**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM **10-Q

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**(Mark One)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe Quarterly Period Ended March 31, 2006**

**Or**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 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,**             |   | **91367**                            |
| **Woodland  Hills, California**          |   | (Zip Code)                           |
| (Address of  Principal Executive Office) |   |                                 |

 

**(818) 287-3000**

(Registrant’s TelephoneNumber, Including Area Code)

**Not applicable**

(Former Name, FormerAddress 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 Exchange Act.(Check one)

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o No x

Therewere 64,183,481 shares of the registrant’s common stock outstanding at May 5,2006.

 

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**INDEX**
| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                                                | ** ** |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------------------|------------|
|              | Item 1.    | Condensed Consolidated  Balance Sheets at March 31, 2006 (unaudited) and December 31, 2005                     | 3          |
|              |       | Unaudited Condensed  Consolidated Statements of Operations for the Quarters Ended March 31,  2006 and 2005          | 4          |
|              |       | Unaudited Condensed Consolidated Statements of  Comprehensive Income for the Quarters Ended March 31, 2006 and 2005 | 5          |
|              |       | Unaudited Condensed Consolidated Statement of  Stockholders’ Equity for the Quarter Ended March 31, 2006       | 6          |
|              |       | Unaudited Condensed  Consolidated Statements of Cash Flows for the Quarters Ended March 31,  2006 and 2005          | 7          |
|              |       | Notes to the Unaudited  Condensed Consolidated Financial Statements                                                      | 8          |
|              | Item 2.    | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                              | 22         |
|              | Item 3.    | Quantitative and Qualitative  Disclosures About Market Risk                                                              | 37         |
|              | Item 4.    | Controls and Procedures                                                                                                  | 38         |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                                    | ** ** |
|              | Item 1.    | Legal Proceedings                                                                                                        | 39         |
|              | Item 1A.   | Risk Factors                                                                                                             | 41         |
|              | Item 2.    | Unregistered Sales of Equity  Securities and Use of Proceeds                                                             | 59         |
|              | Item 6.    | Exhibits                                                                                                                 | 60         |
| **SIGNATURES**    | 62         |

 

In this document, “United Online,” the “Company,” “we,”“us” and “our” collectively refer to United Online, Inc. and itswholly-owned subsidiaries.

2

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**PART I—FINANCIALINFORMATION**

**ITEM 1.**   FINANCIALSTATEMENTS

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

| ** **                                       | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **(unaudited)**          | ** ** | ** **                  | ** ** |
| **Assets**                                       |       |                     |       |                        |       |   |   |
| Current assets:                                  |       |                     |       |                        |       |   |   |
| Cash and cash equivalents                        |       | $                        | 22,569     |                        |       | $ | 100,397 |   |   |
| Short-term investments                           |       | 152,730                  |       |                        | 143,965    |   |   |
| Accounts receivable                              |       | 17,858                   |       |                        | 19,201     |   |   |
| Deferred tax assets, net                         |       | 13,892                   |       |                        | 14,808     |   |   |
| Other current assets                             |       | 12,295                   |       |                        | 12,332     |   |   |
| Total current assets                             |       | 219,344                  |       |                        | 290,703    |   |   |
| Property and  equipment, net                     |       | 35,440                   |       |                        | 33,093     |   |   |
| Deferred tax  assets, net                        |       | 54,284                   |       |                        | 53,547     |   |   |
| Goodwill                                         |       | 89,479                   |       |                        | 80,499     |   |   |
| Intangible  assets, net                          |       | 56,511                   |       |                        | 59,338     |   |   |
| Other assets                                     |       | 3,217                    |       |                        | 4,008      |   |   |
| Total assets                                     |       | $                        | 458,275    |                        |       | $ | 521,188 |   |   |
| **Liabilities  and Stockholders’ Equity**   |       |                     |       |                        |       |   |   |
| Current liabilities:                             |       |                     |       |                        |       |   |   |
| Accounts payable                                 |       | $                        | 39,024     |                        |       | $ | 46,955 |   |   |
| Accrued liabilities                              |       | 27,165                   |       |                        | 36,249     |   |   |
| Deferred revenue                                 |       | 55,196                   |       |                        | 52,835     |   |   |
| Current portion of term loan                     |       | —                   |       |                        | 16,498     |   |   |
| Current portion of capital leases                |       | 393                      |       |                        | 373        |   |   |
| Total current liabilities                        |       | 121,778                  |       |                        | 152,910    |   |   |
| Deferred revenue                                 |       | 3,474                    |       |                        | 3,449      |   |   |
| Term loan                                        |       | —                   |       |                        | 37,710     |   |   |
| Capital leases                                   |       | 255                      |       |                        | 325        |   |   |
| Other liabilities                                |       | 3,820                    |       |                        | 4,379      |   |   |
| Total liabilities                                |       | 129,327                  |       |                        | 198,773    |   |   |
| Commitments and  contingencies (see Note 8)      |       |                     |       |                        |       |   |   |
| Stockholders’ equity:                       |       |                     |       |                        |       |   |   |
| Common stock                                     |       | 6                        |       |                        | 6          |   |   |
| Additional paid-in capital                       |       | 451,099                  |       |                        | 472,745    |   |   |
| Deferred stock-based compensation                |       | —                   |       |                        | (15,558    | ) |   |
| Accumulated other comprehensive loss             |       | (398                     | )          |                        | (327       | ) |   |
| Accumulated deficit                              |       | (121,759                 | )          |                        | (134,451   | ) |   |
| Total stockholders’ equity                  |       | 328,948                  |       |                        | 322,415    |   |   |
| Total liabilities  and stockholders’ equity |       | $                        | 458,275    |                        |       | $ | 521,188 |   |   |

