilaguides

On
July 25, 2006, the Company acquired the publishing business and related assets
of OAM Solutions, Inc., the publisher of theLilaguides, local information guides for parents, for $2.1 million,
which includes direct transaction costs.
The acquisition represents the Companys first significant step into the
business of catering to the needs of first-time parents.  The cost of this acquisition was allocated
to the assets acquired based upon a preliminary determination of their fair
values as follows:

|                         |  |   |           | 
|------------------------ |  | - | --------- | 
|Current
  assets         |  | $ | 8,700     | 
|Property and
  equipment |  |   | 14,300    | 
|Tradename                |  |   | 83,000    | 
|Other
  intangibles      |  |   | 168,000   | 
|Goodwill                 |  |   | 1,817,000 | 
|                         |  |   |           | 
|Total cost               |  | $ | 2,091,000 | 
|                         |  |   |           | 

This
acquisition would not have had a material impact with respect to the condensed
consolidated results of operations for the three and nine months ended
September 30, 2006 and 2005 had the acquisition been consummated on January 1,
2005.

4. SHIPPING AND HANDLING CHARGES

For
the three months ended September 30, 2006 and 2005, merchandise revenue
included outbound shipping and handling charges of approximately $655,000 and
$494,000, respectively.   For the nine
months ended September 30, 2006 and 2005, merchandise revenue included outbound
shipping and handling charges of approximately $1,815,000 and $1,522,000,
respectively.

5. INVENTORY

Inventory
consists of the following:

|                 |  | September 30, |           | December 31, |  
|---------------- |  | ------------- | --------- | ------------ | -
|                 |  |               |           |              |  
|                 |  | 2006          |           | 2005         |  
|                 |  |               |           |              |  
|Raw materials    |  | $             | 220,771   |              | $
|Finished
  goods |  |               | 1,692,304 |              |  
|                 |  |               |           |              |  
|                 |  | $             | 1,913,075 |              | $
|                 |  |               |           |              |  

6. GOODWILL

The
changes in the carrying amount of goodwill for the nine months ended September
30, 2006, based upon a preliminary determination of the fair values of assets
acquired and liabilities assumed for acquisitions during the period, are as
follows:

10

---



|                                                       |  |   |            | 
|------------------------------------------------------ |  | - | ---------- | 
|Balance as
  of December 31, 2005                      |  | $ | 8,904,714  | 
|Acquisition
  of OAM Solutions, Inc. (See Note 3)      |  |   | 1,817,169  | 
|Acquisition
  of WeddingChannel.com, Inc. (See Note 3) |  |   | 28,063,821 | 
|                                                       |  |   |            | 
|Balance as
  of September 30, 2006                     |  | $ | 38,785,704 | 
|                                                       |  |   |            | 

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

7. INTANGIBLE ASSETS

|                                      |  |                              |            |                            |   |            |  |                              |            |                            |   |            |  |   |         |  |   |         | 
|------------------------------------- |  | ---------------------------- | ---------- | -------------------------- | - | ---------- |  | ---------------------------- | ---------- | -------------------------- | - | ---------- |  | - | ------- |  | - | ------- | 
|                                      |  | September 30, 2006           |            | December 31, 2005          |  
|                                      |  |                              |            |                            |  
|                                      |  | Gross Cost
  Carrying Amount |            | Accumulated
  Amortization |   | Net
  Cost |  | Gross Cost
  Carrying Amount |            | Accumulated
  Amortization |   | Net
  Cost | 
|                                      |  |                              |            |                            |   |            |  |                              |            |                            |   |            | 
|Indefinite lived intangibles:         |  |                              |            |                            |   |            |  |                              |            |                            |   |            |  |   |         |  |   |         | 
|Tradenames                            |  | $                            | 16,780,000 |                            | $ |           |  | $                            | 16,780,000 |                            | $ |           |  | $ |        |  | $ |        | 
|                                      |  |                              |            |                            |   |            |  |                              |            |                            |   |            |  |   |         |  |   |         | 
|                                      |  |                              |            |                            |   |            |  |                              |            |                            |   |            |  |   |         |  |   |         | 
|Amortizable intangibles:              |  |                              |            |                            |   |            |  |                              |            |                            |   |            |  |   |         |  |   |         | 
|Customer and advertiser relationships |  |                              | 12,710,000 |                            |   | 91,000     |  |                              | 12,619,000 |                            |   |           |  |   |        |  |   |        | 
|Developed technology and patents      |  |                              | 15,230,000 |                            |   | 195,000    |  |                              | 15,035,000 |                            |   |           |  |   |        |  |   |        | 
|Trademarks and tradenames             |  |                              | 211,919    |                            |   | 40,737     |  |                              | 171,182    |                            |   | 100,000    |  |   | 19,445  |  |   | 80,555  | 
|Service contracts and other           |  |                              | 1,598,000  |                            |   | 680,996    |  |                              | 917,004    |                            |   | 700,000    |  |   | 575,000 |  |   | 125,000 | 
|                                      |  |                              |            |                            |   |            |  |                              |            |                            |   |            |  |   |         |  |   |         | 
|                                      |  |                              | 29,749,919 |                            |   | 1,007,733  |  |                              | 28,742,186 |                            |   | 800,000    |  |   | 594,445 |  |   | 205,555 | 
|                                      |  |                              |            |                            |   |            |  |                              |            |                            |   |            |  |   |         |  |   |         | 
|                                      |  |                              |            |                            |   |            |  |                              |            |                            |   |            |  |   |         |  |   |         | 
|Total                                 |  | $                            | 46,529,919 |                            | $ | 1,007,733  |  | $                            | 45,522,186 |                            | $ | 800,000    |  | $ | 594,445 |  | $ | 205,555 | 
|                                      |  |                              |            |                            |   |            |  |                              |            |                            |   |            |  |   |         |  |   |         | 

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

|                                        |  |              
|--------------------------------------- |  | -------------
|Customer and
  advertiser relationships |  | 4 to 10 years
|Developed
  technology and patents      |  | 5 years      
|Trademarks
  and tradenames             |  | 3 to 5 years 
|Service
  contracts and other           |  | 1 to 7 years 

Amortization
expense was $352,000 and $30,000 for the three months ended September 30, 2006
and 2005, respectively, and $413,000 and $110,000 for the nine months ended
September 30, 2006 and 2005, respectively. Estimated annual amortization
expense is $1,634,000 in 2006, $4,803,000 in 2007, $4,661,000 in each of 2008
and 2009, $4,639,000 in 2010, $3,523,000 in 2011 and $5,234,000, thereafter.

