**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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| **(Mark One)** |                                                                                                    |
|----------------|---------------------------------------------------------------------------------------------------------|
| **x**          | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **     | **For the Quarterly Period Ended March 31,  2007**                                                 |
| ** **     | **Or**                                                                                                  |
| **o**          | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition periodfrom                         to**

**Commissionfile number 000-33367**

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**UNITED ONLINE, INC.**

(Exact Name of Registrantas Specified in Its Charter)

| **Delaware**                             |   | **77-0575839**                       |
|------------------------------------------|--------|--------------------------------------|
| (State or other  Jurisdiction of         |   | (I.R.S Employer  Identification No.) |
| Incorporation or  Organization)          |   |                                 |
| **21301 Burbank Boulevard,**             |   | ** **                           |
| **Woodland  Hills, California**          |   | **91367**                            |
| (Address of  Principal Executive Office) |   | (Zip Code)                           |

 

**(818)287-3000**(Registrant’s TelephoneNumber, Including Area Code)

**Not applicable**

(Former Name, Former Address and Former Fiscal Year,if Changed Since Last Report)

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes x  No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one)

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct). Yes o   No x

There were 66,733,323shares of the registrant’s common stock outstanding at April 27, 2007.

 

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**INDEX**

| **PART I.**  | ** ** | ** ** | **FINANCIAL  INFORMATION**                                                                                               | ** ** | ** ** |
|-------------------|------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|------------|
|              | Item  1.   |       | Condensed  Consolidated Balance Sheets at March 31, 2007 (unaudited) and December 31,  2006                    |       | 3          |
|              |       |       | Unaudited Condensed Consolidated Statements of  Operations for the Quarters Ended March 31, 2007 and 2006           |       | 4          |
|              |       |       | Unaudited Condensed Consolidated Statements of  Comprehensive Income for the Quarters Ended March 31, 2007 and 2006 |       | 5          |
|              |       |       | Unaudited Condensed Consolidated Statement of  Stockholders’ Equity for the Quarter Ended March 31, 2007       |       | 6          |
|              |       |       | Unaudited Condensed Consolidated Statements of Cash  Flows for the Quarters Ended March 31, 2007 and 2006           |       | 7          |
|              |       |       | Notes to the Unaudited Condensed Consolidated Financial  Statements                                                      |       | 8          |
|              | Item 2.    |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                              |       | 16         |
|              | Item 3.    |       | Quantitative and Qualitative Disclosures About Market  Risk                                                              |       | 29         |
|              | Item 4.    |       | Controls and Procedures                                                                                                  |       | 30         |
| **PART II.** | ** ** | ** ** | **OTHER  INFORMATION**                                                                                                   | ** ** | ** ** |
|              | Item  1.   |       | Legal  Proceedings                                                                                                       |       | 31         |
|              | Item  1A.  |       | Risk Factors                                                                                                             |       | 32         |
|              | Item 2.    |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                             |       | 33         |
|              | Item 6.    |       | Exhibits                                                                                                                 |       | 34         |
| **SIGNATURES**    |       | 36         |

 

Inthis document, “United Online,” the “Company,” “we,” “us” and “our”collectively refer to United Online, Inc. and its wholly-ownedsubsidiaries.

*This Quarterly Report on Form 10-Qand the documents incorporated herein by reference contain forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995 based on our current expectations, estimates and projections about ouroperations, industry, financial condition and liquidity. Statements containingwords such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “may,” “will”or similar expressions constitute forward-looking statements. Theseforward-looking statements include, but are not limited to, statements aboutthe markets in which we compete, our pay accounts, our product and serviceofferings, the advertising market, operating expenses, operating efficiencies,revenues, capital requirements, tax payments and our cash position. Inaddition, any statements that refer to expectations, projections or othercharacterizations of future events or circumstances, including any underlyingassumptions, are forward-looking statements. Such statements are not guaranteesof future performance and are subject to risks, uncertainties and assumptionsthat are difficult to predict. Therefore, our actual results could differ materiallyand adversely from those expressed in any forward-looking statements as aresult of various factors. The section entitled “Risk Factors” in thisQuarterly Report on Form 10-Q and our other filings with the SEC setforth some of the important risk factors that may affect our business,financial position, results of operations and cash flows. Statements indicatingfactors that we believe may impact our results are not intended to beexclusive. We undertake no obligation to revise or update publicly anyforward-looking statements, other than as required by law.*

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**PART I—FINANCIALINFORMATION**

**ITEM 1.   FINANCIALSTATEMENTS**

**UNITED ONLINE, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands)**

| ** **                                       | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| **Assets**                                       | ** ** |                     | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Current assets:                                  |       |                     |       |                        |       |   |   |   |   |
| Cash and cash equivalents                        |       |                     | $          | 16,585                      |       |   |   | $ | 19,252 |   |   |
| Short-term investments                           |       |                     | 151,426    |                        |       |   | 143,110 |   |   |
| Accounts receivable                              |       |                     | 30,739     |                        |       |   | 32,226 |   |   |
| Deferred tax assets, net                         |       |                     | 11,147     |                        |       |   | 11,705 |   |   |
| Other current assets                             |       |                     | 12,981     |                        |       |   | 13,426 |   |   |
| Total current assets                             |       |                     | 222,878    |                        |       |   | 219,719 |   |   |
| Property and  equipment, net                     |       |                     | 35,339     |                        |       |   | 34,296 |   |   |
| Deferred tax  assets, net                        |       |                     | 60,600     |                        |       |   | 59,655 |   |   |
| Goodwill                                         |       |                     | 133,018    |                        |       |   | 133,018 |   |   |
| Intangible  assets, net                          |       |                     | 50,162     |                        |       |   | 53,653 |   |   |
| Other assets                                     |       |                     | 4,183      |                        |       |   | 2,678 |   |   |
| Total assets                                     |       |                     | $          | 506,180                     |       |   |   | $ | 503,019 |   |   |
| **Liabilities and Stockholders’ Equity**    | ** ** |                     | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Current liabilities:                             |       |                     |       |                        |       |   |   |   |   |
| Accounts payable                                 |       |                     | $          | 37,806                      |       |   |   | $ | 36,550 |   |   |
| Accrued liabilities                              |       |                     | 30,016     |                        |       |   | 39,547 |   |   |
| Member redemption liability                      |       |                     | 16,804     |                        |       |   | 15,835 |   |   |
| Deferred revenue                                 |       |                     | 57,715     |                        |       |   | 53,121 |   |   |
| Current portion of capital leases                |       |                     | 17         |                        |       |   | 17 |   |   |
| Total current liabilities                        |       |                     | 142,358    |                        |       |   | 145,070 |   |   |
| Member redemption  liability                     |       |                     | 4,378      |                        |       |   | 4,154 |   |   |
| Deferred revenue                                 |       |                     | 3,878      |                        |       |   | 3,227 |   |   |
| Capital leases                                   |       |                     | 9          |                        |       |   | 13 |   |   |
| Other liabilities                                |       |                     | 4,782      |                        |       |   | 3,589 |   |   |
| Total liabilities                                |       |                     | 155,405    |                        |       |   | 156,053 |   |   |
| Commitments and  contingencies (see Note 8)      |       |                     |       |                        |       |   |   |   |   |
| Stockholders’ equity:                       |       |                     |       |                        |       |   |   |   |   |
| Common stock                                     |       |                     | 7          |                        |       |   | 7 |   |   |
| Additional paid-in capital                       |       |                     | 430,098    |                        |       |   | 439,383 |   |   |
| Accumulated other comprehensive loss             |       |                     | (179       | )                           |       |   | (245 | ) |   |
| Accumulated deficit                              |       |                     | (79,151    | )                           |       |   | (92,179 | ) |   |
| Total stockholders’ equity                  |       |                     | 350,775    |                        |       |   | 346,966 |   |   |
| Total liabilities  and stockholders’ equity |       |                     | $          | 506,180                     |       |   |   | $ | 503,019 |   |   |

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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**UNITED ONLINE, INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)**

| ** **                                                                   | ** ** | **Quarter Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| Revenues                                                                     |       | $                                      | 129,851    |   | $ | 127,332 |   |
| Operating  expenses:                                                         |       |                                   |       |   |   |
| Cost of revenues (including stock-based compensation,  see Note 4) |       | 29,247                                 |       | 29,890 |   |
| Sales and marketing (including stock-based  compensation, see Note 4)   |       | 46,025                                 |       | 43,419 |   |
| Product development (including stock-based  compensation, see Note 4)        |       | 13,471                                 |       | 12,816 |   |
| General and administrative (including stock-based  compensation, see Note 4) |       | 15,489                                 |       | 16,246 |   |
| Amortization of intangible assets                                            |       | 3,495                                  |       | 4,389 |   |
| Total operating expenses                                                     |       | 107,727                                |       | 106,760 |   |
| Operating income                                                             |       | 22,124                                 |       | 20,572 |   |
| Interest and  other income, net                                              |       | 1,700                                  |       | 1,716 |   |
| Interest expense                                                             |       | (360                                   | )          | (1,716 | ) |
| Income before  income taxes                                                  |       | 23,464                                 |       | 20,572 |   |
| Provision for  income taxes                                                  |       | 10,436                                 |       | 8,921 |   |
| Income before  cumulative effect of accounting change                        |       | 13,028                                 |       | 11,651 |   |
| Cumulative effect  of accounting change, net of tax                          |       | —                                 |       | 1,041 |   |
| Net income                                                                   |       | $                                      | 13,028     |   | $ | 12,692 |   |
| Basic net income per  share:                                                 |       |                                   |       |   |   |
| Income before cumulative effect of accounting change                         |       | $                                      | 0.20       |   | $ | 0.19 |   |
| Cumulative effect of accounting change, net of tax                           |       | —                                 |       | 0.01 |   |
| Basic net income  per share                                                  |       | $                                      | 0.20       |   | $ | 0.20 |   |
| Diluted net income per  share:                                               |       |                                   |       |   |   |
| Income before cumulative effect of accounting change                         |       | $                                      | 0.19       |   | $ | 0.18 |   |
| Cumulative effect of accounting change, net of tax                           |       | —                                 |       | 0.02 |   |
| Diluted net  income per share                                                |       | $                                      | 0.19       |   | $ | 0.20 |   |
| Shares used to  calculate basic net income per share                         |       | 65,627                                 |       | 62,511 |   |
| Shares used to calculate  diluted net income per share                       |       | 68,080                                 |       | 64,889 |   |

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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**UNITED ONLINE, INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands)**

| ** **                                                                                                                                            | ** ** | **Quarter Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                                            | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| Net income                                                                                                                                            |       | $                                      | 13,028     |   | $ | 12,692 |   |
| Unrealized gain  (loss) on short-term investments, net of tax of $42 and $(5) for  the quarters ended March 31, 2007 and 2006, respectively |       | 64                                     |       | (16 | ) |
| Unrealized loss  on derivative, net of tax of $(60) for the quarter ended March 31, 2006                                                         |       | —                                 |       | (83 | ) |
| Foreign currency  translation                                                                                                                         |       | 2                                      |       | 28 |   |
| Comprehensive income                                                                                                                                  |       | $                                      | 13,094     |   | $ | 12,621 |   |

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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**UNITED ONLINE, INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY(in thousands)**

| ** **                                                       | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated** | ** ** | **Total  Stockholders’** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|---------------------------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                                       | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**                           | ** ** | **Loss**        | ** ** | **Deficit**                   | ** ** | **Equity** | ** ** |
| Balance at  January 1, 2007                                 |       | 65,805                |       |                    | $          | 7                                     |       |            | $          | 439,383                       |       |   | $ | (245 | ) |   |   | $ | (92,179 | ) |   |   | $ | 346,966 |   |   |
| Exercises of  stock options                                      |       | 275                   |       |                    | —     |                                  |       | 1,883           |       |                          | —     |   |   |   | — |   |   |   | 1,883 |   |   |
| Vesting of restricted  stock units                               |       | 340                   |       |                    | —     |                                  |       | —          |       |                          | —     |   |   |   | — |   |   |   | — |   |   |
| Repurchases of  common stock                                     |       | —                |       |                    | —     |                                  |       | (2,657          | )          |                          | —     |   |   |   | — |   |   |   | (2,657 | ) |   |
| Dividends paid on  shares outstanding and restricted stock units |       | —                |       |                    | —     |                                  |       | (13,727         | )          |                          | —     |   |   |   | — |   |   |   | (13,727 | ) |   |
| Stock-based  compensation                                        |       | —                |       |                    | —     |                                  |       | 4,047           |       |                          | —     |   |   |   | — |   |   |   | 4,047 |   |   |
| Unrealized gain  on short-term investments, net of tax           |       | —                |       |                    | —     |                                  |       | —          |       |                          | 64         |   |   |   | — |   |   |   | 64 |   |   |
| Foreign currency  translation                                    |       | —                |       |                    | —     |                                  |       | —          |       |                          | 2          |   |   |   | — |   |   |   | 2 |   |   |
| Tax benefits from  stock options                                 |       | —                |       |                    | —     |                                  |       | 1,169           |       |                          | —     |   |   |   | — |   |   |   | 1,169 |   |   |
| Net income                                                       |       | —                |       |                    | —     |                                  |       | —          |       |                          | —     |   |   |   | 13,028 |   |   |   | 13,028 |   |   |
| Balance at  March 31, 2007                                  |       | 66,420                |       |                    | $          | 7                                     |       |            | $          | 430,098                       |       |   | $ | (179 | ) |   |   | $ | (79,151 | ) |   |   | $ | 350,775 |   |   |