 

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

3

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

| ** **                                                                   | ** ** | **Quarter Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Revenues                                                                     |       | $                                      | 127,332    |   | $ | 130,531 |   |
| Operating  expenses:                                                         |       |                                   |       |   |   |
| Cost of revenues (including stock-based compensation,  see Note 6) |       | 29,890                                 |       | 27,779 |   |
| Sales and marketing (including stock-based  compensation, see Note 6)   |       | 43,419                                 |       | 54,083 |   |
| Product development (including stock-based  compensation, see Note 6)        |       | 12,816                                 |       | 9,106 |   |
| General and administrative (including stock-based  compensation, see Note 6) |       | 16,246                                 |       | 12,600 |   |
| Amortization of intangible assets                                            |       | 4,389                                  |       | 5,978 |   |
| Total operating expenses                                                     |       | 106,760                                |       | 109,546 |   |
| Operating income                                                             |       | 20,572                                 |       | 20,985 |   |
| Interest and  other income, net                                              |       | 1,716                                  |       | 1,417 |   |
| Interest expense                                                             |       | (1,716                                 | )          | (2,002 | ) |
| Income before  income taxes                                                  |       | 20,572                                 |       | 20,400 |   |
| Provision for  income taxes                                                  |       | 8,921                                  |       | 8,913 |   |
| Income before  cumulative effect of accounting change                        |       | 11,651                                 |       | 11,487 |   |
| Cumulative effect  of accounting change, net of tax (see Note 1)             |       | 1,041                                  |       | — |   |
| Net income                                                                   |       | $                                      | 12,692     |   | $ | 11,487 |   |
| Basic net income per  share:                                                 |       |                                   |       |   |   |
| Income before cumulative effect of accounting change                         |       | $                                      | 0.19       |   | $ | 0.19 |   |
| Cumulative effect of accounting change, net of tax                           |       | 0.01                                   |       | — |   |
| Basic net income  per share                                                  |       | $                                      | 0.20       |   | $ | 0.19 |   |
| Diluted net income per  share:                                               |       |                                   |       |   |   |
| Income before cumulative effect of accounting change                         |       | $                                      | 0.18       |   | $ | 0.18 |   |
| Cumulative effect of accounting change, net of tax                           |       | 0.02                                   |       | — |   |
| Diluted net  income per share                                                |       | $                                      | 0.20       |   | $ | 0.18 |   |
| Shares used to calculate basic net income per share                          |       | 62,511                                 |       | 60,393 |   |
| Shares used to calculate  diluted net income per share                       |       | 64,889                                 |       | 63,038 |   |

 