8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts
payable and accrued expenses consist of the following:

|                                    |  |                 |            |                |   |           | 
|----------------------------------- |  | --------------- | ---------- | -------------- | - | --------- | 
|                                    |  | September
  30, |            | December
  31, |  
|                                    |  |                 |            |                |  
|                                    |  | 2006            |            | 2005           |  
|                                    |  |                 |            |                |  
|Accounts
  payable                  |  | $               | 3,336,708  |                | $ | 1,971,455 | 
|Professional
  services             |  |                 | 620,764    |                |   | 1,198,788 | 
|Compensation
  and related benefits |  |                 | 3,806,966  |                |   | 1,030,129 | 
|Other
  accrued expenses            |  |                 | 3,397,988  |                |   | 1,373,706 | 
|                                    |  |                 |            |                |   |           | 
|                                    |  | $               | 11,162,426 |                | $ | 5,574,078 | 
|                                    |  |                 |            |                |   |           | 

11

---



Compensation
and related benefits at September 30, 2006 includes $2,022,000 of the Merger
consideration representing payroll taxes that will be withheld and remitted
related to cash payments to WeddingChannel option holders in connection with
the Merger (See Note 3).

9. LONG-TERM DEBT

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

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

Maturities
of long-term obligations during the three years ending September 30, 2009 are
as follows: 2007, $46,651; 2008, $50,733 and 2009, $55,173. Interest expense
for the three and nine months ended September 30, 2006 was $3,000 and $10,000,
respectively. Interest expense for the three and nine months ended September
30, 2005 was $4,000 and $13,000, respectively.

10. STOCK PLANS

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

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

The
2000 Non-Officer Stock Incentive Plan (the 2000 Plan) was approved by the
Board of Directors in June 2000. Under the terms of the 2000 Plan, 435,000
shares of common stock of the Company have been reserved for nonqualified stock
options, stock issuances (which may be Restricted Stock) or any combination
thereof. Awards may be granted to employees (other than officers or directors
of the Company) and consultants and other independent advisors who provide
services to the Company. Options are granted at the fair market value of the
stock on the date of grant. Generally, options vest over a four-year period and
have terms not to exceed 10 years.

As
of September 30, 2006, under the 1999 Plan and the 2000 Plan, there were
1,931,610 shares subject to outstanding options and 1,690,085 shares subject to
outstanding options that were exercisable at such date. As of

12

---



September 30,
2006, there were 333,500 of service-based restricted stock awards outstanding.
As of September 30, 2006, there were 2,137,450 shares available for future
grants under the 1999 Plan and 270,418 shares available for future grants under
the 2000 Plan.

The
Employee Stock Purchase Plan (the ESPP) was adopted by the Board of Directors
and approved by the stockholders in November 1999 and became effective upon
completion of the Companys initial public offering of its common stock. The Compensation
Committee of the Board of Directors administers the ESPP. The ESPP permits a
participating employee to make contributions to purchase shares of common stock
by having withheld from his or her salary an amount between 1 percent and 15
percent of compensation. Under the ESPP, eligible employees of the Company may
elect to participate on the start date of an offering period or 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 percent discount from the fair market value, as
defined in the ESPP, of such stock. Each offering period is determined by the
plan administrator and may not exceed two years. The Company initially reserved
300,000 shares of common stock under the ESPP. The shares reserved
automatically increase on the first trading day in January of each calendar
year by the lesser of the (i) the number of shares of common stock issued under
the ESPP in the immediately preceding calendar year, (ii) 300,000 shares or
(iii) such other lesser amount approved by the Board of Directors. Through
September 30, 2006, 365,767 shares were issued under the ESPP and 305,203
shares were added to the reserve pursuant to the automatic increase provision.

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

|                                          |  |        |           |                                   |   |      | 
|----------------------------------------- |  | ------ | --------- | --------------------------------- | - | ---- | 
|                                          |  | Shares |           | Weighted Average
  Exercise Price |  
|                                          |  |        |           |                                   |  
|Options outstanding at December 31, 2005  |  |        | 2,515,749 |                                   | $ | 2.63 | 
|Options granted                           |  |        |          |                                   |   |     | 
|Options exercised                         |  |        | (534,950  | )                                 |   | 1.95 | 
|Options canceled                          |  |        | (49,189   | )                                 |   | 4.41 | 
|                                          |  |        |           |                                   |   |      | 
|Options outstanding at September 30, 2006 |  |        | 1,931,610 |                                   | $ | 2.78 | 
|                                          |  |        |           |                                   |   |      | 

The
weighted average grant-date fair value of options granted during the nine
months ended September 30, 2005 was $2.43. The fair value of options which
vested during the three months ended September 30, 2006 and September 30, 2005
was $1.99 and $1.79, respectively. The fair value of options which vested
during the nine months ended September 30, 2006 and September 30, 2005 was
$1.82 and $1.72, respectively. The total intrinsic value of options exercised
during the three months ended September 30, 2006 and 2005 was $5.6 million and
$2.1 million, respectively. The total intrinsic value of options exercised
during the nine months ended September 30, 2006 and 2005 was $7.9 million and
$3.8 million, respectively.

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

|                          |  |                                                   |           |                                                                  |  |                                       |  |                                                   |      |                                       |  |           |  |   |      | 
|------------------------- |  | ------------------------------------------------- | --------- | ---------------------------------------------------------------- |  | ------------------------------------- |  | ------------------------------------------------- | ---- | ------------------------------------- |  | --------- |  | - | ---- | 
|                          |  |                                                   |           | Options Outstanding                                              |  | Options Exercisable                   | 
|                          |  |                                                   |           |                                                                  |  |                                       | 
|Range of
  exercise price |  | Number
  Outstanding
  as of
  September 30, 2006 |           | Weighted
  Average
  Remaining
  Contractual
  Life
  (In Years) |  | Weighted
  Average
  Exercise
  Price |  | Number
  Exercisable
  as of
  September 30, 2006 |      | Weighted
  Average
  Exercise
  Price | 
|                          |  |                                                   |           |                                                                  |  |                                       |  |                                                   |      |                                       | 
|$0.42 to
  $1.03          |  |                                                   | 544,116   |                                                                  |  | 4.48                                  |  | $                                                 | 0.80 |                                       |  | 543,082   |  | $ | 0.80 | 
|$1.37 to
  $4.10          |  |                                                   | 1,229,094 |                                                                  |  | 6.72                                  |  |                                                   | 3.32 |                                       |  | 1,067,077 |  |   | 3.25 | 
|$4.80 to
  $9.00          |  |                                                   | 158,400   |                                                                  |  | 7.75                                  |  |                                                   | 5.41 |                                       |  | 79,926    |  |   | 5.83 | 
|                          |  |                                                   |           |                                                                  |  |                                       |  |                                                   |      |                                       |  |           |  |   |      | 
|                          |  |                                                   | 1,931,610 |                                                                  |  | 6.18                                  |  | $                                                 | 2.78 |                                       |  | 1,690,085 |  | $ | 2.58 | 
|                          |  |                                                   |           |                                                                  |  |                                       |  |                                                   |      |                                       |  |           |  |   |      | 

The weighted
average remaining contractual life of options exercisable as of September 30,
2006 was 5.94 years.

As
of September 30, 2006, there were 2,137,450 shares available for future grants
under the 1999 Plan and

13

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270,418 shares
available for future grants under the 2000 Plan.