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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**UNITED ONLINE, INC.UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)**

| ** **                                                                            | ** ** | **Quarter Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                            | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                                |       |                                   |       |   |   |
| Net income                                                                            |       | $                                      | 13,028     |   | $ | 12,692 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |       |                                   |       |   |   |
| Depreciation and amortization                                                         |       | 8,240                                  |       | 9,096 |   |
| Stock-based compensation                                                              |       | 4,047                                  |       | 4,969 |   |
| Deferred taxes                                                                        |       | (430                                   | )          | (302 | ) |
| Tax benefits from stock options                                                       |       | 1,169                                  |       | 1,873 |   |
| Excess tax  benefits from stock-based compensation                                    |       | (868                                   | )          | (1,414 | ) |
| Cumulative effect  of accounting change, net of tax                                   |       | —                                 |       | (1,041 | ) |
| Other                                                                                 |       | 238                                    |       | 1,437 |   |
| Changes in  operating assets and liabilities (excluding the effects of acquisitions): |       |                                   |       |   |   |
| Accounts receivable                                                                   |       | 1,486                                  |       | 1,394 |   |
| Other assets                                                                          |       | (1,060                                 | )          | (730 | ) |
| Accounts payable and accrued liabilities                                              |       | (7,028                                 | )          | (15,541 | ) |
| Member redemption  liability                                                          |       | 1,193                                  |       | — |   |
| Deferred revenue                                                                      |       | 5,246                                  |       | 1,846 |   |
| Other liabilities                                                                     |       | (55                                    | )          | (40 | ) |
| Net cash provided by operating activities                                             |       | 25,206                                 |       | 14,239 |   |
| Cash flows from  investing activities:                                                |       |                                   |       |   |   |
| Purchases of property and equipment                                                   |       | (5,797                                 | )          | (7,061 | ) |
| Purchases of rights, patents and trademarks                                           |       | —                                 |       | (509 | ) |
| Purchases of short-term investments                                                   |       | (79,491                                | )          | (124,121 | ) |
| Proceeds from maturities and sales of short-term  investments                         |       | 71,040                                 |       | 115,320 |   |
| Cash paid for acquisitions, net of cash acquired                                      |       | —                                 |       | (10,990 | ) |
| Proceeds from sales of assets, net                                                    |       | 14                                     |       | — |   |
| Net cash used for investing activities                                                |       | (14,234                                | )          | (27,361 | ) |
| Cash flows from  financing activities:                                                |       |                                   |       |   |   |
| Payments on term loan                                                                 |       | —                                 |       | (54,209 | ) |
| Payments on capital leases                                                            |       | (4                                     | )          | (50 | ) |
| Proceeds from exercises of stock options                                              |       | 1,883                                  |       | 2,622 |   |
| Repurchases of common stock                                                           |       | (2,657                                 | )          | (1,643 | ) |
| Payments for dividends                                                                |       | (13,727                                | )          | (12,868 | ) |
| Excess tax  benefits from stock-based compensation                                    |       | 868                                    |       | 1,414 |   |
| Net cash used for financing activities                                                |       | (13,637                                | )          | (64,734 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                         |       | (2                                     | )          | 28 |   |
| Change in cash  and cash equivalents                                                  |       | (2,667                                 | )          | (77,828 | ) |
| Cash and cash  equivalents, beginning of period                                       |       | 19,252                                 |       | 100,397 |   |
| Cash and cash  equivalents, end of period                                             |       | $                                      | 16,585     |   | $ | 22,569 |   |

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

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**UNITED ONLINE, INC.NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**1.**                 DESCRIPTION OFBUSINESS, BASIS OF PRESENTATION AND RECENT ACCOUNTING PRONOUNCEMENTS

**Description ofBusiness**

United Online, Inc. (“UnitedOnline” or the “Company”) is a leading provider of consumer Internet and mediaservices through a number of brands, including Classmates, MyPoints, NetZeroand Juno. The Company’s primary Content & Media services includesocial networking and online loyalty marketing. The Company’s primaryCommunications services include Internet access and email. On a combined basis,the Company’s Web properties attract a significant number of Internet userseach month and the Company offers marketers a broad array of Internetadvertising products and services as well as online market research andmeasurement services.

**Basis ofPresentation**

The accompanying consolidated financial statements forthe quarters ended March 31, 2007 and 2006, which include United Onlineand its wholly-owned subsidiaries, are unaudited except for the balancesheet information at December 31, 2006, which is derived from the auditedconsolidated financial statements filed on March 1, 2007 with theSecurities and Exchange Commission (“SEC”) in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2006 but does not include all disclosuresrequired by accounting principles generally accepted in the United States ofAmerica (“GAAP”). The Company’s interim financial statements have been preparedin accordance with GAAP including those for interim financial information andwith the instructions for Form 10-Q and Article 10 ofRegulation S-X issued by the SEC. Accordingly, they do not includeall of the information and note disclosures required by GAAP for completefinancial statements. The year-end condensed balance sheet data was derivedfrom audited financial statements, but does not include all disclosuresrequired by GAAP. All significant intercompany accounts and transactions havebeen eliminated in consolidation. The consolidated financial statements, in theopinion of management, reflect all adjustments (consisting only of normalrecurring adjustments) that are necessary for a fair presentation of theresults for the periods shown. The results of operations for such periods arenot necessarily indicative of the results expected for any future periods.

The preparation offinancial statements in accordance with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent liabilities and the reported amountsof revenues and expenses. Actual results could differ from those estimates.These unaudited condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and relatednotes for the year ended December 31, 2006 included in the Company’sAnnual Report on Form 10-K filed on March 1, 2007 with the SEC.

**Recent AccountingPronouncements**

*Accounting forUncertainty in Income Taxes*

In July 2006, the FinancialAccounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48,*Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109*, which clarifies theaccounting for uncertainty in income tax positions. This Interpretationrequires that the Company recognize, in the consolidated financial statements,the impact of a tax position that is more likely than not to be sustained uponexamination based on the technical merits of the position. The 

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provisionsof FIN 48 are effective for the Company beginning in the March 2007quarter, with any cumulative effect of a change in accounting principlerecorded as an adjustment to opening retained earnings. The implementation ofFIN 48 did not have a material impact on the Company’s financial position,results of operations or cash flows.

*Fair ValueMeasurements*

In September 2006,the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 157,*Fair Value Measurements*, which clarifiesthe definition of fair value, establishes guidelines for measuring fair value,and expands disclosures regarding fair value measurements. SFAS No. 157does not require any new fair value measurements and eliminates inconsistenciesin guidance found in various prior accounting pronouncements. SFAS No. 157will be effective for the Company on January 1, 2008. The Company iscurrently evaluating the impact of adopting SFAS No. 157 on its financialposition, results of operations and cash flows.

*Fair Value Option*

In February 2007, theFASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities*, which permits entitiesto choose to measure many financial instruments and certain other items at fairvalue that are not currently required to be measured at fair value. SFAS No. 159will be effective for the Company on January 1, 2008. The Company iscurrently evaluating the impact of adopting SFAS No. 159 on its financialposition, results of operations and cash flows.

**2.   BALANCESHEET COMPONENTS**

**Short-TermInvestments**

Short-terminvestments consist of the following (in thousands):

| ** **            | ** ** | **March 31, 2007** | ** ** |
|-----------------------|------------|------------------------------|------------|
| ** **            | ** ** | **Amortized  Cost**          | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| U.S. corporate  notes |       | $                            | —     |   |   | $ | — |   |   |   | $ | — |   |   | $ | — |   |
| Government  agencies  |       | 151,533                      |       |   | 19 |   |   |   | (126 | ) |   | 151,426 |   |
| Total                 |       | $                            | 151,533    |   |   | $ | 19 |   |   |   | $ | (126 | ) |   | $ | 151,426 |   |

 

| ** **            | ** ** | **December 31, 2006** | ** ** |
|-----------------------|------------|---------------------------------|------------|
| ** **            | ** ** | **Amortized  Cost**             | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| U.S. corporate  notes |       | $                               | 2,500      |   |   | $ | — |   |   |   | $ | — |   |   | $ | 2,500 |   |
| Government  agencies  |       | 140,822                         |       |   | 15 |   |   |   | (227 | ) |   | 140,610 |   |
| Total                 |       | $                               | 143,322    |   |   | $ | 15 |   |   |   | $ | (227 | ) |   | $ | 143,110 |   |

 

Gross unrealized gains andlosses are presented net of tax in accumulated other comprehensive income onthe consolidated balance sheets. The Company had no material realized gains orlosses from the sale of short-term investments in the quarters ended March 31,2007 and 2006.

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Thefollowing table summarizes the fair value and gross unrealized losses on theCompany’s short-term investments, aggregated by type of investment instrumentand length of time that individual securities have been in a continuousunrealized loss position, at March 31, 2007 and December 31, 2006 (inthousands):

| ** **            | ** ** | **March 31, 2007**           | ** ** |
|-----------------------|------------|----------------------------------------|------------|
| ** **            | ** ** | **Less than 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total** | ** ** |
| ** **            | ** ** | **Fair  Value**                        | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| U.S. corporate  notes |       | $                                      | —     |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   |
| Government  agencies  |       | 37,267                                 |       |   | (13 | ) |   | 28,317 |   |   | (113 | ) |   | 65,584 |   |   | (126 | ) |   |
| Total                 |       | $                                      | 37,267     |   |   | $ | (13 | ) |   | $ | 28,317 |   |   | $ | (113 | ) |   | $ | 65,584 |   |   | $ | (126 | ) |   |

 

| ** **            | ** ** | **December 31, 2006**        | ** ** |
|-----------------------|------------|----------------------------------------|------------|
| ** **            | ** ** | **Less than 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total** | ** ** |
| ** **            | ** ** | **Fair  Value**                        | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| U.S. corporate  notes |       | $                                      | —     |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   |
| Government  agencies  |       | 21,432                                 |       |   | (5 | ) |   | 22,568 |   |   | (222 | ) |   | 44,000 |   |   | (227 | ) |   |
| Total                 |       | $                                      | 21,432     |   |   | $ | (5 | ) |   | $ | 22,568 |   |   | $ | (222 | ) |   | $ | 44,000 |   |   | $ | (227 | ) |   |

 

The Company’s investment portfolio consists of bothcorporate and government securities, including auction rate securities, thathave a maximum maturity of four years. Auction rate securities have long-termunderlying maturities, typically 20 to 30 years, but have interest rates thatare reset every 7, 28 or 35 days, at which time the securities can typically bepurchased or sold, creating a highly liquid market. Our investment policypermits investments in auction rate securities with a maximum reset date of oneyear. The Company’s intent is not to hold these securities to maturity, butrather to use the interest rate reset feature to provide liquidity asnecessary. The Company’s investment in auction rate securities provides higheryields than money market and other cash equivalent investments. The longer theduration of securities in the investment portfolio, the more susceptible theyare to changes in market interest rates and bond yields. As yields increase,those securities purchased with a lower yield-at-cost show a mark-to-marketunrealized loss. All unrealized losses are due to changes in interest rates andbond yields.

Maturitiesof short-term investments were as follows (in thousands):

| ** **                           | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Amortized  Cost**          | ** ** | **Estimated  Fair Value**  | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
| Maturing within 1  year              |       | $                            | 48,018     |                            | $          | 48,012 |   | $ | 24,502 |   | $ | 24,499 |   |
| Maturing between  1 year and 4 years |       | 29,683                       |       | 29,580                          |       | 34,930 |   | 34,781 |   |
| Maturing after 4  years              |       | 73,832                       |       | 73,834                          |       | 83,890 |   | 83,830 |   |
| Total                                |       | $                            | 151,533    |                            | $          | 151,426 |   | $ | 143,322 |   | $ | 143,110 |   |

 

**Accounts Receivable**

At March 31, 2007,two customers comprised approximately 14% and 13% of the consolidated accountsreceivable balance. At December 31, 2006, one customer comprisedapproximately 13% of the consolidated accounts receivable balance. For thequarters ended March 31, 2007 and 2006, the Company did not have anyindividual customers that comprised more than 10% of total revenues.

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**Accrued Liabilities**

Accruedliabilities consist of the following (in thousands):

| ** **                                  | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Employee  compensation and related expenses |       |                     | $          | 15,953                      |       |   |   | $ | 27,061 |   |   |
| Income taxes  payable                       |       |                     | 10,728     |                        |       |   | 9,305 |   |   |
| Other                                       |       |                     | 3,335      |                        |       |   | 3,181 |   |   |
| Total                                       |       |                     | $          | 30,016                      |       |   |   | $ | 39,547 |   |   |

 

**3.   STOCKHOLDERS’EQUITY**

*Common StockRepurchases*

The Company’s Board of Directors authorized a commonstock repurchase program that allows the Company to repurchase shares of itscommon stock through open market or privately negotiated transactions based on prevailingmarket conditions and other factors through December 31, 2007. At March 31,2007, the Company had repurchased $139.2 million of its common stock under theprogram, leaving $60.8 million remaining under the program.

Shares withheld fromrestricted stock units (“RSUs”) awarded to employees upon vesting to payapplicable withholding taxes on their behalf are considered common stockrepurchases, but are not counted as purchases against the Board-approvedrepurchase program. Upon vesting, the Company currently does not collect theapplicable withholding taxes for RSUs from employees. Instead, the Companyautomatically withholds, from the RSUs that vest, the portion of those shareswith a fair market value equal to the amount of the withholding taxes due. TheCompany then pays the applicable withholding taxes in cash, which is accountedfor as a repurchase of common stock. In the quarters ended March 31, 2007and 2006, approximately 194,000 shares and 129,000 shares, respectively, werewithheld from RSUs that vested in order to pay the applicable employeewithholding taxes.

*Dividends*

Dividends are paid on common shares and RSUsoutstanding as of the record date.

In February 2007, the Company’s Board of Directorsdeclared a quarterly cash dividend of $0.20 per share of common stock. Therecord date for the dividend was February 14, 2007 and the dividend, whichtotaled $13.7 million, was paid on February 28, 2007. In April 2007,the Company’s Board of Directors declared a quarterly cash dividend of $0.20per share of common stock. The record date for the dividend is May 14,2007, and the dividend will be paid on May 31, 2007.