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,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Net income                                                                                                                          |       | $                                      | 12,692     |   | $ | 11,487 |   |
| Unrealized loss  on short-term investments, net of tax of $(5) and $(154) for the  quarters ended March 31, 2006 and 2005 |       | (16                                    | )          | (228 | ) |
| Unrealized gain  (loss) on derivative, net of tax of $(60) and $36 for the quarters ended  March 31, 2006 and 2005             |       | (83                                    | )          | 53 |   |
| Foreign currency  translation                                                                                                       |       | 28                                     |       | (19 | ) |
| Comprehensive income                                                                                                                |       | $                                      | 12,621     |   | $ | 11,293 |   |

 

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

5

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

| ** **                                                       | ** ** | **Common Stock** | ** ** | **Additional  Paid-In** | ** ** | **Deferred  Stock-Based** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated**        | ** ** | **Total  Stockholders’** | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|-------------------------|------------|---------------------------|------------|---------------------------------------|------------|------------------------|------------|-------------------------------|------------|
| ** **                                                       | ** ** | **Shares**            | ** ** | **Amount**              | ** ** | **Capital**               | ** ** | **Compensation**                      | ** ** | **Income (Loss)** | ** ** | **Deficit**                   | ** ** | **Equity** | ** ** |
| Balance at December 31, 2005                                |       | 62,606                |       |                    | $          | 6                         |       |                                  |       | $                      | 472,745    |                          |       |   | $ | (15,558 | ) |   |   | $ | (327 | ) |   |   | $ | (134,451 | ) |   |   | $ | 322,415 |   |   |
| Cumulative effect of accounting change, net of tax               |       | —                |       |                    | —     |                      |       |                                  | (1,041     | )                      |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | (1,041 | ) |   |
| Reversal of deferred stock-based compensation                    |       | —                |       |                    | —     |                      |       |                                  | (15,558    | )                      |       |                          | 15,558     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Exercises of stock options                                       |       | 670                   |       |                    | —     |                      |       |                                  | 2,622      |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 2,622 |   |   |
| Vesting of restricted stock units                                |       | 251                   |       |                    | —     |                      |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Repurchases of common stock                                      |       | —                |       |                    | —     |                      |       |                                  | (1,643     | )                      |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | (1,643 | ) |   |
| Dividends paid on shares outstanding and restricted  stock units |       | —                |       |                    | —     |                      |       |                                  | (12,868    | )                      |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | (12,868 | ) |   |
| Stock-based compensation                                         |       | —                |       |                    | —     |                      |       |                                  | 4,969      |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 4,969 |   |   |
| Unrealized loss on short-term investments, net of  tax           |       | —                |       |                    | —     |                      |       |                                  | —     |                   |       |                          | —     |   |   |   | (16 | ) |   |   | — |   |   |   | (16 | ) |   |
| Unrealized loss on derivative, net of tax                        |       | —                |       |                    | —     |                      |       |                                  | —     |                   |       |                          | —     |   |   |   | (83 | ) |   |   | — |   |   |   | (83 | ) |   |
| Foreign currency translation                                     |       | —                |       |                    | —     |                      |       |                                  | —     |                   |       |                          | —     |   |   |   | 28 |   |   |   | — |   |   |   | 28 |   |   |
| Tax benefits from stock options                                  |       | —                |       |                    | —     |                      |       |                                  | 1,873      |                   |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 1,873 |   |   |
| Net income                                                       |       | —                |       |                    | —     |                      |       |                                  | —     |                   |       |                          | —     |   |   |   | — |   |   |   | 12,692 |   |   |   | 12,692 |   |   |
| Balance at March 31,  2006                                  |       | 63,527                |       |                    | $          | 6                         |       |                                  |       | $                      | 451,099    |                          |       |   | $ | — |   |   |   | $ | (398 | ) |   |   | $ | (121,759 | ) |   |   | $ | 328,948 |   |   |

 