The
aggregate intrinsic value of stock options outstanding at September 30, 2006
was $37.4 million, of which $33.0 million relates to vested awards. The
intrinsic value for stock options is calculated based on the exercise price of
the underlying awards and the quoted price of the Companys common stock as of
September 30, 2006. The following table summarizes nonvested stock option
activity for the nine months ended September 30, 2006:

|                                                      |  |        |          |                                       |   |      | 
|----------------------------------------------------- |  | ------ | -------- | ------------------------------------- | - | ---- | 
|                                                      |  | Shares |          | Weighted
  Average
  Exercise
  Price |  
|                                                      |  |        |          |                                       |  
|Nonvested
  options outstanding at December 31, 2005  |  |        | 558,377  |                                       | $ | 3.89 | 
|Vested                                                |  |        | (268,934 | )                                     |   | 3.53 | 
|Canceled                                              |  |        | (47,918  | )                                     |   | 4.49 | 
|                                                      |  |        |          |                                       |   |      | 
|Nonvested
  options outstanding at September 30, 2006 |  |        | 241,525  |                                       | $ | 4.16 | 
|                                                      |  |        |          |                                       |   |      | 

The
weighted average grant-date fair value of ESPP rights arising from elections
made by ESPP plan participants during the nine months ended September 30, 2006
and 2005 was $6.30 and $2.89, respectively. During the nine months ended
September 30, 2006, ESPP rights to approximately 13,000 shares were granted to
employees who elected to change their payroll percentage deductions effective
February 1, 2006, as permitted semi-annually within the offering period in
effect at that date under the ESPP plan. These ESPP rights were treated as
modified stock awards which had a weighted average grant-date value of $10.60.
The fair value of ESPP rights that vested during the nine months ended
September 30, 2006 and 2005 was $7.80 and $1.66, respectively. On January 31,
2006, the Company issued 24,040 shares at a weighted average price of $3.89
under the ESPP. On July 31, 2006, the Company issued 36,524 shares at a
weighted average price of $4.55 under the ESPP.

The
intrinsic value of shares purchased through the ESPP on January 31, 2006 and
July 31, 2006 and of outstanding ESPP rights as of September 30, 2006 were
$237,000 and $530,000, respectively. The intrinsic value of outstanding ESPP
rights as of September 30, 2006 was $99,000. The intrinsic value of ESPP rights
is calculated as the discount from the quoted price of the Companys common
stock, as defined in the ESPP, which was available to employees as of the
respective dates.

As
of September 30, 2006, there was $198,000 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 1.2 years.

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

|                                         |  |                                 |  |             |  |             |  |             |  |  |  |  | 
|---------------------------------------- |  | ------------------------------- |  | ----------- |  | ----------- |  | ----------- |  |  |  |  | 
|                                         |  | Nine Months Ended September 30, | 
|                                         |  |                                 | 
|                                         |  | 2006                            |  | 2005        | 
|                                         |  |                                 |  |             | 
|                                         |  | Options                         |  | ESPP Rights |  | Options     |  | ESPP Rights | 
|                                         |  |                                 |  |             |  |             |  |             | 
|Weighted average
  expected option lives |  | N/A                             |  | 0.50 years  |  | 3.69 years  |  | 0.82 years  | 
|Risk-free
  interest rate                |  | N/A                             |  | 4.60%-5.18% |  | 3.25%-3.71% |  | 2.95%-3.80% | 
|Expected
  volatility                    |  | N/A                             |  | 25.8%-26.8% |  | 33%-67.1%   |  | 23.6%-34.2% | 
|Dividend
  yield                         |  | N/A                             |  | 0%          |  | 0%          |  | 0%          | 

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

During
the three and nine months ended September 30, 2006, the Company recorded
$111,000 and $383,000, respectively, of compensation expense related to options
and ESPP rights and received cash from the exercise of options and ESPP rights
of $779,000 and $1,302,000, respectively, for which the Company issued new
shares of common stock.

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As
of September 30, 2006, there were 333,500 service-based restricted stock awards
outstanding. During the three and nine months ended September 30, 2006, 99,500
and 301,000 shares of restricted stock were awarded at a weighted average
grant-date fair value of $16.95 and $13.36, respectively, and no shares of
restricted stock vested or canceled during the period. The aggregate intrinsic
value of restricted shares at September 30, 2006 was $7.4 million. The
intrinsic value for restricted shares is calculated based on the par value of
the underlying shares and the quoted price of the Companys common stock as of
September 30, 2006.

As
of September 30, 2006, there was $3.1 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 2.7 years. During the three and nine months ended September 30, 2006, the Company
recorded $277,000 and $694,000, respectively, of compensation expense related
to restricted shares.

11.
AGREEMENT WITH COLLAGES. NET, INC. (Collages)

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

Since
inception of the Agreement through September 30, 2006, the Company has earned
approximately $882,000 in revenue pursuant to the Agreement. The Company has
deferred recognition of this revenue since the realization of the resulting
asset, representing an equity investment in Collages, is not reasonably
assured.

12. COMMITMENTS AND
CONTINGENCIES

Legal
Proceedings

On
September 19, 2003, WeddingChannel.com, Inc. (WeddingChannel) filed a
complaint against the Company in the United States District Court for the
Southern District of New York. The complaint alleged that the Company violated
U.S. Patent 6,618,753 (Systems and Methods for Registering Gift Registries and
for Purchasing Gifts), and further alleged that certain actions of the Company
gave rise to various federal statute, state statute and common law causes of
actions. WeddingChannel sought, among other things, damages and injunctive
relief. This complaint was served on the Company on September 22, 2003. On September
26, 2006, the Court approved a stipulation between WeddingChannel and the
Company dismissing the case without prejudice and without costs.

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

13. PRIVATE PLACEMENT
OF COMMON STOCK

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

14. COMMON STOCK
OFFERING

On
August 15, 2006, the Company completed a follow-on offering for the sale of
2,000,000 shares of its common stock at a public offering price per share of
$16.00. On September 13, 2006, the Company issued an additional 809,600 shares
of its common stock at $16.00 per share pursuant to the overallotment option
set forth in the related underwriting agreement to the follow-on offering. The
Company received proceeds of approximately $42.1 million net of fees,
underwriting discounts and other expenses associated with the follow-on
offering. The proceeds from the sale of shares completed on August 15, 2006
were used to fund a portion of the cash consideration for the WeddingChannel
acquisition.

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15. WARRANT EXERCISE

On
August 16, 2006, The Knot issued 316,859 shares of common stock upon the
exercise of a warrant in consideration of the termination of the right to
purchase an additional 150,890 shares of common stock pursuant to the warrants
net exercise provision. The warrant was exercised by TW AOL Holdings Inc. (TW
AOL), an affiliate of Time Warner Inc., following assignment of the warrant to
TW AOL by a successor of America Online, Inc. (AOL).