The payment of futuredividends is discretionary and will be subject to determination by the Board ofDirectors each quarter following its review of the Company’s financialperformance. Dividends have been declared and paid out of the Company’ssurplus, as defined and computed in accordance with the General Corporation Lawof the State of Delaware.

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**4.   STOCK-BASEDCOMPENSATION**

Thefollowing table summarizes the stock-based compensation that has beenincluded in the following captions for each of the periods presented (inthousands):

| ** **                      | ** ** | **Quarter Ended  March 31,** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| Operating expenses:             |       |                                   |       |   |   |
| Cost of revenues                |       | $                                      | 194        |   | $ | 237 |   |
| Sales and  marketing            |       | 892                                    |       | 944 |   |
| Product  development            |       | 1,245                                  |       | 1,466 |   |
| General and  administrative     |       | 1,716                                  |       | 2,322 |   |
| Total stock-based  compensation |       | $                                      | 4,047      |   | $ | 4,969 |   |

 

**5.   INCOMETAXES**

For the quarter ended March 31, 2007, the Companyrecorded a tax provision of $10.4 million on pre-tax income of$23.5 million, resulting in a year-to-date effective tax rate of 44.5%.For the quarter ended March 31, 2006, the Company recorded a tax provisionof $8.9 million on pre-tax income of $20.6 million, resulting in a year-to-dateeffective tax rate of 43.4%. The effective tax rates differ from the statutoryrate primarily due to (1) stock-based compensation that is limited under Section 162(m) ofthe Internal Revenue Code and (2) foreign losses, the benefit of which isnot currently recognizable due to uncertainty regarding realization.

The Company adopted the provisions of FIN 48 on January 1,2007. As a result of the implementation of FIN 48, the Company recognized nomaterial adjustment in the liability for unrecognized income tax benefits. Atthe adoption date of January 1, 2007, the Company had $4.8 million ofunrecognized tax benefits, all of which would affect the Company’s effectivetax rate if recognized. At March 31, 2007, the Company has $5.1 million ofunrecognized tax benefits.

The Company recognizes interest and penalties relatedto uncertain tax positions in income tax expense. At March 31, 2007, theCompany has approximately $1.0 million of accrued interest related to uncertaintax positions included in income taxes payable.

The tax years 2003 through2006 remain open to examination by the major taxing jurisdictions to which theCompany is subject. The Company is not currently under examination in anyjurisdiction where the Company files tax returns. The Company has, however,been contacted by a state tax authority in connection with its intention tobegin an examination for the tax years ended December 31, 2003 and 2004.

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**6.   NET INCOMEPER SHARE**

Thefollowing table sets forth the computation of basic and diluted net income pershare for the quarters ended March 31, 2007 and 2006 (in thousands, exceptper share amounts):

| ** **                                                                                       | ** ** | **Quarter Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                       | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| Numerator:                                                                                       |       |                                   |       |   |   |
| Income before  cumulative effect of accounting change                                            |       | $                                      | 13,028     |   | $ | 11,651 |   |
| Cumulative effect  of accounting change, net of tax                                              |       | —                                 |       | 1,041 |   |
| Net income                                                                                       |       | $                                      | 13,028     |   | $ | 12,692 |   |
| Denominator:                                                                                     |       |                                   |       |   |   |
| Weighted-average  common shares—basic                                                       |       | 66,102                                 |       | 62,986 |   |
| Less: weighted-average common shares subject to  repurchase                                      |       | (475                                   | )          | (475 | ) |
| Shares used to  calculate basic net income per share                                             |       | 65,627                                 |       | 62,511 |   |
| Add: Dilutive effect of stock options, restricted  stock and employee stock purchase plan shares |       | 2,453                                  |       | 2,378 |   |
| Shares used to  calculate diluted net income per share                                           |       | 68,080                                 |       | 64,889 |   |
| Basic net income per  share:                                                                     |       |                                   |       |   |   |
| Income before cumulative effect of accounting change                                             |       | $                                      | 0.20       |   | $ | 0.19 |   |
| Cumulative effect of accounting change, net of tax                                               |       | —                                 |       | 0.01 |   |
| Basic net income  per share                                                                      |       | $                                      | 0.20       |   | $ | 0.20 |   |
| Diluted net income per  share:                                                                   |       |                                   |       |   |   |
| Income before cumulative effect of accounting change                                             |       | $                                      | 0.19       |   | $ | 0.18 |   |
| Cumulative effect of accounting change, net of tax                                               |       | —                                 |       | 0.02 |   |
| Diluted net income per  share                                                                    |       | $                                      | 0.19       |   | $ | 0.20 |   |

 

The diluted per sharecomputations exclude those stock options, unvested common stock and RSUs whichare antidilutive. The number of antidilutive shares at March 31, 2007 and2006 was 3.0 million and 5.3 million, respectively.

**7.   SEGMENTINFORMATION**

Revenueand income from operations by segment are as follows (in thousands):

| ** **                      | ** ** | **Quarter Ended March 31, 2007** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **Content & Media**                    | ** ** | **Communications** | ** ** | **Total** | ** ** |
| Billable services               |       |                                                 | $          | 23,354 |   |   |   | $ | 72,966 |   |   | $ | 96,320 |   |
| Advertising                     |       |                                                 | 20,821     |   |   |   | 12,710 |   |   | 33,531 |   |
| Total revenues                  |       |                                                 | $          | 44,175 |   |   |   | $ | 85,676 |   |   | $ | 129,851 |   |
| Segment income from  operations |       |                                                 | $          | 5,765 |   |   |   | $ | 32,834 |   |   | $ | 38,599 |   |

 

| ** **                      | ** ** | **Quarter Ended March 31, 2006** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **Content & Media**                    | ** ** | **Communications** | ** ** | **Total** | ** ** |
| Billable services               |       |                                                 | $          | 20,497 |   |   |   | $ | 90,659 |   |   | $ | 111,156 |   |
| Advertising                     |       |                                                 | 6,493      |   |   |   | 9,683 |   |   | 16,176 |   |
| Total revenues                  |       |                                                 | $          | 26,990 |   |   |   | $ | 100,342 |   |   | $ | 127,332 |   |
| Segment income from  operations |       |                                                 | $          | 6,294 |   |   |   | $ | 33,468 |   |   | $ | 39,762 |   |

 

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Areconciliation of segment income from operations (which excludes corporateexpenses, depreciation, amortization of intangible assets and stock-basedcompensation) to consolidated operating income, is as follows for each periodpresented (in thousands):

| ** **                            | ** ** | **Quarter Ended  March 31,** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| Segment income from  operations:      |       |                                   |       |   |   |
| Content & Media              |       | $                                      | 5,765      |   | $ | 6,294 |   |
| Communications                        |       | 32,834                                 |       | 33,468 |   |
| Total segment  income from operations |       | 38,599                                 |       | 39,762 |   |
| Corporate expenses                    |       | (4,188                                 | )          | (5,125 | ) |
| Depreciation                          |       | (4,745                                 | )          | (4,707 | ) |
| Amortization of intangible assets     |       | (3,495                                 | )          | (4,389 | ) |
| Stock-based compensation              |       | (4,047                                 | )          | (4,969 | ) |
| Consolidated operating  income        |       | $                                      | 22,124     |   | $ | 20,572 |   |

 

The Company manages its working capital on aconsolidated basis and does not allocate long-lived assets to segments. Inaddition, segment assets are not reported to, or used by, the chief operatingdecision maker and therefore, pursuant to SFAS No. 131, total segmentassets have not been disclosed. The Company’s $133.0 million of goodwillis related entirely to purchase transactions in the Content & Mediasegment.

The Company has notprovided information about geographic segments because the vast majority of theCompany’s revenues and related results of operations and identifiable assetsare in the United States of America and additional geographic information isthus not material nor meaningful.

**8.   COMMITMENTSAND CONTINGENCIES**

*Legal Contingencies*

On April 20, 2001, Jodi Bernstein, on behalf ofhimself and all others similarly situated, filed a lawsuit in the United StatesDistrict Court for the Southern District of New York against NetZero, certainofficers and directors of NetZero and the underwriters of NetZero’s initialpublic offering, Goldman Sachs Group, Inc., BancBoston Robertson Stephens, Inc.and Salomon Smith Barney, Inc. The complaint alleges that the prospectusthrough which NetZero conducted its initial public offering in September 1999was materially false and misleading because it failed to disclose, among otherthings, that (i) the underwriters had solicited and received excessive andundisclosed commissions from certain investors in exchange for which theunderwriters allocated to those investors material portions of the restrictednumber of NetZero shares issued in connection with the offering; and (ii) theunderwriters had entered into agreements with customers whereby the underwritersagreed to allocate NetZero shares to those customers in the offering inexchange for which the customers agreed to purchase additional NetZero sharesin the aftermarket at pre-determined prices. Plaintiffs are seeking injunctiverelief and damages. Additional lawsuits setting forth substantially similarallegations were also served against NetZero on behalf of additional plaintiffsin April and May 2001. The case against NetZero was consolidated withapproximately 300 other suits filed against more than 300 issuers thatconducted their initial public offerings between 1998 and 2000, theirunderwriters and an unspecified number of their individual corporate officersand directors. The majority of issuers, including NetZero, and their insurershave approved a settlement agreement. The district court’s final approval ofthe settlement has been stayed pending the outcome of the Court of Appeals forthe Second Circuit’s decision to vacate the district court’s decision grantingclass certification in six of the suits. On April 7, 2007, the SecondCircuit denied plaintiffs’ petition for rehearing its decision to reverse thedistrict court’s class certification order.

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On August 21, 2001,Juno commenced an adversary proceeding in U.S. Bankruptcy Court in the SouthernDistrict of New York against Smart World Technologies, LLC, dba “Freewwweb”(the “Debtor”), a provider of free Internet access that had elected to ceaseoperations and had sought the protection of Chapter 11 of the Bankruptcy Code.The adversary proceeding arose out of a subscriber referral agreement betweenJuno and the Debtor. In response to the commencement of the adversaryproceeding, the Debtor and its principals filed a pleading with the bankruptcycourt asserting that Juno is obligated to pay compensation in an amount inexcess of $80 million as a result of Juno’s conduct in connection with thesubscriber referral agreement. In addition, a dispute arose between Juno andUUNET Technologies, Inc., an affiliate of MCI WorldCom Network Services, Inc.,regarding the value of services provided by UUNET, with UUNET claiming inexcess of $1.0 million and Juno claiming less than $0.3 million. On August 4,2006, Juno entered into a settlement agreement with the Committee of UnsecuredCreditors providing for the settlement of all claims against Juno pursuant to aproposed plan of liquidation of the Debtor. The settlement and plan ofliquidation were approved by the bankruptcy court in December 2006 and thedeadline for appealing elapsed in January 2007. We had previously reserved$6.25 million for the Freewwweb settlement, which was increased by $0.25million in the December 2006 quarter. Pursuant to the settlementagreement, Juno paid a total of $6.5 million.

On April 27, 2004,plaintiff MyMail Ltd. filed a lawsuit in the United States District Court forthe Eastern District of Texas against NetZero, Juno, NetBrands, America Online, Inc.,AT&T, EarthLink, Inc., SBC Communications, Inc., and VerizonCommunications, Inc. alleging infringement of plaintiff’s patent whichpurported to cover user access to a computer network. Plaintiff soughtinjunctive and declaratory relief and damages. On October 28, 2005, thecourt issued an order granting defendants’ motions for summary judgment ofnon-infringement of the patent. MyMail appealed the trial court’s ruling, andon February 20, 2007, the Court of Appeals for the Federal Circuitaffirmed the trial court’s ruling.

On March 6, 2006,plaintiff Anthony Piercy filed a purported consumer class action lawsuit in theSuperior Court of the State of California, County of Los Angeles, againstNetZero claiming that NetZero continues to charge consumers fees after theycancel their Internet access account. Plaintiff is seeking injunctive anddeclaratory relief and damages. NetZero has filed a response to the lawsuitdenying the material allegations of the complaint. On April 17, 2007,NetZero received notice from plaintiff’s counsel that Mr. Piercy would bewithdrawing from the action as a class representative.

On July 27, 2006,plaintiff Donald E. Ewart filed a purported consumer class action lawsuit inthe Superior Court of the State of California, County of Los Angeles, againstNetZero claiming that NetZero continues to charge consumers fees after theycancel their Internet access account. Plaintiff is seeking injunctive anddeclaratory relief and damages. NetZero filed a response to the lawsuit denyingthe material allegations of the complaint. Mr. Ewart subsequently withdrewfrom the action as a class representative, and on March 16, 2007, BarbaraRasnake and Robert Du Verger were substituted as purported classrepresentatives.

The pending lawsuitsinvolve complex questions of fact and law and may require the expenditure ofsignificant funds and the diversion of other resources to defend. Although theCompany does not believe the outcome of the above outstanding legalproceedings, claims and litigation will have a material adverse effect on itsbusiness, financial position, results of operations or cash flows, the resultsof litigation are inherently uncertain and the Company can provide no assurancethat it will not be materially and adversely impacted by the results of suchproceedings. At March 31, 2007, the Company had not established reservesfor any of the matters described above.

The Company is subject to various other legalproceedings and claims that arise in the ordinary course of business.Management believes the amount and ultimate liability, if any, with respect tothese actions will not materially affect the Company’s business, financialposition, results of operations or cash flows. There can be no assurance,however, that such actions will not be material or adversely affect the Company’sbusiness, financial position, results of operations or cash flows.