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,** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                                     | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                |       |                                         |       |   |   |
| Net income                                                                            |       | $                                            | 12,692     |   | $ | 11,487 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:    |       |                                         |       |   |   |
| Depreciation and amortization                                                         |       | 9,096                                        |       | 9,452 |   |
| Stock-based compensation                                                              |       | 4,969                                        |       | 1,075 |   |
| Deferred taxes                                                                        |       | (302                                         | )          | (677 | ) |
| Tax benefits from stock-based compensation                                            |       | 1,873                                        |       | 3,947 |   |
| Excess tax benefits from stock-based compensation                                     |       | (1,414                                       | )          | — |   |
| Cumulative effect of accounting change, net of tax                                    |       | (1,041                                       | )          | — |   |
| Other                                                                                 |       | 1,437                                        |       | 570 |   |
| Changes in  operating assets and liabilities (excluding the effects of acquisitions): |       |                                         |       |   |   |
| Accounts receivable                                                                   |       | 1,394                                        |       | 295 |   |
| Other assets                                                                          |       | (730                                         | )          | 2,986 |   |
| Accounts payable and accrued liabilities                                              |       | (15,541                                      | )          | (2,856 | ) |
| Deferred revenue                                                                      |       | 1,846                                        |       | 4,581 |   |
| Other liabilities                                                                     |       | (40                                          | )          | 825 |   |
| Net cash provided by operating activities                                             |       | 14,239                                       |       | 31,685 |   |
| Cash flows from  investing activities:                                                |       |                                         |       |   |   |
| Purchases of property and equipment                                                   |       | (7,061                                       | )          | (3,455 | ) |
| Purchases of rights, patents and trademarks                                           |       | (509                                         | )          | (5,500 | ) |
| Purchases of short-term investments                                                   |       | (124,121                                     | )          | (98,317 | ) |
| Proceeds from maturities and sales of short-term  investments                         |       | 115,320                                      |       | 115,858 |   |
| Cash paid for acquisitions, net of cash acquired                                      |       | (10,990                                      | )          | (8,540 | ) |
| Net cash provided by (used for) investing activities                                  |       | (27,361                                      | )          | 46 |   |
| Cash flows from  financing activities:                                                |       |                                         |       |   |   |
| Payments on term loan                                                                 |       | (54,209                                      | )          | (30,833 | ) |
| Payments on capital leases                                                            |       | (50                                          | )          | (288 | ) |
| Proceeds from exercises of stock options                                              |       | 2,622                                        |       | 1,821 |   |
| Repurchases of common stock                                                           |       | (1,643                                       | )          | (14,207 | ) |
| Payments for dividends                                                                |       | (12,868                                      | )          | — |   |
| Excess tax benefits from stock-based compensation                                     |       | 1,414                                        |       | — |   |
| Net cash used for financing activities                                                |       | (64,734                                      | )          | (43,507 | ) |
| Effect of  exchange rate changes on cash and cash equivalents                         |       | 28                                           |       | (14 | ) |
| Change in cash  and cash equivalents                                                  |       | (77,828                                      | )          | (11,790 | ) |
| Cash and cash  equivalents, beginning of period                                       |       | 100,397                                      |       | 56,512 |   |
| Cash and cash  equivalents, end of period                                             |       | $                                            | 22,569     |   | $ | 44,722 |   |

 

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

7

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**UNITEDONLINE, INC.NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**1.   DESCRIPTION OF BUSINESS, BASIS OFPRESENTATION, SIGNIFICANTACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS**

**Description ofBusiness**

United Online, Inc. (“United Online” or the “Company”)is a leading provider of consumer Internet and media services through a numberof brands, including NetZero, Juno, Classmates and MyPoints (as of April 2006).The Company’s Communications services include Internet access, email, Internetsecurity and VoIP. The Company’s Content & Media services includesocial networking, Web hosting and photo sharing. On a combined basis, theCompany’s Web properties attract a significant number of Internet users eachmonth and the Company offers marketers a broad array of Internet advertisingproducts as well as online market research and measurement services.

On April 10, 2006,the Company acquired MyPoints, a leading provider of online loyalty marketingservices, for $56.0 million in cash. The Company intends to report MyPointswithin its Content & Media segment beginning in the June 2006quarter.

**Basis ofPresentation**

The accompanying consolidated financial statements forthe quarters ended March 31, 2006 and 2005, which include United Onlineand its wholly-owned subsidiaries, are unaudited except for the balancesheet information at December 31, 2005, which is derived from the auditedconsolidated financial statements filed with the Securities and ExchangeCommission (“SEC”) in the Company’s Annual Report on Form 10-K on March 6,2006 but does not include all disclosures required by accounting principlesgenerally accepted in the United States of America (“GAAP”). The Company’sinterim financial statements have been prepared in accordance with GAAPincluding those for interim financial information and with the instructions forForm 10-Q and Article 10 of Regulation S-X issued by the SEC.Accordingly, they do not include all of the information and note disclosuresrequired by GAAP for complete financial statements. All significantintercompany accounts and transactions have been eliminated in consolidation.The consolidated financial statements, in the opinion of management, reflectall adjustments (consisting only of normal recurring adjustments) that arenecessary for a fair presentation of the results for the periods shown. Theresults of operations for such periods are not necessarily indicative of theresults 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, 2005 included in the Company’sAnnual Report on Form 10-K filed on March 6, 2006 with the SEC.