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

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

Overview

The
Knot is a leading lifestage media company targeting couples planning their
weddings and future lives together. We commenced operations in May 1996. Our
principal website, at www.theknot.com,
is the most trafficked wedding site online and offers extensive wedding-related
content and shopping and an active community. We also provide wedding content
to MSN and Comcast. We publish The Knot
Weddings Magazine, which features editorial content and a shopping
directory format which covers every major wedding planning decision and is
distributed to newsstands and bookstores across the nation. We also publish The Knot Weddings regional magazines in 15
markets in the United States and The Knot Real
Weddings in two additional local markets. We also author books on
wedding-related and newlywed-related topics.

In
November 2004, we launched The Nest, the first online destination for the newly
married audience, at www.thenest.com.
In August 2006, we published the first issue of our new lifestyle magazine, The Nest.

In
January 2005, we acquired the business and assets of GreatBoyfriends LLC
including the websites www.greatboyfriends.com
and www.greatgirlfriends.com,
which are referral-based online dating services supported by subscriptions.

On
July 25, 2006, we acquired the publishing business and related assets of OAM
Solutions, Inc., the publisher of Lilaguides,
local information guides for parents, for $2.1 million in cash, including
transaction costs.

On
September 8, 2006, we completed the acquisition of WeddingChannel.com, Inc.
(WeddingChannel), through the merger of a wholly-owned subsidiary of the
Company, with and into WeddingChannel (the Merger). The results of operations
for WeddingChannel have been included in the Companys consolidated statements
of operations since that date. The Merger will increase the Companys market
share and provide the Company additional opportunities to leverage its core
assets including its audience and local and national sales forces.
WeddingChannels registry offerings will also enhance the services the Company
is able to provide engaged couples and their wedding guests. We intend to
maintain WeddingChannel.com as a
separate website and continue to offer WeddingChannels services ranging from
planning content and interactive tools to convenient, comprehensive shopping
and community participation. The aggregate estimated purchase price for all of
the capital stock and stock options of WeddingChannel was approximately $82.7
million representing cash paid of $61.7 million, including an estimated working
capital adjustment of $3.8 million, issuance of 1,149,876 shares of common
stock valued at $18.7 million and direct transaction costs of $2.3 million. The
Merger is expected to have a material effect on our results of operations and
financial condition.

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

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

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

WeddingChannel
offers couples and their guests one place to view all their gift registries via
its registry system that searches approximately 1.5 million registries from its
many retail partners including Macys, Bloomingdales, Tiffany & Co., Crate
& Barrel, Neiman Marcus, Williams-Sonoma, Pottery Barn, The Home Depot,
JCPenney, Starwood Hotels, Sandals Resorts and others. The Knot Gift Registry
Center offers additional product selections through our partnerships with
Target Club Wedd and Michael C. Fina. We earn commissions from the sale of
products in connection with these retail partnerships.

We
sell wedding supplies direct to consumers through our integrated shopping
destination, The Knot Wedding Shop. We offer over one thousand products,
including disposable cameras, wedding bubbles and bells, candy and cookies,
ring pillows, toasting flutes, reception decorations, table centerpieces,
goblets and glasses, garters and unity candles. We offer personalization
options for many of our wedding supplies. We have launched our own line of
Knot-branded wedding supplies called The Knot Wedding Collections and our own
line of wedding-themed apparel, which can be personalized as well. To further
enhance our shopping experience, the WeddingChannel Store was launched in
September 2006. Similar to The Knot Wedding Shop, WeddingChannels informative
content is integrated with shopping services allowing the bride a one-stop
destination to purchase all of her wedding day needs. The merchandise is
similar to that of The Knot Wedding Shop and is offered to a new audience in
order to generate further revenues. Wedding supplies are sold direct to the
consumer and are fulfilled from our Redding, California facility.

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

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

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

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

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

Leverage
our Relationship with our Audience. We believe a large
and active membership base is critical to our success. Membership enrollment is
free; and our members enjoy the use of personal Web pages, message boards,
budgeting and planning tools, wedding checklists and wedding fashion and
honeymoon searches. New membership growth has leveled off in recent years. We
enrolled approximately 1.0 million and 1.1 million new members in the years
2005 and 2004, respectively. During the first nine months of 2006, we were
enrolling an average of approximately 3,300 new members per day. Our priority
in the wedding space is to increase member usage through our content and
product offerings, additional interactive premium services, active community
participation and strategic relationships.

18

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

We
have also created or acquired other small properties to leverage the clients and
technologies we have developed and to broaden the complementary services we
offer.

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

Critical
Accounting Policies

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

Revenue Recognition

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

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

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

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

Registry
services revenue represents commissions earned in connection with the sale of
products from gift registries under agreements with certain retail partners
where we are not primarily obligated in a transaction, not subject to inventory
risk and amounts earned are determined using a fixed percentage. This
commission revenue is recognized when the products are sold by the retail
partners.

Merchandise
revenue generally includes the selling price of wedding supplies through our
websites as well as related outbound shipping and handling charges since we are
the primary party obligated in a transaction, are subject to inventory risk,
and we establish our own pricing and selection of suppliers. Merchandise
revenues are recognized when products are shipped to customers, reduced by
discounts as well as an allowance for estimated sales returns.

Publishing
revenue primarily includes print advertising revenue derived from the
publication of national and regional magazines. These revenues are recognized
upon the publication of the related magazines, at which time all material
services related to the magazine have been performed. Additionally, publishing
revenues are derived from the sale of magazines on newsstands and in
bookstores, and from author royalties received related to book publishing

19

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contracts.
Revenues from the sale of magazines are recognized when the products are
shipped, reduced by an allowance for estimated sales returns. Author royalties,
to date, have been derived from publisher royalty advances that are recognized
as revenue when all of our contractual obligations have been met which is
typically upon the delivery to, and acceptance by, the publisher of the final
manuscript.

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

Revenue for
which realization is not reasonably assured is deferred.

Allowance for Doubtful Accounts

We
maintain an allowance for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. As of September 30,
2006 and December 31, 2005, our allowance for doubtful accounts amounted to
$941,000 and $274,000, respectively. In determining these allowances, we
evaluate a number of factors, including the credit risk of customers,
historical trends and other relevant information. If the financial condition of
our customers were to deteriorate, additional allowances may be required.

Inventory

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

Goodwill and Other Intangibles

As
of September 30, 2006, we had recorded goodwill and other intangible assets of
$84.3 million which includes estimated goodwill and other intangible assets of
$73.5 million arising from our recent acquisition of WeddingChannel in
September 2006. In our most recent assessment of impairment of goodwill as of
October 1, 2005, we made estimates of fair value using multiple approaches. In
our ongoing assessment of impairment of goodwill and other intangible assets,
we consider whether events or changes in circumstances such as significant
declines in revenues, earnings or material adverse changes in the business
climate, indicate that the carrying value of assets may be impaired. As of
September 30, 2006, no impairment indicators were noted. Future adverse changes
in market conditions or poor operating results of strategic investments could
result in losses or an inability to recover the carrying value of the
investments, thereby possibly requiring impairment charges in the future.