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**ITEM 2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**Forward-LookingStatements**

*This Quarterly Report on Form 10-Q and thedocuments incorporated herein by reference contain forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995 based on our current expectations, estimates and projections about ouroperations, industry, financial condition and liquidity. Statements containingwords such as “anticipate,” “expect,” “intend,” “plan,” “believe,” “may,” “will”or similar expressions constitute forward-looking statements. Theseforward-looking statements include, but are not limited to, statementsabout the markets in which we compete, our pay accounts, our product andservice offerings, the advertising market, operating expenses, operatingefficiencies, revenues, capital requirements, tax payments and our cashposition. In addition, any statements that refer to expectations, projectionsor other characterizations of future events or circumstances, including anyunderlying assumptions, are forward-looking statements. Such statementsare not guarantees of future performance and are subject to risks,uncertainties and assumptions that are difficult to predict. Therefore, ouractual results could differ materially and adversely from those expressed inany forward-looking statements as a result of various factors. Thesection entitled “Risk Factors” in this Quarterly Report on Form 10-Qand our other filings with the SEC set forth some of the important risk factorsthat may affect our business, financial position, results of operations andcash flows. Statements indicating factors that we believe may impact ourresults are not intended to be exclusive. We undertake no obligation to reviseor update publicly any forward-looking statements, other than as requiredby law.*

**Overview**

We are a leading providerof consumer Internet and media services through a number of brands includingClassmates, MyPoints, NetZero and Juno. Our primary Content & Mediaservices include social networking and online loyalty marketing. Our primaryCommunications services include Internet access and email. On a combined basis,our Web properties attract a significant number of Internet users each monthand we offer marketers a broad array of Internet advertising products andservices as well as online market research and measurement services.

**Segment Definitions**

Wereport our businesses in two reportable segments:

| **Segment**              | ** ** | ** **                                                            | ** ** | **Internet Services** |
|--------------------------|------------|-----------------------------------------------------------------------|------------|----------------------------|
| Content & Media |       | Social networking,  loyalty marketing, Web hosting and photo sharing. |
| Communications           |       | Internet access, email, Internet security, family  services and VoIP. |

 

**Segment Services**

***Content & Media***

Our primary Content &Media services are social networking under the Classmates brand and onlineloyalty marketing under the MyPoints brand. Our Content & Mediaservices also include international social-networking, Web-hosting andphoto-sharing services, though these services do not generate material revenues.For additional information regarding our Content & Media segment, seeNote 7—“Segment Information” of the Notes to the Condensed ConsolidatedFinancial Statements, which appears in Part I, Item 1 of this QuarterlyReport on Form 10-Q.

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*Social-NetworkingServices*

Our social-networking services connect millions ofusers primarily across the United States and, to a lesser extent, Canada,Germany, France, Sweden, India and Great Britain, among others. The primaryfocus of these services has been to enable members to locate and reconnect withpast acquaintances from school, work or military affiliations. Basic membershipin our social-networking services is free and the vast majority of oursocial-networking accounts are free accounts. A free account allows a user toengage in a variety of activities on our Web sites including posting a personalprofile and searching our database for other registered members. We also offerpay services which, in general, allow the member to engage in a variety of additionalactivities, including communicating with other registered members. The majorityof our social-networking revenues are derived from our pay services. Oursocial-networking services also contain advertising initiatives throughouttheir Web sites. In general, pricing for our social-networking services variesby service and term of membership, with most domestic pay accounts consistingof a three-month commitment for $15.00, a 12-month commitment for $39.00or a 24-month commitment for $59.00, although the standard pricing ofcertain of our services, including our international services, is lower.

Our strategy for oursocial-networking services is to continue to enhance our members’ experience infinding and interacting with past acquaintances from school, work and themilitary, and to encourage our members to contribute user-generated content.Our strategy is also to expand the scope of our services to provide memberswith a platform to not only connect with past acquaintances, but also to meetand interact with new people based on shared interests and communities.

*Loyalty MarketingServices*

Our MyPoints loyalty marketing service providesretailers an efficient means to reach a targeted online audience whileproviding consumers a compelling way to earn rewards while shopping andengaging in other online activities. MyPoints provides advertisers andretailers online direct marketing solutions such as rewards-based Web shopping,targeted emails based on self-reported and behavioral data, and online surveysthat pre-qualify MyPoints’ members for targeted offers. MyPoints’ members arerewarded with points for clicking or shopping through MyPoints’ emails, forshopping through the MyPoints Web site, and for completing surveys. The pointsare then redeemable for gift cards and other benefits with various partners.Hundreds of major brands have used MyPoints to market their products andservices. Virtually all of our loyalty marketing revenues are derived fromadvertising.

Our strategy for ourloyalty marketing services is to increase the number of users by generatingadditional awareness regarding MyPoints’ benefits and to encourage utilizationof the service as an online shopping portal. Our strategy is also to increasethe number of major advertisers on our service.

***Communications***

Our primary Communicationspay services are consumer Internet access and email under the NetZero and Junobrands. We offer several additional Communications pay services, such asInternet security services, but these additional services and brands do notgenerate significant revenues. For additional information regarding ourCommunications segment, see Note 7—“Segment Information” of the Notes to the CondensedConsolidated Financial Statements, which appears in Part I, Item 1 of thisQuarterly Report on Form 10-Q.

*Internet AccessServices*

Our Internet access services consist of both dial-upand broadband digital subscriber line (“DSL”) services. Our DSL services,however, were only launched at the end of 2006 and we do not currently generatesignificant revenues from our DSL services.

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Our dial-up access services are provided on both afree and pay basis, with the free services subject to hourly and otherlimitations. Basic pay dial-up access services include Internet access and anemail account, although we also offer an enhanced email service as a standalonepay service. In addition, we offer accelerated dial-up access services whichreduce the time for certain Web pages to download when compared to ourbasic access services. Our accelerated access services are also bundled withadditional benefits such as pop-up blocking, antivirus software and enhancedemail storage. Our dial-up access services are available in more than 9,500cities across the United States and Canada. In general, monthly pricing for ourdial-up access services ranges from $6.95 for basic services to $14.95 for ourbundled services, with $9.95 being our most prevalent price point.

Our DSL services, which we purchase from third parties,are currently available in parts of 34 states and Washington, D.C. and cancover up to an estimated 30% of our pay access accounts. While we intend toexpand our coverage area, our ability to do so will be dependent on acquiringservices from additional third parties. In general, monthly pricing for our DSLservices ranges from $17.95 to $34.95, though we anticipate our pricing maychange and fluctuate by speed and coverage territory.

Our strategy for ourCommunications segment is to manage our dial-up business primarily forprofitability while extending the business life cycle of our dial-upsubscribers by offering them a broadband alternative to their dial-up service.

**Account Metrics**

At March 31,2007, we had approximately 5.0 million pay accounts and approximately 20.1million active accounts. A pay account represents a unique billing relationshipwith a customer who subscribes to one or more of our pay services. “Active”accounts include total pay accounts as well as free users who have logged ontoour access, social-networking, email or VoIP services during the preceding31 days. Active accounts also include those free hosted Web sites thathave received at least one visit during the preceding 90 days; the numberof free photo-sharing users that logged on to the service at least once withinthe preceding 90 days; and the number of MyPoints’ members who earned or spentpoints within the preceding 90 days. The following table sets forth (inthousands), for the dates presented, an analysis of our pay accounts.

| ** **                 | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** | **March 31,  2006** | ** ** |
|----------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|
| Content &  Media: |       |                     |       |                        |       |                         |       |                    |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Social networking          |       |                     | 2,433      |                        |       |                         | 2,169      |                    |       |                     | 2,079      |   |   |   | 2,029 |   |   |   | 1,945 |   |   |
| Other                      |       |                     | 87         |                        |       |                         | 86         |                    |       |                     | 85         |   |   |   | 81 |   |   |   | 76 |   |   |
| Total                      |       |                     | 2,520      |                        |       |                         | 2,255      |                    |       |                     | 2,164      |   |   |   | 2,110 |   |   |   | 2,021 |   |   |
| Communications:            |       |                     |       |                        |       |                         |       |                    |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Access                     |       |                     | 2,158      |                        |       |                         | 2,282      |                    |       |                     | 2,425      |   |   |   | 2,556 |   |   |   | 2,751 |   |   |
| Other                      |       |                     | 306        |                        |       |                         | 317        |                    |       |                     | 323        |   |   |   | 330 |   |   |   | 321 |   |   |
| Total                      |       |                     | 2,464      |                        |       |                         | 2,599      |                    |       |                     | 2,748      |   |   |   | 2,886 |   |   |   | 3,072 |   |   |
| Total pay  accounts        |       |                     | 4,984      |                        |       |                         | 4,854      |                    |       |                     | 4,912      |   |   |   | 4,996 |   |   |   | 5,093 |   |   |

 

In general, we count and track pay accounts and freeaccounts by unique member identifiers. Users have the ability to register forseparate services under separate brands and member identifiers independently.We do not track whether a pay account has purchased more than one of ourservices unless the account uses the same member identifier. As a result, totalactive free accounts may not represent unique free users. At any point in time,our pay account base includes a number of accounts receiving a free period ofservice as either a promotion or retention tool and a number of accounts thathave notified 

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us that they areterminating their service but whose service is still in effect and may alsoinclude a few thousand internal test accounts.

We have made the decisionto curtail our efforts with respect to our VoIP services and our photo-sharingservices, and we are currently evaluating strategic alternatives for suchservices. Our VoIP services had approximately 15,000 pay accounts andapproximately 198,000 active accounts at March 31, 2007, compared toapproximately 19,000 pay accounts and 182,000 active accounts at December 31,2006. Our photo-sharing services had approximately 18,000 pay accounts andapproximately 147,000 active accounts at March 31, 2007.

**Results ofOperations**

The following tables set forth (in thousands), for theperiods presented, selected historical statements of operations data. Theinformation contained in the tables below should be read in conjunction withLiquidity and Capital Resources and Financial Commitments included in thisItem 2 as well as the consolidated financial statements and notes theretoincluded elsewhere in this Quarterly Report on Form 10-Q.

Consolidatedinformation is as follows:

| ** **                                            | ** ** | **Quarter Ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| Billable services                                     |       | $                                      | 96,320     |   | $ | 111,156 |   |
| Advertising                                           |       | 33,531                                 |       | 16,176 |   |
| Total revenues                                        |       | 129,851                                |       | 127,332 |   |
| Operating  expenses:                                  |       |                                   |       |   |   |
| Cost of revenues                                      |       | 29,247                                 |       | 29,890 |   |
| Sales and marketing                                   |       | 46,025                                 |       | 43,419 |   |
| Product development                                   |       | 13,471                                 |       | 12,816 |   |
| General and administrative                            |       | 15,489                                 |       | 16,246 |   |
| Amortization of intangible assets                     |       | 3,495                                  |       | 4,389 |   |
| Total operating expenses                              |       | 107,727                                |       | 106,760 |   |
| Operating income                                      |       | 22,124                                 |       | 20,572 |   |
| Interest and  other income, net                       |       | 1,700                                  |       | 1,716 |   |
| Interest expense                                      |       | (360                                   | )          | (1,716 | ) |
| Income before  income taxes                           |       | 23,464                                 |       | 20,572 |   |
| Provision for  income taxes                           |       | 10,436                                 |       | 8,921 |   |
| Income before  cumulative effect of accounting change |       | 13,028                                 |       | 11,651 |   |
| Cumulative effect  of accounting change, net of tax   |       | —                                 |       | 1,041 |   |
| Net income                                            |       | $                                      | 13,028     |   | $ | 12,692 |   |

 

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Informationfor our two reportable segments is as follows:

| ** **                      | ** ** | **Content & Media**      | ** ** | **Communications**                     | ** ** |
|---------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **Quarter Ended  March 31,** | ** ** | **Quarter Ended  March 31,** | ** ** |
| ** **                      | ** ** | **2007**                               | ** ** | **2006**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| Billable services               |       | $                                      | 23,354     |                                   | $          | 20,497 |   | $ | 72,966 |   | $ | 90,659 |   |
| Advertising                     |       | 20,821                                 |       | 6,493                                  |       | 12,710 |   | 9,683 |   |
| Total revenues                  |       | 44,175                                 |       | 26,990                                 |       | 85,676 |   | 100,342 |   |
| Operating expenses:             |       |                                   |       |                                   |       |   |   |   |   |
| Cost of revenues                |       | 9,356                                  |       | 3,152                                  |       | 17,696 |   | 24,063 |   |
| Sales and marketing             |       | 20,939                                 |       | 12,130                                 |       | 24,066 |   | 30,285 |   |
| Product development             |       | 4,162                                  |       | 2,413                                  |       | 7,003 |   | 7,918 |   |
| General and administrative      |       | 3,953                                  |       | 3,001                                  |       | 4,077 |   | 4,608 |   |
| Total operating expenses        |       | 38,410                                 |       | 20,696                                 |       | 52,842 |   | 66,874 |   |
| Segment income  from operations |       | $                                      | 5,765      |                                   | $          | 6,294 |   | $ | 32,834 |   | $ | 33,468 |   |

 

Areconciliation of segment income from operations (which excludes corporateexpenses, depreciation, amortization of intangible assets and stock-basedcompensation) to consolidated operating income, is as follows for each periodpresented (in thousands):

| ** **                            | ** ** | **Quarter Ended  March 31,** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **2007**                               | ** ** | **2006** | ** ** |
| Segment income from  operations:      |       |                                   |       |   |   |
| Content & Media              |       | $                                      | 5,765      |   | $ | 6,294 |   |
| Communications                        |       | 32,834                                 |       | 33,468 |   |
| Total segment  income from operations |       | 38,599                                 |       | 39,762 |   |
| Corporate expenses                    |       | (4,188                                 | )          | (5,125 | ) |
| Depreciation                          |       | (4,745                                 | )          | (4,707 | ) |
| Amortization of intangible assets     |       | (3,495                                 | )          | (4,389 | ) |
| Stock-based compensation              |       | (4,047                                 | )          | (4,969 | ) |
| Consolidated operating  income        |       | $                                      | 22,124     |   | $ | 20,572 |   |

 

***Quarter Ended March 31, 2007 Compared to QuarterEnded March 31, 2006***

**Revenues**

*Billable ServicesRevenues*

Billable services revenues consist of fees charged topay accounts for our pay services and for technical support. Our billableservices revenues are primarily dependent on two factors: the average number ofpay accounts for a period and the average monthly revenue per pay account (“ARPU”)for a period. The average number of pay accounts is a simple average calculatedbased on the number of pay accounts at the beginning and end of a period. ARPUis calculated by dividing billable services revenues for a period by theaverage number of pay accounts for that period. ARPU may fluctuate from periodto period as a result of a variety of factors including changes in the mix ofpay services and their related pricing plans; the use of promotions, such asone or more free months of service, and discounted pricing plans to obtain orretain subscribers; increases or decreases in the price of our services; thenumber of services subscribed to by each pay account; pricing and success ofnew pay services and the penetration of these types of services as a percentageof total pay accounts; and the timing of pay accounts being added or removedduring a period.