**SignificantAccounting Policies**

*Stock-BasedCompensation—**On January 1, 2006, the Company adoptedStatement of Financial Accounting Standards (“SFAS”) No. 123 (revised2004),*Share-Based Payment*, which requires the measurement and recognition ofcompensation expense for all share-based payment awards made to employees anddirectors including employee stock options, restricted awards and employeestock purchases related to the Employee Stock Purchase Plan (“employee stockpurchases”) based on the grant date fair values of the awards. SFAS No. 123Rsupersedes the Company’s previous accounting under*

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*Accounting Principles Board (“APB”) Opinion No. 25,*Accountingfor Stock Issued to Employees*. In March 2005, the SEC issued Staff AccountingBulletin (“SAB”) No. 107 relating to SFAS No. 123R. The Company hasapplied the provisions of SAB No. 107 in its adoption of SFAS 123R (seeNote 6 for additional information).*

*TheCompany adopted SFAS No. 123R using the modified prospective transitionmethod, and the Company’s consolidated financial statements at and for thequarter ended March 31, 2006 reflect the impact of SFAS No. 123R. Inaccordance with the modified prospective transition method, the Company’sconsolidated financial statements for prior periods have not been restated toreflect, and do not include, the impact of SFAS No. 123R. Stock-basedcompensation expense recognized under SFAS No. 123R for the quarter ended March 31,2006 was $5.0 million, which was primarily related to stock options, restrictedstock and the discount on employee stock purchases. Stock-based compensationexpense for the quarter ended March 31, 2005 was $1.1 million, which wasprimarily related to restricted stock.*

*SFAS No. 123Rrequires companies to estimate the fair value of share-based payment awards onthe grant-date using an option-pricing model. Under SFAS No. 123, theCompany used the Black-Scholes option-pricing model for valuation ofshare-based awards for its pro forma information. Upon adoption of SFAS No. 123R,the Company elected to continue to use the Black-Scholes option-pricing modelfor valuing awards. The value of the portion of the award that is ultimatelyexpected to vest is recognized as expense over the requisite service periods inthe Company’s consolidated statements of operations. Prior to the adoption ofSFAS No. 123R, the Company accounted for share-based awards to employeesand directors using the intrinsic value method in accordance with APB No. 25as allowed under SFAS No. 123,*Accounting forStock-Based Compensation*. Under the intrinsic value method, no stock-basedcompensation expense related to stock options had been recognized in theCompany’s consolidated statements of operations, other than as related toacquisitions, because the exercise price of the Company’s stock options grantedto employees and directors equaled the fair market value of the underlyingstock at the grant-date.*

*Stock-basedcompensation expense recognized during the current period is based on the valueof the portion of share-based payment awards that is ultimately expected tovest. SFAS No. 123R requires forfeitures to be estimated at the time ofgrant in order to calculate the amount of share-based awards that willultimately vest. The forfeiture rate is based on historical rates. Stock-basedcompensation expense recognized in the Company’s consolidated statements ofoperations for the quarter ended March 31, 2006 includes (i) compensationexpense for share-based payment awards granted prior to, but not yet vested at,December 31, 2005 is based on the grant-date fair value estimated inaccordance with the pro forma provisions of SFAS No. 123 and (ii) compensationexpense for the share-based payment awards granted subsequent to December 31,2005, based on the grant-date fair value estimated in accordance with theprovisions of SFAS No. 123R. As stock-based compensation expenserecognized in the consolidated statement of operations for the quarter ended March 31,2006 is based on awards ultimately expected to vest, it has been reduced forestimated forfeitures. In the Company’s pro forma information required underSFAS No. 123 for the periods prior to 2006, the Company accounted forforfeitures as they occurred. Accordingly, a pretax cumulative effectadjustment totaling $1.1 million ($1.0 million, net of tax) was recorded in theMarch 2006 quarter to adjust for awards granted prior to January 1,2006, that are not ultimately expected to vest.*