Deferred Taxes

A
tax valuation allowance is established, as needed, to reduce net deferred tax
assets to the amount for which recovery is probable. As of September 30, 2006,
we have established a full valuation allowance of $11.1 million against certain
of our net deferred tax assets which primarily result from net operating loss
carryforwards generated prior to 2006. Depending on the amount and timing of
taxable income we may ultimately generate in the future, as well as other
factors including limitations which may arise from changes in the Companys
ownership, we could recognize no benefit from these deferred tax assets, in
accordance with our current estimate, or we could recognize some or all of
their full value.

The
Merger with WeddingChannel was a stock transaction for tax purposes, which
results in different book and tax bases. Accordingly, the purchase price
allocation includes $18.5 million of deferred tax liabilities related to the
tax effect of the preliminary differences in the book and tax bases of property
and equipment and acquired intangibles other than goodwill. In addition, a
deferred tax asset of $11.9 million, associated with a reduction in a portion
of the valuation allowance previously recorded by WeddingChannel with respect
to its net operating carryforwards for federal and state income tax purposes,
has been recorded based on the recognition and timing of reversal of the
estimated deferred tax liabilities. To the extent further reductions in the
valuation allowance are recorded, the offsetting credit would first reduce
goodwill and then other intangible assets.

20

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Stock-Based
Compensation

Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS)
No. 123(R), Share-Based Payment, using the modified perspective method. Under
this method, previously reported amounts are not restated. SFAS No. 123(R)
requires the measurement of compensation expense for all stock awards granted
to employees and non-employee directors at fair value on the date of grant and
recognition of compensation expense over the related service periods for awards
expected to vest. Under the modified perspective method, we recognize
compensation expense for all stock awards granted after December 31, 2005, and
for awards granted prior to January 1, 2006 that remained unvested as of that
date or which may be subsequently modified.

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

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

Refer
to the section entitled Stock-Based Compensation on page 24 for a further
discussion of the impact of SFAS No. 123(R) on our recording of stock-based
compensation for the three and nine months ended September 30, 2006.

Results of Operations

General

Net
revenues and operating expenses of WeddingChannel have been included in our
consolidated statements of operations since September 8, 2006. Accordingly, the
WeddingChannel amounts are identical for the three and nine months ended
September 30, 2006.

Net
Revenues

Net
revenues were $18.5 million and $51.0 million for the three and nine months
ended September 30, 2006, respectively, compared to $13.1 million and $38.6
million for the corresponding periods in 2005. Net revenues in 2006 include
$1.5 million from WeddingChannel.

Online
sponsorship and advertising revenues increased to $9.4 million and $25.5
million for the three and nine months ended September 30, 2006, respectively,
as compared to $6.7 million and $18.5 million for the corresponding periods in
2005. The 2006 revenue amounts include $378,000 for WeddingChannel. In addition
to the impact from WeddingChannel, revenue from local vendor online advertising
programs increased by $1.1 million and $3.5 million for the three and nine
months ended September 30, 2006, respectively, or by approximately 25% and 27%
when compared to the corresponding periods in 2005, primarily as a result of an
increase in the number and average spending of local vendor clients, including
the continuing impact of price increases. There was also an increase of $1.2
million and $3.2 million in national online sponsorship and advertising revenue
for the three and nine months ended September 30, 2006, or approximately 55%
and 54%, respectively, when compared to the corresponding periods in 2005,
largely due to an increase in the average spending by our national accounts.
Online sponsorship and advertising revenues amounted to 51% of our net revenues for the three months ended
September 30, 2006 and 2005.

21

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For the nine months ended
September 30, 2006 and 2005, sponsorship and advertising revenues amounted to
50% and 48% of our net revenues, respectively.

Registry
services revenue was $955,000 and $1.1 million for the three and nine months
ended September 30, 2006 as compared to $63,000 and $210,000 for the
corresponding periods in 2005. The increases are primarily the result of
$797,000 in commissions earned from WeddingChannels retail partners. Registry
services revenue amounted to 5% of our net revenues for the three months ended
September 30, 2006 and 0.5% for the three months ended September 30, 2005. For
the nine months ended September 30, 2006 and 2005, registry services revenue
was 2% and 0.5% of our net revenues, respectively.

Merchandise
revenues increased to $4.3 million and $12.2 million for the three and nine
months ended September 30, 2006, respectively, as compared to $3.3 million and
$10.6 million for the corresponding periods in 2005. The 2006 revenue amounts
include $262,000 sold through the WeddingChannel store. In addition, revenues
for The Knot Wedding Shop increased by $867,000 and $1.9 million or 29% and 20%
for the three and nine months ended September 30, 2006, respectively, as
compared to the prior year. Site improvements and more effective marketing
efforts resulted in increased traffic and sales with respect to the shopping
areas on our site. The sale of wedding supplies to wholesale customers
decreased by $93,000 and $318,000 for the three and nine months ended September
30, 2006, respectively, as compared to the prior year. Subsequent to August
2006, we are no longer pursuing wholesale customers. The balance of the
merchandise revenue variance relates to registry revenue. In 2006, we are no
longer maintaining inventory and recording sales of registry-related products.
Merchandise revenues amounted to 23% of our net revenues for the three months
ended September 30, 2006 and 25% for the three months ended September 30, 2005.
For the nine months ended September 30, 2006 and 2005, merchandise revenue was
24% and 27% of our net revenues, respectively.

Publishing
and other revenues increased to $3.9 million and $12.2 million for the three
and nine months ended September 30, 2006, respectively, as compared to $3.1
million and $9.3 million for the corresponding periods in 2005. Local print
revenue increased by $436,000 and $1.7 million for the three and nine months
ended September 30, 2006, respectively, or approximately 35% and 30%,
respectively, when compared to the corresponding periods in 2005, due to an
increase in advertising pages sold, including pages associated with the local
section of our national magazine, and a small increase in pricing. For the
three and nine months ended September 30, 2006, national print revenue
increased by $251,000 and $560,000, respectively, or 14% and 17%, respectively,
primarily as a result of an increase in the number of designer advertisers and
advertising page rates for both designer and national advertisers in our
national magazine. We also recorded a small amount of revenue from the initial
issue of The Nestmagazine. We
recorded $361,000 in author royalties for the nine months ended September 30,
2006 upon the delivery and acceptance of two new books from our current program
of wedding and newlywed-related publications. Additionally, for the nine months
ended September 30, 2006, we recorded revenues of $314,000 from our bridal
events program in partnership with Four Seasons Hotels and Resorts. Publishing
and other revenue amounted to 21% and 24% of our net revenues for the three
months ended September 30, 2006 and 2005, respectively. For the nine months
ended September 30, 2006 and 2005, publishing and other revenue were both 24%
of our net revenues.