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*ConsolidatedBillable Services Revenues.*   Consolidated billable services revenuesdecreased by $14.8 million, or 13%, to $96.3 million for the quarter endedMarch 31, 2007, compared to $111.2 million for the quarter ended March 31,2006. The decrease in billable services revenues was due to a decrease inbillable services revenues from our Communications segment, partially offset byan increase in revenues from our Content & Media segment. Billableservices revenues related to our Content & Media segment and ourCommunications segment constituted 24.2% and 75.8%, respectively, of ourconsolidated billable services revenues for the quarter ended March 31,2007, compared to 18.4% and 81.6%, respectively, for the quarter ended March 31,2006. We anticipate that our consolidated billable services revenues willcontinue to decline as a result of expected continued declines inCommunications billable services revenues.

*Content &Media Billable Services Revenues.***  **Content & Mediabillable services revenues consist of fees charged to pay accounts forsocial-networking, Web-hosting and other services, with substantially all suchrevenues generated from social-networking. Content & Media billableservices revenues increased by $2.9 million, or 14%, to $23.4 million forthe quarter ended March 31, 2007, compared to $20.5 million for thequarter ended March 31, 2006. The increase in Content & Mediabillable services revenues was due to a 24% increase in our average number ofpay accounts from 1,931,000 for the quarter ended March 31, 2006 to2,388,000 for the quarter ended March 31, 2007. Substantially all of thisincrease was associated with growth in our social-networking pay accountsprimarily as a result of organic growth. The increase in Content &Media billable services revenues was partially offset by an 8% decrease in ARPUfrom $3.54 for the quarter ended March 31, 2006 to $3.26 for the quarterended March 31, 2007. The decrease in ARPU is attributable to a decreasein ARPU for our social-networking services primarily due to a greaterpercentage of those pay accounts represented by international pay accounts withlower-priced service plans and decreases in ARPU for our Web-hosting and onlinephoto-sharing services. We anticipate Content & Media billableservices revenues will continue to grow, at least in the near term.

*CommunicationsBillable Services Revenues.***  **Communications billableservices revenues consist of fees charged to pay accounts for access, email,Internet security and other services, with substantially all generated fromaccess. Communications billable services revenues decreased by $17.7 million, or20%, to $73.0 million for the quarter ended March 31, 2007, comparedto $90.7 million for the quarter ended March 31, 2006. The decrease inbillable services revenues was due to a 19% decrease in our average number ofpay accounts from 3,120,000 for the quarter ended March 31, 2006 to2,532,000 for the quarter ended March 31, 2007. The decrease in averagenumber of pay accounts is attributable to a decreased number of dial-up payaccess accounts. Additionally, Communications billable services revenuesdecreased due to a 1% decrease in ARPU from $9.69 for the quarter ended March 31,2006 to $9.61 for the quarter ended March 31, 2007. The decrease in ARPUis primarily attributable to a decline in ARPU for our access services due toincreased use of free months of service and promotional pricing to obtain orretain pay access accounts. We anticipate that the average number ofCommunications pay accounts will continue to decline due to decreases in dial-uppay access accounts. We also may experience further declines in ARPU primarilyas a result of discounted prices for extended service commitments on our accessservices, including providing our $14.95 accelerated access services at $9.95for a one-year commitment. We anticipate continued declines in Communicationsbillable services revenues.

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*AdvertisingRevenues*

We connect advertisers to consumers through a varietyof online marketing initiatives integrated throughout our services and Webproperties, including advertising and search placements, email campaigns anduser registration placements. In addition, we offer advertisers sophisticatedmarket research capabilities and online direct marketing solutions. Factorsimpacting our advertising revenues generally include changes in orders fromsignificant customers, the performance of our online marketing initiatives, thestate of the online search and advertising markets, seasonality, increases ordecreases in our active accounts, and increases or decreases in advertisinginventory available for sale.

*ConsolidatedAdvertising Revenues.*   Consolidated advertising revenues increasedby $17.4 million, or 107%, to $33.5 million for the quarter ended March 31,2007, compared to $16.2 million for the quarter ended March 31, 2006. Theincrease was primarily attributable to increases in advertising revenues in ourContent & Media segment and, to a lesser extent, our Communicationssegment. Advertising revenues related to our Content & Media segmentand our Communications segment constituted 62.1% and 37.9%, respectively, ofour consolidated advertising revenues for the quarter ended March 31,2007, compared to 40.1% and 59.9%, respectively, for the quarter ended March 31,2006.

*Content &Media Advertising Revenues.***  **Content & Mediaadvertising revenues increased by $14.3 million, or 221%, to$20.8 million for the quarter ended March 31, 2007, compared to$6.5 million for the quarter ended March 31, 2006. The increase wasdue to increased advertising revenues as a result of revenues generated fromour loyalty marketing service which was acquired in April 2006, partiallyoffset by a decline in advertising revenues generated from oursocial-networking services. We anticipate Content & Media advertisingrevenues to increase sequentially in the June 2007 quarter when comparedto the March 2007 quarter.

*Communications AdvertisingRevenues.*   Communicationsadvertising revenues increased by $3.0 million, or 31%, to$12.7 million for the quarter ended March 31, 2007, from$9.7 million for the quarter ended March 31, 2006. The increase wasprimarily attributable to increases in search revenues and advertising sales.We anticipate Communications advertising revenues will remain relatively flat,at least in the near term.

**Cost of Revenues**

Cost of revenues includes telecommunications and datacenter costs; personnel and overhead-related costs associated with operatingour networks and data centers; depreciation of network computers and equipment;email technical support and license fees; costs related to providing telephonetechnical support; customer billing and billing support to our pay accounts;domain name registration fees; and costs of providing rewards to members of ourloyalty marketing service. Historically, the costs that comprise our Content &Media cost of revenues were relatively fixed. However, as a result of ourloyalty marketing service which was acquired in April 2006, these costshave become more variable and have increased significantly as a percentage ofrevenues. The majority of the costs that comprise our Communications cost ofrevenues are variable. As such, our Communications cost of revenues as apercentage of revenues is highly dependent on our ARPU, our average hourlytelecommunications cost and usage, and our average customer billing and supportcosts per pay account.

*ConsolidatedCost of Revenues.*   Consolidated cost of revenues decreased by$0.6 million, or 2%, to $29.2 million for the quarter ended March 31,2007, compared to $29.9 million for the quarter ended March 31, 2006.The decrease was primarily due to decreased costs associated with ourCommunications segment and a $0.4 million decrease in depreciation, partiallyoffset by increased costs associated with our Content & Media segment.Cost of revenues related to our Content & Media segment and ourCommunications segment constituted 34.6% and 65.4%, respectively, of our totalsegment cost of revenues 

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for the quarter ended March 31,2007, compared to 11.6% and 88.4%, respectively, for the quarter ended March 31,2006.

*Content &Media Cost of Revenues.***  **Content & Mediacost of revenues increased by $6.2 million, or 197%, to $9.4 millionfor the quarter ended March 31, 2007, compared to $3.2 million forthe quarter ended March 31, 2006. The increase was primarily related tocosts associated with our loyalty marketing service which was acquired in April 2006and, to a lesser extent, increased costs associated with our social-networkingservices. As a percentage of Content & Media revenues, Content & Mediacost of revenues increased to 21.2% in the quarter ended March 31, 2007,compared to 11.7% in the quarter ended March 31, 2006, primarily due tothe acquisition of our loyalty marketing service which was acquired in April2006. In general, our loyalty marketing cost of revenues as a percentage ofrevenues is higher relative to our social-networking cost of revenues as apercentage of revenues. In addition, the costs associated with our loyaltymarketing service may vary somewhat from quarter to quarter depending onincreases or decreases in advertising revenue, which can be impacted by seasonalityand other factors. We anticipate that Content & Media cost of revenues as apercentage of Content & Media revenues will decrease, at least in the nearterm. 

*Communications Cost ofRevenues.*   Communicationscost of revenues decreased by $6.4 million, or 26%, to $17.7 millionfor the quarter ended March 31, 2007, compared to $24.1 million forthe quarter ended March 31, 2006. The decrease was primarily due to a$4.7 million decrease in telecommunications costs associated with ourdial-up access, a $1.8 million decrease in customer support andbilling-related costs as a result of a decrease in the number of pay accountsand a $0.8 million decrease in costs associated with our VoIP service. Thesedecreases were partially offset by a $0.7 million increase in costsassociated with our DSL service. As a percentage of Communications revenues,Communications cost of revenues decreased to 20.7% in the quarter ended March 31,2007, compared to 24.0% in the quarter ended March 31, 2006, primarily asa result of decreased telecommunications costs. We anticipate thatCommunications cost of revenues as a percentage of Communications revenues maybe relatively flat in the near term, although it may be negatively impacted byour higher cost of revenue DSL broadband access service, which was launched inthe December 2006 quarter.

**Sales and Marketing**

Sales and marketing expenses include advertising andpromotion expenses, performance fees paid to distribution partners to acquirenew accounts, personnel-related expenses for sales and marketing personnel andtelemarketing costs incurred to acquire and retain pay accounts and up-sell payaccounts to additional services. Marketing and advertising costs to promote ourproducts and services are expensed in the period incurred. Advertising andpromotion expenses include media, agency and promotion expenses. Mediaproduction costs are expensed the first time the advertisement is run. Mediaand agency fees are expensed over the period the advertising runs. Salesexpenses are expensed in the period incurred or, in the case of commissionspaid to sales personnel, when the associated advertising revenue is recognized.

*ConsolidatedSales and Marketing Expenses.*   Consolidated sales and marketing expensesincreased by $2.6 million, or 6%, to $46.0 million, or 35.4% ofconsolidated revenues, for the quarter ended March 31, 2007, compared to$43.4 million, or 34.1% of consolidated revenues, for the quarter ended March 31,2006. The increase was primarily attributable to an increase in marketingexpenses related to our Content & Media segment, partially offset by asignificant reduction in marketing expenses related to our Communicationssegment. Sales and marketing expenses related to our Content & Mediasegment and our Communications segment constituted 46.5% and 53.5%,respectively, of total segment sales and marketing expenses for the quarterended March 31, 2007 versus 28.6% and 71.4%, respectively, for the quarterended March 31, 2006.

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*Content &Media Sales and Marketing Expenses.*   Content &Media sales and marketing expenses increased by $8.8 million, or 73%, to$20.9 million, or 47.4% of Content & Media revenues, for thequarter ended March 31, 2007, compared to $12.1 million, or 44.9% ofContent & Media revenues, for the quarter ended March 31, 2006.The increase was the result of the costs associated with our loyalty marketingservice which was acquired in April 2006, a $2.8 million increase inmarketing, promotion and distribution costs related to acquiring and retainingaccounts, particularly social-networking accounts and a $0.4 million increasein personnel and overhead-related expenses. The vast majority of non-personnelContent & Media marketing expenses are associated with performance-basedadvertising arrangements.

*Communications Sales andMarketing Expenses.*   Communications sales and marketing expensesdecreased by $6.2 million, or 21%, to $24.1 million, or 28.1% ofCommunications revenues, for the quarter ended March 31, 2007, compared to$30.3 million, or 30.2% of Communications revenues, for the quarter ended March 31,2006. This decrease is attributable to a $7.2 million decline in advertising,promotion and distribution costs related to our access services, the majorityof which was due to reductions in distribution, media and telemarketingadvertising costs and a $0.7 million decrease in advertising costs associatedwith our VoIP service. These decreases were partially offset by a$1.4 million increase in personnel and overhead-related expenses.

**Product Development**

Product development expenses include expenses for themaintenance of existing software and technology and the development of new orimproved software and technology, including personnel-related expenses for thesoftware engineering department and the costs associated with operating ourfacility in India. Costs incurred by us to manage, monitor and operate ourservices are generally expensed as incurred, except for certain costs relatingto the acquisition and development of internal-use software, which arecapitalized and depreciated over their estimated useful lives, generally threeyears or less.

*ConsolidatedProduct Development Expenses.*   Consolidated product development expensesincreased by $0.7 million, or 5%, to $13.5 million for the quarter ended March 31,2007, compared to $12.8 million for the quarter ended March 31, 2006.The increase was attributable to increases in expenses in the Content &Media segment, partially offset by decreases in expenses in the Communicationssegment as well as a $0.2 million decrease in stock-based compensation.Product development expenses related to our Content & Media segmentand our Communications segment constituted 37.3% and 62.7%, respectively, oftotal segment product development expenses for the quarter ended March 31,2007, compared to 23.4% and 76.6%, respectively, for the quarter ended March 31,2006.

*Content &Media Product Development Expenses.***  **Content &Media product development expenses increased by $1.7 million, or 72%, to$4.2 million for the quarter ended March 31, 2007, compared to$2.4 million for the quarter ended March 31, 2006. The increase wasprimarily due to increases in personnel-related expenses related to oursocial-networking services and headcount associated with the acquisition of ourloyalty marketing business in April 2006.

*Communications ProductDevelopment Expenses.***  **Communications productdevelopment expenses decreased by $0.9 million, or 12%, to$7.0 million for the quarter ended March 31, 2007, compared to$7.9 million for the quarter ended March 31, 2006. The decrease wasprimarily the result of a $0.6 million decrease in personnel-related expenses.Capitalized software expenses remained relatively flat at $1.7 million for thequarter ended March 31, 2007 compared to the quarter ended March 31,2006.

**General andAdministrative**

General and administrative expenses includepersonnel-related expenses for executive, finance, legal, human resources andinternal customer support personnel. In addition, general and administrativeexpenses include fees for professional legal, accounting and financialservices; office relocation costs; 

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non-income taxes;insurance; and occupancy and other overhead-related costs, as well as theexpenses incurred and credits received as a result of certain legalsettlements.

*ConsolidatedGeneral and Administrative Expenses.***  **Consolidatedgeneral and administrative expenses decreased by $0.8 million, or 5%, to$15.5 million for the quarter ended March 31, 2007, compared to$16.2 million for the quarter ended March 31, 2006. The decrease wasdue to a decrease in unallocated corporate expenses, costs associated with ourCommunications segment and a $0.6 million decrease in stock-based compensationas a result of equity awards granted prior to 2006 being expensed in connectionwith Financial Accounting Standards Board (“FASB”) Interpretation No. (“FIN”) 28.The decrease was partially offset by an increase in costs associated with ourContent & Media segment and a $0.4 million increase in depreciation.General and administrative expenses related to our Content & Mediasegment and our Communications segment constituted 49.2% and 50.8%,respectively, of total segment general and administrative expenses for thequarter ended March 31, 2007, compared to 39.4% and 60.6%, respectively,for the quarter ended March 31, 2006.

*Content &Media General and Administrative Expenses.***  **Content &Media general and administrative expenses increased by $1.0 million, or32%, to $4.0 million for the quarter ended March 31, 2007, comparedto $3.0 million for the quarter ended March 31, 2006. The increasewas primarily due to increases in compensation costs and facilities and otheroverhead-related costs related to our loyalty marketing service which wasacquired in April 2006.

*CommunicationsGeneral and Administrative Expenses.*   Communicationsgeneral and administrative expenses decreased by $0.5 million, or 12%, to $4.1million for the quarter ended March 31, 2007, compared to $4.6 million forthe quarter ended March 31, 2006. The decrease was due to a decrease inconsulting fees and a decrease in overhead-related costs.

*Unallocated CorporateExpenses.***  **Excluding stock-based compensation and depreciation,****unallocated corporate general and administrative expensesdecreased by $0.9 million, or 18%, to $4.2 million for the quarterended March 31, 2007, compared to $5.1 million for the quarter ended March 31,2006. The decrease was primarily due to decreases in consulting fees andcompensation costs.

**Amortization ofIntangible Assets**

Amortization of intangible assets includesamortization of acquired pay accounts and free accounts, acquired trademarksand trade names, purchased technologies and other identifiable intangibleassets. In accordance with the provisions set forth in Statement of FinancialAccounting Standards (“SFAS”) No. 142, *Goodwill and OtherIntangible Assets*, goodwill is not being amortized but is tested forimpairment at a reporting unit level on an annual basis and between annualtests if an event occurs or circumstances change that would indicate the fairvalue of a reporting unit is below its carrying value amount.

Consolidated amortizationof intangible assets decreased by $0.9 million, or 20%, to $3.5 millionfor the quarter ended March 31, 2007, compared to $4.4 million forthe quarter ended March 31, 2006. The decrease was primarily attributableto the accelerated amortization of intangible assets in 2005 associated withthe Classmates acquisition in November 2004, partially offset by increasedamortization related to intangible assets acquired in connection with theacquisition of The Names Database in the March 2006 quarter and the acquisitionof MyPoints in the June 2006 quarter.

**Interest and OtherIncome, Net**

Interest income consists of earnings on our cash, cashequivalents and short-term investments. Other income and expense, net consistsof realized gains and losses recognized in connection with the sale ofshort-term investments.

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Interest and other income,net remained relatively flat at $1.7 million for the quarters ended March 31,2007 and 2006 due to lower average cash balances being offset by higherinterest rates. Net realized gains on our short-term investments were notsignificant for the quarters ended March 31, 2007 and 2006.

**Interest Expense**

Interest expense consists of interest expense on ourterm loan retired in January 2006, capital leases, the amortization ofpremiums on certain of our short-term investments and imputed interest on theacquired member retention liability.

Interest expense decreasedby $1.4 million, or 79%, to $0.4 million for the quarter ended March 31,2007, compared to $1.7 million for the quarter ended March 31, 2006.The decrease was primarily the result of decreases in interest expense andamortized deferred financing costs related to the term loan. In January 2006,we expensed the remaining $1.5 million in deferred financing costs upon therepayment of the $54.2 million balance of the term loan.

**Provision forIncome Taxes**

For the quarter ended March 31,2007, we recorded a tax provision of $10.4 million on pre-tax income of$23.5 million, resulting in a year-to-date effective tax rate of 44.5%.For the quarter ended March 31, 2006, we recorded a tax provision of $8.9million on pre-tax income of $20.6 million, resulting in a year-to-dateeffective tax rate of 43.4%. The effective tax rates differ from the statutoryrate primarily due to (1) stock-based compensation that is limited under Section 162(m) ofthe Internal Revenue Code and (2) foreign losses, the benefit of which isnot currently recognizable due to uncertainty regarding realization.

**Cumulative Effectof Accounting Change, Net of Tax**

In the quarter ended March 31,2006, we recorded a $1.1 million pretax benefit ($1.0 million, net oftax) as the cumulative effect of a change in accounting principle upon theadoption of SFAS No. 123R, *Share-Based Payment,*to recognize the effect of estimating the number of awards granted prior to January 1,2006 that are not ultimately expected to vest.

**Liquidity andCapital Resources**

Ourtotal cash, cash equivalent and short-term investment balances increased by$5.6 million, or 3%, to $168.0 million at March 31, 2007,compared to $162.4 million at December 31, 2006. Our summary cashflows for the quarters ended March 31, 2007 and 2006 were as follows (inthousands):

| ** **                                 | ** ** | **March 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|
| ** **                                 | ** ** | **2007**           | ** ** | **2006** | ** ** |
| Net cash provided  by operating activities |       | $                  | 25,206     |   | $ | 14,239 |   |
| Net cash used for  investing activities    |       | (14,234            | )          | (27,361 | ) |
| Net cash used for  financing activities    |       | (13,637            | )          | (64,734 | ) |
|                                            |            |                    |            |  |  |  |  |

 

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Net cash providedby operating activities increased by $11.0 million, or 77%, for the quarterended March 31, 2007 compared to the quarter ended March 31, 2006.Cash provided by operating activities is driven by our net income adjusted fornon-cash items, including depreciation and amortization, stock-basedcompensation, deferred taxes and tax benefits from stock options and changes inworking capital. The increase was primarily the result of the following:

·                    a$12.9 million net increase in working capital accounts, including a$4.6 million increase in income taxes payable, a $3.9 millionincrease in accounts payable and accrued liabilities, a $3.4 millionincrease in deferred revenue primarily due to increases in social-networkingpay accounts, and a $1.2 million increase in member redemption liabilityrelated to our loyalty marketing service; and

·                    a$1.4 million increase in net income, excluding a $1.0 million cumulative effectof an accounting change in connection with the adoption of SFAS No. 123Rin the March 2006 quarter.

These increases were partially offset by a$1.8 million decrease in depreciation, amortization and stock-based compensationand a $1.5 million decrease in amortization of debt issuance costs.

Net cash used forinvesting activities decreased by $13.1 million, or 48%, for the quarterended March 31, 2007 compared to the quarter ended March 31, 2006. Thedecrease was primarily the result of the following:

·                    an$11.0 million decrease in cash paid for acquisitions. We acquired TheNames Database in March 2006 for $9.5 million, net of cash acquired,and we paid the remaining $1.5 million due in connection with theacquisition of our photo-sharing service in March 2006; and

·                    a$1.3 million decrease in purchases of property and equipment.

We have invested significantly in our networkinfrastructure, software licenses, leasehold improvements, and computer equipmentand we will need to make further significant investments in the future. Capitalexpenditures for the quarter ended March 31, 2007 were $5.8 million. Weanticipate that our total capital expenditures for the remainder of 2007 willbe in the range of $16 million to $21 million. The actual amount of futurecapital expenditures may fluctuate due to a number of factors including,without limitation, potential future acquisitions and new business initiatives,which are difficult to predict and could change significantly over time.Additionally, technological advances may require us to make capitalexpenditures to develop or acquire new equipment or technology in order toreplace aging or technologically obsolete equipment.

Net cash used for financing activities decreased by$51.1 million, or 79%, for the quarter ended March 31, 2007 comparedto the quarter ended March 31, 2006. The decrease was primarily the resultof payments on the term loan of $54.2 million in the March 2006 quarter.

The payment of dividends will negatively impact cashflows from financing activities. In February 2007, our Board of Directorsdeclared and paid a quarterly cash dividend of $0.20 per share of common stockfor a total of $13.7 million. In April 2007, our Board of Directorsdeclared a quarterly dividend of $0.20 per share of common stock that willbe paid on May 31, 2007. The payment of future dividends is discretionaryand will be subject to determination by the Board of Directors each quarterfollowing its review of our financial performance.

Future cash flows from financing activities may alsobe affected by repurchases of common stock. Our Board of Directors authorized acommon stock repurchase program that allows us to repurchase shares of ourcommon stock through open market or privately negotiated transactions based onprevailing market conditions and other factors through December 31, 2007.At March 31, 2007, we had repurchased $139.2 million of our commonstock under the program, and the remaining amount available under the programwas $60.8 million.

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Cash flows from financing activities may also benegatively impacted by the withholding of a portion of shares underlying therestricted stock units (“RSUs”) we award to employees. Upon vesting, wecurrently do not collect the applicable withholding taxes for RSUs fromemployees. Instead, we automatically withhold, from the RSUs that vest, theportion of those shares with a fair market value equal to the amount of thewithholding taxes due. We then pay the applicable withholding taxes in cash.Similar to repurchases of common stock, the net effect of such withholding willadversely impact our cash flows. The amounts remitted in the quarters ended March 31,2007 and 2006 were $2.7 million and $1.6 million, respectively, for which wewithheld approximately 194,000 shares and 129,000 shares of common stock,respectively, that were underlying the RSUs. The amount we pay in futurequarters will vary based on our stock price and the number of RSUs vestingduring the quarter.

Based on our currentprojections, we expect to continue to generate positive cash flows fromoperations, at least in the near term. We intend to use our existing cashbalances and future cash generated from operations to fund dividend payments,if declared by the Board; to develop and acquire complementary services,businesses or technologies; to repurchase shares of our common stock if webelieve market conditions to be favorable; to repurchase the common stockunderlying RSUs and pay the withholding taxes due on vested RSUs; and to fundfuture capital expenditures. We currently anticipate that our future cash flowsfrom operations and existing cash, cash equivalent and short-term investmentbalances will be sufficient to fund our operations over the next year, and inthe near term we do not anticipate the need for additional financing to fundour operations. However, we may raise additional debt or equity capital for avariety of reasons including, without limitation, developing new or enhancingexisting services or products, repurchasing our common stock, acquiringcomplementary services, businesses or technologies or funding significantcapital expenditures. If we need to raise additional capital through public orprivate debt or equity financings, strategic relationships or otherarrangements, it might not be available to us in a timely manner, on acceptableterms, or at all. Our failure to raise sufficient capital when needed couldhave a material adverse effect on our business, financial position, results ofoperations and cash flows, and could impair our ability to pay dividends. Ifadditional funds were raised through the issuance of equity securities, thepercentage of stock owned by the then-current stockholders would be reduced.Furthermore, such equity securities might have rights, preferences orprivileges senior to holders of our common stock.

**FinancialCommitments**

Ourfinancial commitments were as follows at March 31, 2007 (in thousands):

| ** **                    | ** ** | ** ** | ** ** | **Apr-Dec** | ** ** | **Year Ending December 31,** | ** ** | ** ** | ** ** |
|-------------------------------|------------|------------|------------|-------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                    | ** ** | **Total**  | ** ** | **2007**    | ** ** | **2008**                                    | ** ** | **2009**   | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** |
| Capital leases(1)             |       | $          | 28         |        | $          | 14                                          |       | $          | 14         |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |   | $ | — |   |   |
| Operating leases              |       | 43,845     |       | 6,167       |       | 8,490                                       |       | 7,471      |       | 6,015 |   | 4,528 |   | 4,072 |   |   | 7,102 |   |   |
| Telecommunications  purchases |       | 11,919     |       | 6,967       |       | 4,941                                       |       | 11         |       | — |   | — |   | — |   |   | — |   |   |
| Media purchases               |       | 4,346      |       | 4,346       |       | —                                      |       | —     |       | — |   | — |   | — |   |   | — |   |   |
| Total                         |       | $          | 60,138     |        | $          | 17,494                                      |       | $          | 13,445     |   | $ | 7,482 |   | $ | 6,015 |   | $ | 4,528 |   | $ | 4,072 |   |   | $ | 7,102 |   |   |

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(1)          Includes$2 of imputed interest.

**Off-Balance SheetArrangements**

At March 31, 2007, wehad no off-balance sheet arrangements that have, or are reasonably likely tohave, a current or future material effect on our consolidated financialcondition, results of operations, liquidity, capital expenditures or capitalresources.