Cost
of Revenues

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

Cost
of revenues increased to $4.2 million and $11.4 million for the three and nine months
ended September 30, 2006, respectively, from $3.0 million and $8.8 million for
the corresponding periods in 2005. Online advertising cost of revenue increased
by $99,000 and $395,000 for the three and nine months ended September 30, 2006,
respectively, primarily due to the production costs associated with The Knot
TV. The cost of revenues from the sale of merchandise increased by $505,000 and
$933,000 for the three and nine months ended September 30, 2006, respectively,
due to the increases in revenue. Publishing and other cost of revenue increased
by $549,000 and $1.2 million for the three and nine months ended September 30,
2006, respectively, due to higher production costs for both our national and
local print publications as a result of increased advertising page counts,
production costs associated with the initial issue of The Nestmagazine in August 2006 and
direct costs related to the bridal events program. As a percentage of our net
revenues, cost of revenues was 23% and 22% for the three and nine months ended
September 30, 2006, respectively, as compared to 23% for each of the
corresponding periods in the prior year. Margin improvements resulting from a
higher mix of registry services revenue and higher online advertising revenue
for the three and nine

22

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months ended September 30, 2006, respectively, were
generally offset by lower margins for publishing and other revenue due to the
investment in The Nest magazine
and the costs for the bridal events program.

Product
and Content Development

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

Product
and content development expenses increased to $2.2 million and $5.8 million for
the three and nine months ended September 30, 2006, respectively, from $1.7
million and $5.2 million for the corresponding periods in 2005. These increases
include $329,000 associated with WeddingChannel, primarily for personnel and
related expenses. Other personnel and related expenses increased by $326,000
and $761,000 for the three and nine months ended September 30, 2006,
respectively, primarily due to additional investments in information technology
and editorial staff, including increases of approximately $62,000 and $116,000,
respectively, related to stock-based compensation. These increases were offset,
in part, by reductions in costs for computer hardware and software and outside
consultants. In addition, for the nine months ended September 30, 2005, we
incurred severance and other costs of approximately $120,000 in connection with
the relocation of a significant portion of our information technology function
to Austin, Texas. As a percentage of our net revenues, product and content
development expenses decreased to 12% and 11% for each of the three and nine
months ended September 30, 2006, respectively, as compared to 13% for the
corresponding periods in the prior year.

Sales
and Marketing

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

Sales
and marketing expenses increased to $4.7 million and $13.7 million for the
three and nine months ended September 30, 2006, respectively, from $3.5 million
and $10.7 million for the corresponding periods in 2005. These costs include
$372,000 associated with WeddingChannel, primarily for personnel and related
expenses. Other personnel and related costs increased by $274,000 and $1.5
million for the three and nine months ended September 30, 2006, respectively,
primarily as a result of investments in national and local sales staff, in
part, as additional support for sales efforts for new initiatives, including
The Nest. These increases include approximately $46,000 and $168,000,
respectively, related to stock-based compensation. For the three and nine
months ended September 30, 2006, we incurred higher sales commissions and
incentives of $136,000 and $258,000, respectively, as a result of the increases
in online and print advertising revenue and additional promotion expenses of
$294,000 for the nine months. Both periods in 2006 include $224,000 of
fulfillment expenses for the initial issue of The
Nest magazine. As a percentage of our net revenues, sales and
marketing expenses were 25% and 27% for the three and nine months ended
September 30, 2006, respectively, and 27% and 28% for the corresponding periods
in 2005.

General
and Administrative

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

General
and administrative expenses increased to $4.2 million and decreased to $10.8
million for the three and nine months ended September 30, 2006, respectively,
as compared to $3.9 million and $10.9 million for the corresponding periods in
2005. Legal and other professional costs related to our previous litigation
with WeddingChannel amounted to $163,000 for the nine months ended September
30, 2006. On September 26, 2006, the Court approved a stipulation between
WeddingChannel and us dismissing the case without prejudice and without costs.
Legal costs related to this litigation were $1.5 million and $3.7 million in
the three and nine months ended September 30, 2005, respectively. For the three
months ended September 30, 2006 compared to September 30, 2005, we incurred
additional stock-based compensation expense of approximately $248,000, higher
costs of $249,000 with respect to the development of a formal disaster recovery
plan, higher consulting and audit costs related to Sarbanes-Oxley compliance of
$412,000, additional professional and other legal costs of $212,000 and higher
bad debt expense of $112,000. For the nine months ended September 30, 2006
compared to September 30, 2005, we incurred additional stock-based compensation
expense of approximately $761,000, higher costs of $576,000 with respect to the

23

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development of a formal disaster recovery plan, higher
consulting and audit costs related to Sarbanes-Oxley compliance of $659,000,
additional professional and other legal costs of $585,000, and higher bad debt
expense of $217,000. Other general and administrative expenses associated with
WeddingChannel for the three and nine months ended September 30, 2006 were
$314,000. As a percentage of our net revenues, general and administrative
expenses decreased to 23% and 21% for the three and nine months ended September
30, 2006, respectively, from 30% and 28% for each of the corresponding periods
in 2005.

Stock-Based
Compensation

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

|                                                                                                                |  |                        |          |                       |   |           |  
|--------------------------------------------------------------------------------------------------------------- |  | ---------------------- | -------- | --------------------- | - | --------- | -
|                                                                                                                |  | Three
  Months
  Ended |          | Nine
  Months
  Ended |  
|                                                                                                                |  | September
  30, 2005   |          | September
  30, 2005  |  
|                                                                                                                |  |                        |          |                       |  
|Net income, as
  reported                                                                                       |  | $                      | 722,461  |                       | $ | 2,471,178 |  
|Add: Total
  stock-based employee compensation expense included in reported net income                          |  |                        | 23,750   |                       |   | 23,750    |  
|Deducted: Total
  stock-based employee compensation expense determined under fair value method
  for all awards |  |                        | (305,621 | )                     |   | (766,850  | )
|                                                                                                                |  |                        |          |                       |   |           |  
|Net income, pro
  forma                                                                                         |  | $                      | 440,590  |                       | $ | 1,728,078 |  
|                                                                                                                |  |                        |          |                       |   |           |  
|Basic earnings
  per share, as reported                                                                         |  | $                      | 0.03     |                       | $ | 0.11      |  
|                                                                                                                |  |                        |          |                       |   |           |  
|Basic earnings
  per share, pro forma                                                                           |  | $                      | 0.02     |                       | $ | 0.08      |  
|                                                                                                                |  |                        |          |                       |   |           |  
|Diluted earnings
  per share, as reported                                                                       |  | $                      | 0.03     |                       | $ | 0.10      |  
|                                                                                                                |  |                        |          |                       |   |           |  
|Diluted earnings
  per share, pro forma                                                                         |  | $                      | 0.02     |                       | $ | 0.07      |  
|                                                                                                                |  |                        |          |                       |   |           |  

As
of September 30, 2006, total unrecognized estimated compensation expense
related to nonvested stock options, restricted shares and ESPP rights was $3.3
million, which is expected to be recognized over a weighted average period of 2.6
years. We currently believe that stock-based compensation expense for the
calendar year ended December 31, 2006 will range from $1.5 million to $1.6
million.