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**Recent AccountingPronouncements**

*Accounting forUncertainty in Income Taxes*

In July 2006, theFASB issued FIN 48, *Accounting for Uncertaintyin Income Taxes—an interpretation of FASB Statement No. 109*,which clarifies the accounting for uncertainty in income tax positions. ThisInterpretation requires that we recognize, in the consolidated financialstatements, the impact of a tax position that is more likely than not to besustained upon examination based on the technical merits of the position. Theprovisions of FIN 48 are effective for us beginning in the March 2007quarter, with any cumulative effect of a change in accounting principlerecorded as an adjustment to opening retained earnings. The implementation ofFIN 48 did not have a material impact on our financial position, results ofoperations or cash flows.

*Fair ValueMeasurements*

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*,which clarifies the definition of fair value, establishes guidelines for measuringfair value, and expands disclosures regarding fair value measurements. SFAS No. 157does not require any new fair value measurements and eliminates inconsistenciesin guidance found in various prior accounting pronouncements. SFAS No. 157will be effective for us on January 1, 2008. We are currently evaluatingthe impact of adopting SFAS No. 157 on our financial position, results ofoperations and cash flows.

*Fair Value Option*

In February 2007, theFASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities*, which permits entitiesto choose to measure many financial instruments and certain other items at fairvalue that are not currently required to be measured at fair value. SFAS No. 159will be effective for us on January 1, 2008. We are currently evaluatingthe impact of adopting SFAS No. 159 on our financial position, results ofoperations and cash flows.

**ITEM 3.**                QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to certainmarket risks arising from transactions in the normal course of business,principally risk associated with interest rate and foreign currencyfluctuations.

*Interest Rate Risk*

We have interest rate risk primarily related to ourinvestment portfolio.

We maintain a short-terminvestment portfolio consisting of U.S. commercial paper, U.S. Government orU.S. Government Agency obligations, municipal obligations, auction ratesecurities and money market funds. Our primary objective is the preservation ofprincipal and liquidity while maximizing yield. The minimum long-termrating is A, and if a long-term rating is not available, we require a short-termcredit rating of A1 and P1. The value of these investments may fluctuate withchanges in interest rates. However, we believe this risk is immaterial due tothe relatively short-term nature of the investments.

*Foreign CurrencyRisk*

We transact business indifferent foreign currencies and may be exposed to financial market riskresulting from fluctuations in foreign currency exchange rates, particularlythe Indian Rupee (INR) and the Euro, which may result in a gain or loss ofearnings to us. The volatility of the INR and the Euro (and all otherapplicable currencies) are monitored throughout the year. We face two risksrelated to foreign currency exchange: translation risk and transaction risk.Amounts invested in our foreign operations are 

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translatedinto U.S. dollars using period-end exchange rates. The resulting translationadjustments are recorded as a component of accumulated other comprehensiveincome (loss) in stockholders’ equity. Our foreign subsidiaries generallycollect revenues and pay expenses in currencies other than the U.S. dollar.Since the functional currencies of our foreign operations are denominated inthe local currency of our subsidiaries, the foreign currency translationadjustments are reflected as a component of stockholders’ equity and do notimpact operating results. Revenues and expenses in foreign currencies translateinto higher or lower revenues and expenses in U.S. dollars as the U.S. dollarweakens or strengthens against other currencies. Therefore, changes in exchangerates may negatively affect our consolidated revenues and expenses (asexpressed in U.S. dollars) from foreign operations. Currency transaction gainsor losses arising from transactions in currencies other than the functionalcurrency are included in operating expenses. While we have not engaged inforeign currency hedging, we may in the future use hedging programs, currencyforward contracts, currency options and/or other derivative financialinstruments commonly utilized to reduce financial market risks if it isdetermined that such hedging activities are appropriate to reduce risk.

**ITEM 4.**                CONTROLSAND PROCEDURES

*Disclosure Controlsand Procedures*

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer, hasevaluated the effectiveness of the Company’s disclosure controls and procedures(as such term is defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of theend of the period covered by this report. Based on such evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theend of such period, the Company’s disclosure controls and procedures areeffective in recording, processing, summarizing and reporting, on a timelybasis, information required to be disclosed by the Company in the reports thatit files or submits under the Exchange Act and are effective in ensuring thatinformation required to be disclosed by the Company in the reports that itfiles or submits under the Exchange Act is accumulated and communicated to theCompany’s management, including the Company’s Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

*Changes in InternalControl Over Financial Reporting*

On April 10, 2006, we completed the acquisitionof MyPoints. We are in the process of integrating MyPoints and continuing ourevaluation of internal controls pursuant to the Sarbanes-Oxley Act of 2002.Excluding the MyPoints acquisition, there have not been any changes in theCompany’s internal control over financial reporting (as such term is defined inRules 13a-15(f) and 15d-15(f) under the ExchangeAct) during the first quarter of 2007 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

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**PART II—OTHERINFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS

On April 20, 2001, Jodi Bernstein, on behalf ofhimself and all others similarly situated, filed a lawsuit in the United StatesDistrict Court for the Southern District of New York against NetZero, certainofficers and directors of NetZero and the underwriters of NetZero’s initialpublic offering, Goldman Sachs Group, Inc., BancBoston Robertson Stephens, Inc.and Salomon Smith Barney, Inc. The complaint alleges that the prospectusthrough which NetZero conducted its initial public offering in September 1999was materially false and misleading because it failed to disclose, among otherthings, that (i) the underwriters had solicited and received excessive andundisclosed commissions from certain investors in exchange for which theunderwriters allocated to those investors material portions of the restrictednumber of NetZero shares issued in connection with the offering; and (ii) theunderwriters had entered into agreements with customers whereby the underwritersagreed to allocate NetZero shares to those customers in the offering inexchange for which the customers agreed to purchase additional NetZero sharesin the aftermarket at pre-determined prices. Plaintiffs are seeking injunctiverelief and damages. Additional lawsuits setting forth substantially similarallegations were also served against NetZero on behalf of additional plaintiffsin April and May 2001. The case against NetZero was consolidated withapproximately 300 other suits filed against more than 300 issuers thatconducted their initial public offerings between 1998 and 2000, theirunderwriters and an unspecified number of their individual corporate officersand directors. The majority of issuers, including NetZero, and their insurershave approved a settlement agreement. The district court’s final approval ofthe settlement has been stayed pending the outcome of the Court of Appeals forthe Second Circuit’s decision to vacate the district court’s decision grantingclass certification in six of the suits. On April 7, 2007, the SecondCircuit denied plaintiffs’ petition for rehearing its decision to reverse thedistrict court’s class certification order.

On August 21, 2001, Juno commenced an adversaryproceeding in U.S. Bankruptcy Court in the Southern District of New Yorkagainst Smart World Technologies, LLC, dba “Freewwweb” (the “Debtor”), aprovider of free Internet access that had elected to cease operations and hadsought the protection of Chapter 11 of the Bankruptcy Code. The adversaryproceeding arose out of a subscriber referral agreement between Juno and theDebtor. In response to the commencement of the adversary proceeding, the Debtorand its principals filed a pleading with the bankruptcy court asserting thatJuno is obligated to pay compensation in an amount in excess of$80 million as a result of Juno’s conduct in connection with thesubscriber referral agreement. In addition, a dispute arose between Juno andUUNET Technologies, Inc., an affiliate of MCI WorldCom Network Services, Inc.,regarding the value of services provided by UUNET, with UUNET claiming inexcess of $1.0 million and Juno claiming less than $0.3 million. On August 4,2006, Juno entered into a settlement agreement with the Committee of UnsecuredCreditors providing for the settlement of all claims against Juno pursuant to aproposed plan of liquidation of the Debtor. The settlement and plan ofliquidation were approved by the bankruptcy court in December 2006 and thedeadline for appealing elapsed in January 2007. We had previously reserved$6.25 million for the Freewwweb settlement, which was increased by $0.25million in the December 2006 quarter. Pursuant to the settlementagreement, Juno paid a total of $6.50 million.

On April 27, 2004, plaintiff MyMail Ltd.filed a lawsuit in the United States District Court for the Eastern District ofTexas against NetZero, Juno, NetBrands, America Online, Inc., AT&T,EarthLink, Inc., SBC Communications, Inc., and Verizon Communications, Inc.alleging infringement of plaintiff’s patent which purported to cover useraccess to a computer network. Plaintiff sought injunctive and declaratoryrelief and damages. On October 28, 2005, the court issued an ordergranting defendants’ motions for summary judgment of non-infringement of thepatent. MyMail appealed the trial court’s ruling, and on February 20,2007, the Court of Appeals for the Federal Circuit affirmed the trial court’sruling.

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On March 6, 2006, plaintiff Anthony Piercy fileda purported consumer class action lawsuit in the Superior Court of the State ofCalifornia, County of Los Angeles, against NetZero claiming that NetZerocontinues to charge consumers fees after they cancel their Internet accessaccount. Plaintiff is seeking injunctive and declaratory relief and damages.NetZero filed a response to the lawsuit denying the material allegations of thecomplaint. On April 17, 2007, NetZero received notice from plaintiff’scounsel that Mr. Piercy would be withdrawing from the action as a classrepresentative.

On July 27, 2006, plaintiff Donald E. Ewart fileda purported consumer class action lawsuit in the Superior Court of the State ofCalifornia, County of Los Angeles, against NetZero claiming that NetZerocontinues to charge consumers fees after they cancel their Internet access account.Plaintiff is seeking injunctive and declaratory relief and damages. NetZerofiled a response to the lawsuit denying the material allegations of thecomplaint. Mr. Ewart subsequently withdrew from the action as a classrepresentative, and on March 16, 2007, Barbara Rasnake and Robert DuVerger were substituted as purported class representatives.

The pending lawsuits involve complex questions of factand law and may require the expenditure of significant funds and the diversionof other resources to defend. Although we do not believe the outcome of theabove outstanding legal proceedings, claims and litigation will have a materialadverse effect on our business, financial condition, results of operations orcash flows, the results of litigation are inherently uncertain and we cannotassure you that we will not be materially and adversely impacted by the resultsof such proceedings. At March 31, 2007, we had not established reservesfor any of the matters described above.

We are subject to variousother legal proceedings and claims that arise in the ordinary course ofbusiness. We believe the amount, and ultimate liability, if any, with respectto these actions will not materially affect our business, financial condition,results of operations or cash flows. We cannot assure you, however, that suchactions will not be material and will not adversely affect our business,financial condition, results of operations or cash flows.

**ITEM 1A.**        RISKFACTORS

In addition to the otherinformation set forth in this report, you should carefully consider the factorsdiscussed in Part I, Item IA, “Risk Factors,” in our Annual Report on Form 10-Kfor the year ended December 31, 2006, which was filed with the Securitiesand Exchange Commission. These factors could materially affect our business,financial condition or future results. However, they are not the only risksfacing the Company. Additional risks and uncertainties not currently known tous or that we currently deem to be immaterial also may materially adversely affectour business, financial condition and/or operating results.

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**ITEM 2.**                UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

**Common StockRepurchases**

Our Board of Directors authorized a common stockrepurchase program that allows us to repurchase shares of our common stockthrough open market or privately negotiated transactions based on prevailingmarket conditions and other factors. From time to time, the Board of Directorshas increased the amount authorized for repurchase under this program. On April 22,2004, the Board of Directors authorized us to purchase up to an additional$100 million of our common stock through May 31, 2005 under theprogram, bringing the total amount authorized under the program to$200 million. On April 29, 2005, the Board of Directors extended theprogram through December 31, 2006. In January 2007, the Board furtherextended the program through December 31, 2007. At March 31, 2007, wehad repurchased $139.2 million of our common stock under the program,leaving $60.8 million remaining under the program.

Shares withheld from RSUs awarded to employees uponvesting to pay applicable withholding taxes on their behalf are consideredcommon stock repurchases, but are not counted as purchases against theBoard-approved repurchase program. Upon vesting, the Company currently does notcollect the applicable withholding taxes for RSUs from employees. Instead, theCompany automatically withholds, from the RSUs that vest, the portion of thoseshares with a fair market value equal to the amount of the withholding taxesdue. The Company then pays the applicable withholding taxes in cash, which isaccounted for as a repurchase of common stock.

Commonstock repurchases at March 31, 2007 were as follows (in thousands, exceptper share amounts):

| **Period**         | ** ** | ** ** | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price   Paid per Share** | ** ** | **Total Number of  Shares Purchased as  Part of a Publicly  Announced Program** | ** ** | **Maximum Approximate  Dollar Value that May  Yet be Purchased Under  the Program** | ** ** |
|--------------------|------------|------------|------------|------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| 2001-2004          |       |       | 9,664      |                                                 |       |                                                   | $          | 12.92                                                                                                                   |       |                                                                                                                        |       | 9,664 |   |   |   | $ | 74,989 |   |   |
| February 2005 |       |       | 1,268      |                                                 |       |                                                   | 11.20      |                                                                                                                    |       |                                                                                                                        | 1,268      |   |   |   | 60,782 |   |   |
| February 2006 |       |       | 129        |                                                 |       |                                                   | 12.77      |                                                                                                                    |       |                                                                                                                        | —     |   |   |   | 60,782 |   |   |
| May 2006      |       |       | 26         |                                                 |       |                                                   | 11.87      |                                                                                                                    |       |                                                                                                                        | —     |   |   |   | 60,782 |   |   |
| August 2006   |       |       | 38         |                                                 |       |                                                   | 10.92      |                                                                                                                    |       |                                                                                                                        | —     |   |   |   | 60,782 |   |   |
| November 2006 |       |       | 22         |                                                 |       |                                                   | 13.88      |                                                                                                                    |       |                                                                                                                        | —     |   |   |   | 60,782 |   |   |
| February 2007 |       |       | 194        |                                                 |       |                                                   | 13.72      |                                                                                                                    |       |                                                                                                                        | —     |   |   |   | 60,782 |   |   |
| Total              |       |       | 11,341     |                                                 |       |                                                   | $          | 12.75                                                                                                                   |       |                                                                                                                        |       | 10,932 |   |   |   |   |   |   |

 

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**ITEM 6.**                EXHIBITS

|           | ** ** | ** **                                                                                                                                                                                                                                                                                                  | ** ** | **Filed   with this** | ** ** | **Incorporated by Reference to** |
|-----------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------------------|
| **No.**   | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                | ** ** | **Form 10-Q**    | ** ** | **Form**                         | ** ** | **File No.** | ** ** | **Date Filed** |
|  2.1 |       | Stock Purchase Agreement, dated as of April 9,  2006, by and between United Online, Inc. and UAL Corporation                                                                                                                                                                                      |       |                  |       | 8-K                              |   | 000-33367 |   | 4/13/2006 |
|  3.1 |       | Amended and Restated  Certificate of Incorporation                                                                                                                                                                                                                                                          |       |                  |       | 10-K                             |   | 000-33367 |   | 3/1/2007 |
|  3.2 |       | Amended and Restated  Bylaws                                                                                                                                                                                                                                                                                |       |                  |       | 10-K                             |   | 000-33367 |   | 3/1/2007 |
|  3.3 |       | Certificate of  Designation for Series A Junior Participating Preferred Stock (included  in exhibit 4.1 below)                                                                                                                                                                                    |       |                  |       | 10-K                             |   | 000-33367 |   | 3/1/2007 |
|  4.1 |       | Rights Agreement, dated  as of November 15, 2001, between the Company and U.S. Stock Transfer  Corporation, which includes the form of Certificate of Designation for the  Series A Junior Participating Preferred Stock as Exhibit A, and the  form of Rights Certificate as Exhibit B |       |                  |       | 10-K                             |   | 000-33367 |   | 3/1/2007 |
|  4.2 |       | Amendment No. 1 to  Rights Agreement, dated as of April 29, 2003, between the Registrant and  U.S. Stock Transfer Corporation                                                                                                                                                                     |       |                  |       | 10-Q                             |   | 000-33367 |   | 5/1/2003 |
| 10.1      |       | 2001 Amended and  Restated Employee Stock Purchase Plan                                                                                                                                                                                                                                                     |       |                  |       | 10-Q                             |   | 000-33367 |   | 5/3/2004 |
| 10.2      |       | 2001 Stock Incentive  Plan                                                                                                                                                                                                                                                                                  |       |                  |       | 10-K                             |   | 000-33367 |   | 3/1/2007 |
| 10.3      |       | Form of Option  Agreement for 2001 Stock Incentive Plan                                                                                                                                                                                                                                                |       |                  |       | 10-Q                             |   | 000-33367 |   | 10/27/2004 |
| 10.4      |       | Form of Restricted  Stock Unit Issuance Agreement for 2001 Stock Incentive Plan                                                                                                                                                                                                                        |       |                  |       | 10-Q                             |   | 000-33367 |   | 8/8/2005 |
| 10.5      |       | 2001 Supplemental Stock  Incentive Plan                                                                                                                                                                                                                                                                     |       |                  |       | 10-K                             |   | 000-33367 |   | 3/1/2007 |
| 10.6      |       | Form of Option  Agreement for 2001 Supplemental Stock Incentive Plan                                                                                                                                                                                                                                   |       |                  |       | 10-Q                             |   | 000-33367 |   | 10/27/2004 |
| 10.7      |       | Classmates  Online, Inc. Amended and Restated 1999 Stock Plan                                                                                                                                                                                                                                          |       |                  |       | S-8                              |   | 333-121217 |   | 2/11/2005 |
| 10.8      |       | Classmates  Online, Inc. 2004 Stock Plan                                                                                                                                                                                                                                                               |       |                  |       | 10-Q                             |   | 000-33367 |   | 5/10/2005 |
| 10.9      |       | Form of Option  Agreement for Classmates Online, Inc. 2004 Stock Plan                                                                                                                                                                                                                             |       |                  |       | 10-Q                             |   | 000-33367 |   | 5/10/2005 |
| 10.10     |       | United Online, Inc.  2007 Management Bonus Plan                                                                                                                                                                                                                                                        |       | X                     |       |                             |   | 000-33367 |   | 5/3/2007 |

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| 10.11 |   | Amended and Restated  United Online, Inc. Severance Benefit Plan and Summary Plan Description                 |   | X      |   |   |   | 000-33367 |   | 5/3/2007 |
|-------|--------|---------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|-----------|--------|----------|
| 10.12 |   | Employment Agreement  between the Registrant and Mark R. Goldston                                        |   | X      |   |   |   | 000-33367 |   | 5/3/2007 |
| 10.13 |   | Amended and Restated  Employment Agreement between the Registrant and Charles S. Hilliard                |   |   |   | 10-KT  |   | 000-33367 |   | 2/5/2004 |
| 10.14 |   | Amended and Restated  Employment Agreement between the Registrant and Frederic A.  Randall, Jr.     |   |   |   | 10-KT  |   | 000-33367 |   | 2/5/2004 |
| 10.15 |   | Employment Agreement  between the Registrant and Matt Wisk                                                    |   |   |   | 10-Q   |   | 000-33367 |   | 8/8/2005 |
| 10.16 |   | Employment Agreement  between the Registrant and Ted Cahall                                                   |   |   |   | 10-Q   |   | 000-33367 |   | 8/8/2005 |
| 10.17 |   | Employment Agreement  between the Registrant and Jon Fetveit                                                  |   |   |   | 10-Q   |   | 000-33367 |   | 8/8/2005 |
| 10.18 |   | Employment Agreement  between the Registrant and Gerald Popek                                                 |   |   |   | 10-Q   |   | 000-33367 |   | 8/8/2005 |
| 10.19 |   | Employment Agreement  between the Registrant and Robert Taragan                                               |   |   |   | 10-Q   |   | 000-33367 |   | 8/8/2005 |
| 10.20 |   | Employment Agreement  between the Registrant and Jeremy Helfand                                               |   |   |   | 10-Q   |   | 000-33367 |   | 8/9/2006 |
| 10.21 |   | Office Lease between LNR  Warner Center, LLC and NetZero, Inc.                                           |   |   |   | 10-Q   |   | 000-33367 |   | 5/3/2004 |
| 31.1  |   | Certification of the  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |   | X      |   |   |   | 000-33367 |   | 5/3/2007 |
| 31.2  |   | Certification of the Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |   | X      |   |   |   | 000-33367 |   | 5/3/2007 |
| 32.1  |   | Certification of the  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |   | X      |   |   |   | 000-33367 |   | 5/3/2007 |
| 32.2  |   | Certification of the  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |   | X      |   |   |   | 000-33367 |   | 5/3/2007 |

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized on May 3, 2007.

|          | UNITED ONLINE, INC. |
|----------|--------------------------|
|     | By:                      | /s/  CHARLES S. HILLIARD |
|     |                     | Charles S.  Hilliard |
| * * | * *                 | *President  and Chief Financial Officer* |
|     | By:                      | /s/  NEIL P. EDWARDS |
|     |                     | Neil P. Edwards |
| * * | * *                 | *Senior Vice President, Finance, Treasurer and  Chief Accounting Officer* |

 

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**EXHIBITINDEX**

|           | ** ** | ** **                                                                                                                                                                                                                                                                                                  | ** ** | **Filed   with this** | ** ** | **Incorporated by Reference to** |
|-----------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------------------------|
| **No.**   | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                | ** ** | **Form 10-Q**         | ** ** | **Form**                                        | ** ** | **File No.** | ** ** | **Date Filed** |
|  2.1 |       | Stock Purchase Agreement, dated as of April 9,  2006, by and between United Online, Inc. and UAL Corporation                                                                                                                                                                                      |       |                       |       | 8-K                                             |   | 000-33367 |   | 4/13/2006 |
|  3.1 |       | Amended and Restated  Certificate of Incorporation                                                                                                                                                                                                                                                          |       |                       |       | 10-K                                            |   | 000-33367 |   | 3/1/2007 |
|  3.2 |       | Amended and Restated  Bylaws                                                                                                                                                                                                                                                                                |       |                       |       | 10-K                                            |   | 000-33367 |   | 3/1/2007 |
|  3.3 |       | Certificate of  Designation for Series A Junior Participating Preferred Stock (included  in exhibit 4.1 below)                                                                                                                                                                                    |       |                       |       | 10-K                                            |   | 000-33367 |   | 3/1/2007 |
|  4.1 |       | Rights Agreement, dated  as of November 15, 2001, between the Company and U.S. Stock Transfer  Corporation, which includes the form of Certificate of Designation for the Series A  Junior Participating Preferred Stock as Exhibit A, and the form of  Rights Certificate as Exhibit B |       |                       |       | 10-K                                            |   | 000-33367 |   | 3/1/2007 |
|  4.2 |       | Amendment No. 1 to  Rights Agreement, dated as of April 29, 2003, between the Registrant and  U.S. Stock Transfer Corporation                                                                                                                                                                     |       |                       |       | 10-Q                                            |   | 000-33367 |   | 5/1/2003 |
| 10.1      |       | 2001 Amended and  Restated Employee Stock Purchase Plan                                                                                                                                                                                                                                                     |       |                       |       | 10-Q                                            |   | 000-33367 |   | 5/3/2004 |
| 10.2      |       | 2001 Stock Incentive  Plan                                                                                                                                                                                                                                                                                  |       |                       |       | 10-K                                            |   | 000-33367 |   | 3/1/2007 |
| 10.3      |       | Form of Option  Agreement for 2001 Stock Incentive Plan                                                                                                                                                                                                                                                |       |                       |       | 10-Q                                            |   | 000-33367 |   | 10/27/2004 |
| 10.4      |       | Form of Restricted  Stock Unit Issuance Agreement for 2001 Stock Incentive Plan                                                                                                                                                                                                                        |       |                       |       | 10-Q                                            |   | 000-33367 |   | 8/8/2005 |
| 10.5      |       | 2001 Supplemental Stock  Incentive Plan                                                                                                                                                                                                                                                                     |       |                       |       | 10-K                                            |   | 000-33367 |   | 3/1/2007 |
| 10.6      |       | Form of Option  Agreement for 2001 Supplemental Stock Incentive Plan                                                                                                                                                                                                                                   |       |                       |       | 10-Q                                            |   | 000-33367 |   | 10/27/2004 |
| 10.7      |       | Classmates  Online, Inc. Amended and Restated 1999 Stock Plan                                                                                                                                                                                                                                          |       |                       |       | S-8                                             |   | 333-121217 |   | 2/11/2005 |
| 10.8      |       | Classmates  Online, Inc. 2004 Stock Plan                                                                                                                                                                                                                                                               |       |                       |       | 10-Q                                            |   | 000-33367 |   | 5/10/2005 |
| 10.9      |       | Form of Option  Agreement for Classmates Online, Inc. 2004 Stock Plan                                                                                                                                                                                                                             |       |                       |       | 10-Q                                            |   | 000-33367 |   | 5/10/2005 |
| 10.10     |       | United Online, Inc.  2007 Management Bonus Plan                                                                                                                                                                                                                                                        |       | X                          |       |                                            |   | 000-33367 |   | 5/3/2007 |

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| 10.11 |   | Amended and Restated  United Online, Inc. Severance Benefit Plan and Summary Plan Description                 |   | X      |   |   |   | 000-33367 |   | 5/3/2007 |
|-------|--------|---------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|-----------|--------|----------|
| 10.12 |   | Amended and Restated  Employment Agreement between the Registrant and Mark R. Goldston                   |   | X      |   |   |   | 000-33367 |   | 5/3/2007 |
| 10.13 |   | Amended and Restated  Employment Agreement between the Registrant and Charles S. Hilliard                |   |   |   | 10-KT  |   | 000-33367 |   | 2/5/2004 |
| 10.14 |   | Amended and Restated  Employment Agreement between the Registrant and Frederic A.  Randall, Jr.     |   |   |   | 10-KT  |   | 000-33367 |   | 2/5/2004 |
| 10.15 |   | Employment Agreement  between the Registrant and Matt Wisk                                                    |   |   |   | 10-Q   |   | 000-33367 |   | 8/8/2005 |
| 10.16 |   | Employment Agreement  between the Registrant and Ted Cahall                                                   |   |   |   | 10-Q   |   | 000-33367 |   | 8/8/2005 |
| 10.17 |   | Employment Agreement  between the Registrant and Jon Fetveit                                                  |   |   |   | 10-Q   |   | 000-33367 |   | 8/8/2005 |
| 10.18 |   | Employment Agreement  between the Registrant and Gerald Popek                                                 |   |   |   | 10-Q   |   | 000-33367 |   | 8/8/2005 |
| 10.19 |   | Employment Agreement  between the Registrant and Robert Taragan                                               |   |   |   | 10-Q   |   | 000-33367 |   | 8/8/2005 |
| 10.20 |   | Employment Agreement  between the Registrant and Jeremy Helfand                                               |   |   |   | 10-Q   |   | 000-33367 |   | 8/9/2006 |
| 10.21 |   | Office Lease between LNR  Warner Center, LLC and NetZero, Inc.                                           |   |   |   | 10-Q   |   | 000-33367 |   | 5/3/2004 |
| 31.1  |   | Certification of the  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |   | X      |   |   |   | 000-33367 |   | 5/3/2007 |
| 31.2  |   | Certification of the  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |   | X      |   |   |   | 000-33367 |   | 5/3/2007 |
| 32.1  |   | Certification of the  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |   | X      |   |   |   | 000-33367 |   | 5/3/2007 |
| 32.2  |   | Certification of the  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |   | X      |   |   |   | 000-33367 |   | 5/3/2007 |

 

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