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

Depreciation
and Amortization

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

Depreciation and amortization increased to $975,000
and $1.8 million for the three and nine months ended September 30, 2006,
respectively, as compared to $341,000 and $901,000 for the corresponding periods
in 2005. For the three months ended September 30, 2006, we recorded additional
depreciation and amortization of property, equipment, capitalized software and
intangible assets of $460,000, primarily related to assets acquired as a result
of the WeddingChannel acquisition. The increase was also due to increasing
capital expenditures during calendar year 2005 and in the nine months ended
September 30, 2006, including amounts for our new e-commerce platform and
additional computer hardware and software to establish secondary back-up
systems in connection with the development of a formal disaster recovery plan.

24

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Interest
Income

Interest
income, net of interest expense, increased to $1.1 million and $1.7 million for
the three and nine months ended September 30, 2006, respectively, as compared
to $207,000 and $504,000 for the corresponding periods in 2005. These increases
were primarily the result of higher funds available for investment, resulting
from proceeds from the private placement, the availability of proceeds received
from the follow-on offering prior to the payment of the cash portion of the
purchase price for WeddingChannel and higher interest rates.

Provision
for Taxes on Income

For
the three and nine months ended September 30, 2006, we recorded income tax
expense of $90,000 and $366,000, respectively, as compared to $37,000 and
$151,000 for the corresponding periods in 2005. This was primarily due to
operating income generated in certain states and a provision for federal minimum
tax related to the use of our net operating loss carryforwards.

Liquidity and Capital Resources

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

On
August 15, 2006, we completed a follow-on offering for the sale of 2,000,000
shares of our common stock at a public offering price per share of $16.00. On
September 13, 2006, we issued an additional 809,600 shares of our common stock
at $16.00 per share pursuant to the overallotment option set forth in the
underwriting agreement related to the follow-on offering. We received proceeds
of approximately $42.1 million net of fees, underwriting discounts and other
expenses associated with the follow-on offering. The proceeds from the sale of
shares completed on August 15, 2006 were used to fund a portion of the cash
consideration for the WeddingChannel acquisition.

As
of September 30, 2006, our cash, cash equivalents and short-term investments
amounted to $77.7 million. We currently invest primarily in short-term debt
instruments that are highly liquid, of high-quality investment grade, and have
maturities of less than three months, with the intent to make such funds
readily available for operating purposes.

Net
cash provided by operating activities was $13.6 million for the nine months
ended September 30, 2006. This resulted primarily from the net income for the
period of $8.8 million, depreciation, amortization, non-cash services expense
and stock-based compensation of $3.3 million and a decrease in accounts
receivable, net of deferred revenue and net of businesses acquired of $1.7
million due to improved collection efforts and further credit card usage by
local vendors. These sources of cash were offset, in part, by an increase in
deferred production and marketing costs of $121,000. Net cash provided by
operating activities was $4.9 million for the nine months ended September 30,
2005. This resulted primarily from the net income for the period of $2.5
million, depreciation, amortization, non-cash services expense and stock-based
compensation of $1.5 million, a decrease in accounts receivable, net of
deferred revenue, of $988,000 due to improved collection efforts and further
credit card usage by local vendors and an increase in accounts payable and
accrued expenses of $230,000. These sources of cash were offset, in part, by an
increase in inventory of $389,000.

Net
cash used in investing activities was $51.8 million for the nine months ended
September 30, 2006 due primarily to cash paid in connection with the
acquisition of WeddingChannel, net of cash acquired, and the business and
assets of OAM Solutions, Inc. aggregating $53.3 million and purchases of
property, equipment and software of $3.1 million, offset, in part, by the sale
of short-term investments, net of purchases, of $4.6 million. Net cash provided
by investing activities was $7.5 million for the nine months ended September
30, 2005 and consisted primarily of proceeds from the sale of short-term
investments, net of purchases, of $9.6 million offset, in part, by purchases of
property and equipment of $1.4 million and cash paid for the acquisition of the
business and assets of GreatBoyfriends LLC of $621,000. We currently believe
that purchases of property and equipment for the calendar year ended December
31, 2006 will range between $3.5 million and $4.0 million as a result of the
planned acquisition of additional computer hardware and software to establish
secondary back-up systems in connection with the development of a formal
disaster recovery plan for our Company and due to leasehold improvements to be
made at our Omaha facility.

25

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Net
cash provided by financing activities was $91.2 million for the nine months
ended September 30, 2006 primarily due to proceeds from the issuance of common
stock in connection with the completion of the private placement and follow-on
offering in the third quarter of 2006 for which we received aggregate net
proceeds of $89.9 million. We also received proceeds from the exercise of stock
options and through our Employee Stock Purchase Plan of $1.3 million. Net cash
provided by financing activities was $1.2 million and $501,000 for the nine
months ended September 30, 2005 and 2004, respectively, primarily due to
proceeds from the issuance of common stock in connection with the exercise of
stock options and purchases of stock through our Employee Stock Purchase Plan.

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

We
have only achieved operating income in recent periods, and we have an
accumulated deficit of $33.4 million as of September 30, 2006. We believe that
our current cash and cash equivalents will be sufficient to fund our working
capital and capital expenditure requirements for the foreseeable future. This
expectation is primarily based on internal estimates of revenue growth, as well
as continuing emphasis on controlling operating expenses. However, there can be
no assurance that actual costs will not exceed amounts estimated, that actual
revenues will equal or exceed estimated amounts, or that we will sustain
profitable operations, due to significant uncertainties surrounding our
estimates and expectations.

Contractual Obligations and Commitments

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

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

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

As
of September 30, 2006, we had commitments under non-cancelable operating leases
amounting to approximately $5.3 million.

As
of September 30, 2006, other long-term liabilities of $811,000 primarily
represented accruals to recognize rent expense on a straight-line basis over
the respective lives of five of our operating leases under which rental
payments increase over the lease periods. These accruals will be reduced as the
operating lease payments, summarized in the table of contractual obligations
below, are made.

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

|                       |                         |                |       |                        |   |                    |  |             |       |             |   |                     |  |   |     |  |  | 
|---------------------- | ----------------------- | -------------- | ----- | ---------------------- | - | ------------------ |  | ----------- | ----- | ----------- | - | ------------------- |  | - | --- |  |  | 
|                       |                         |                |       | Payments due by Period |  
|                       |                         |                |       |                        |  
|                       | Contractual Obligations |                |       | Total                  |   | Less than 1
  year |  | 1-3
  years |       | 3-5
  years |   | More than 5
  years | 
|                       |                         |                |       |                        |   |                    |  |             |       |             |   |                     | 
|                       |                         | (in thousands) |      
|Long term
  debt       |                         | $              | 153   |                        | $ | 47                 |  | $           | 106   |             | $ |                    |  | $ |    | 
|Operating
  leases     |                         |                | 5,312 |                        |   | 1,277              |  |             | 2,223 |             |   | 1,507               |  |   | 305 | 
|Purchase
  commitments |                         |                | 1,067 |                        |   | 360                |  |             | 707   |             |   |                    |  |   |    | 
|                       |                         |                |       |                        |   |                    |  |             |       |             |   |                     |  |   |     | 
|Total                  |                         | $              | 6,532 |                        | $ | 1,684              |  | $           | 3,036 |             | $ | 1,507               |  | $ | 305 | 
|                       |                         |                |       |                        |   |                    |  |             |       |             |   |                     |  |   |     | 

Seasonality

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

26

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Item 3. Quantitative
and Qualitative Disclosures About Market Risk

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

We
are exposed to some market risk through interest rates related to the
investment of our current cash, cash equivalents and short-term investments of
approximately $77.7 million as of September 30, 2006. These funds are generally
invested in highly liquid debt instruments. As such instruments mature and the
funds are re-invested, we are exposed to changes in market interest rates. This
risk is not considered material, and we manage such risk by continuing to
evaluate the best investment rates available for short-term, high quality
investments.

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

Item 4. Controls and Procedures

The
Companys management, including the Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the Companys disclosure controls and
procedures, as that term is defined in Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange Act), as of September
30, 2006. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
the reports that the Company files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SECs rules and forms, and to ensure that such information is
accumulated and communicated to the Companys management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.

There
were no changes in the Companys internal control over financial reporting during
the quarter ended September 30, 2006 identified in connection with the
evaluation thereof by the Companys management, including the Chief Executive
Officer and Chief Financial Officer, that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over
financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal
Proceedings

On
September 19, 2003, WeddingChannel.com, Inc. (WeddingChannel) filed a
complaint against The Knot in the United States District Court for the Southern
District of New York. The complaint alleged that The Knot violated U.S. Patent
6,618,753 (Systems and Methods for Registering Gift Registries and for
Purchasing Gifts), and further alleged that certain actions of The Knot gave
rise to various federal statute, state statute and common law causes of
actions. WeddingChannel sought, among other things, damages and injunctive
relief. This complaint was served on the Company on September 22, 2003. On
September 26, 2006, the Court approved a stipulation between WeddingChannel and
The Knot dismissing the case without prejudice and without costs.

The
Knot is engaged in other legal actions arising in the ordinary course of
business and believes that the ultimate outcome of these actions will not have
a material effect on its results of operations, financial position or cash
flows.

Item 1A. Risk Factors

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

27

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

Risks Related to the Merger with
WeddingChannel

We may not realize the anticipated benefits of acquiring
WeddingChannel.

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

We may experience difficulties integrating WeddingChannel
with The Knot.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Merger may adversely affect our financial results.

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

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

Following
the completion of our recent follow-on offering, we have 30,972,265 shares of
our common stock outstanding (which includes 2,750,000 shares of common stock
issued in connection with our July 2006 private placement). Only certain of
these shares are subject to lock-up restrictions with the underwriters of the
follow-on offering, and these lock-up restrictions will expire 90 days
following the date of the pricing of the follow-on offering. In addition, we
issued 1,149,876 shares of our common stock as part of the consideration paid
to stockholders of WeddingChannel upon the completion of the Merger, and most
of those shares are freely tradable.

On
July 20, 2006, we filed a shelf registration statement covering resales of the
2,750,000 shares of common stock by the institutional investors who purchased
shares in the private placement. This registration statement was declared
effective on August 14, 2006. These shares are freely tradable.

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

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

Risks
Related to the Securities Markets

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

The
equity trading markets may experience periods of volatility, which could result
in highly variable and unpredictable pricing of equity securities. The market
price of our common stock could change in ways that may or may not be related
to our business, our industry or our operating performance and financial
condition. In addition, the trading volume in our common stock may fluctuate
and cause significant price variations to occur. Our common stock has
experienced significant volume and price fluctuations in the past. For example,
from October 1, 2005 through September 30, 2006, the market price of our common
stock nearly doubled, increasing from $11.33 to $22.13. Our current market
price and valuation may not be sustainable. If the market price of our common
stock declines significantly, you may be unable to resell your common stock at
or above your purchase price. In the past, companies that have experienced
volatility in the market price of their stock have been the object of
securities class action litigation. If we were to become the subject of
securities class action litigation, we could face substantial costs and be
negatively affected by diversion of our managements attention and resources.
We cannot assure you that the market price of our common stock will not
fluctuate or decline significantly, including a decline below your purchase
price, in the future. In addition, the stock markets in general can experience
considerable price and volume fluctuations, which could result in substantial
losses for our stockholders.

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

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

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

We
are also subject to provisions of the Delaware General Corporation Law that
prohibit business combinations with persons owning 15% or more of the voting
shares of a corporations outstanding stock for three years following the date
that person became an interested stockholder, unless the combination is
approved by the board of directors prior to the person owning 15% or more of
the stock, after which the business combination would be subject to special
stockholder approval requirements. This provision could deprive our
stockholders of an opportunity to receive a premium for their common stock as
part of a sale of our company or may otherwise discourage a potential acquiror
from attempting to obtain control from us, which in turn could have a material
adverse effect on the market price of our common stock.

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

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

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

As
of September 30, 2006, our executive officers and directors and 5%
stockholders, and their affiliates, in the aggregate, beneficially owned
approximately 41% of our outstanding common stock. As a result, if some or all
of these stockholders act as a group, they would be able to exercise control
over all matters requiring approval by our stockholders, including the election
of directors and approval of significant corporate transactions. This concentration
of ownership could also have the effect of delaying or preventing a change in
control.

Item 6. Exhibits

| |      |                                                                                                                                                                         
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31.1 | Certification of Chairman and Chief Executive
  Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to
  Section 302 of the Sarbanes-Oxley Act of 2002.
| |      |                                                                                                                                                                         
| | 31.2 | Certification of Chief Financial Officer Pursuant to
  Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the
  Sarbanes-Oxley Act of 2002.             
| |      |                                                                                                                                                                         
| | 32.1 | Certification of Chairman and Executive Officer
  Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.           
| |      |                                                                                                                                                                         
| | 32.2 | Certification of Chief Financial Officer Pursuant to
  18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.                  

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SIGNATURES

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

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

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EXHIBIT
INDEX

|       |                                                                                                                                                                         
|------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number | Description                                                                                                                                                             
|       |                                                                                                                                                                         
|       |                                                                                                                                                                         
|31.1   | Certification of Chairman and Chief Executive
  Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to
  Section 302 of the Sarbanes-Oxley Act of 2002.
|       |                                                                                                                                                                         
|31.2   | Certification of Chief Financial Officer Pursuant to
  Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the
  Sarbanes-Oxley Act of 2002.             
|       |                                                                                                                                                                         
|32.1   | Certification of Chairman and Chief Executive
  Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section
  906 of the Sarbanes-Oxley Act of 2002.     
|       |                                                                                                                                                                         
|32.2   | Certification of Chief Financial Officer Pursuant to
  18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002.                  

33

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