*Prior tothe adoption of SFAS No. 123R, the Company recognized stock-basedcompensation expense for awards with graded vesting by treating each vestingtranche as a separate award and recognizing compensation expense ratably foreach tranche. For equity awards granted subsequent to the adoption of SFAS No. 123R,the Company treats such awards as a single award and recognizes stock-basedcompensation expense on a straight-line basis (net of estimated forfeitures)over the employee service period.*

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*In November 2005,the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)No. SFAS 123(R)-3,*Transition Election Related toAccounting for Tax Effects of Share-Based Payment Awards*. The alternative transition methodincludes simplified methods to establish the beginning balance of theadditional paid-in capital pool (“APIC pool”) related to the tax effects ofemployee share-based compensation, and to determine the subsequent impact onthe APIC pool and consolidated statements of cash flows of the tax effects ofemployee share-based compensation awards that are outstanding upon adoption ofSFAS No. 123R. The Company is in the process of evaluating whether toadopt the provisions of SFAS 123(R)-3.*

*Stock-based compensation expensereduced the Company’s results of operations as follows (in thousands, exceptper share amounts), excluding the cumulative effect of accounting change:*

| ** **                                              | ** ** | **Quarter Ended  March 31, 2006** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| Operating  expenses:                                    |       |                                             |       |   |   |
| Cost of revenues                                        |       |                                             | $          | 237 |   |   |
| Sales and  marketing                                    |       |                                             | 944        |   |   |
| Product  development                                    |       |                                             | 1,466      |   |   |
| General and  administrative                             |       |                                             | 2,322      |   |   |
| Stock-based  compensation                               |       |                                             | 4,969      |   |   |
| Tax benefit recognized                                  |       |                                             | (1,056     | ) |   |
| Stock-based  compensation, net of tax                   |       |                                             | $          | 3,913 |   |   |
| Stock-based  compensation, net of tax per common share: |       |                                             |       |   |   |
| Basic                                                   |       |                                             | $          | 0.06 |   |   |
| Diluted                                                 |       |                                             | $          | 0.06 |   |   |

 

*The following table illustrates (inthousands, except per share amounts) the effect on net income and earnings pershare in the prior year as if the Company had applied the fair valuerecognition provisions of SFAS No. 123, as amended by SFAS No. 148,*Accountingfor Stock-Based Compensation—Transition and Disclosure*.*

| ** **                                                                                                  | ** ** | **Quarter Ended  March 31, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Net income, as  reported                                                                                    |       |                                             | $          | 11,487 |   |   |
| Add: Stock-based compensation included in net  income, net of tax                                           |       |                                             | 917        |   |   |
| Deduct: Total stock-based compensation determined  under fair value-based method for all awards, net of tax |       |                                             | (2,697     | ) |   |
| Pro forma net income                                                                                        |       |                                             | $          | 9,707 |   |   |
| Basic net income per share, as reported                                                                     |       |                                             | $          | 0.19 |   |   |
| Basic net income per share, pro forma                                                                       |       |                                             | $          | 0.16 |   |   |
| Diluted net income per share, as reported                                                                   |       |                                             | $          | 0.18 |   |   |
| Diluted net  income per share, pro forma                                                                    |       |                                             | $          | 0.15 |   |   |

 

**Recent AccountingPronouncement**

In June 2005, the FASBissued SFAS No. 154, *Accounting Changes andError Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3*.SFAS No. 154 changes the requirements for the accounting for and reporting of achange in accounting principle and applies to all voluntary 

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changesin accounting principle. APB Opinion No. 20 previously required that mostvoluntary changes in accounting principle be recognized by including in netincome of the period of change the cumulative effect of changing to the newaccounting principle. SFAS No. 154 requires retrospective application to priorperiods’ financial statements of changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. When it is impracticable to determine the period-specificeffects of an accounting change on one or more individual prior periodspresented, SFAS No. 154 requires that the new accounting principle be appliedto the balances of assets and liabilities as of the beginning of the earliestperiod for which retrospective application is practicable and that acorresponding adjustment be made to the opening balance of retained earningsfor that period rather than being reported in an income statement. When it isimpracticable to determine the cumulative effect of applying a change inaccounting principle to all prior periods, SFAS No. 154 requires that the newaccounting principle be applied as if it were adopted prospectively from theearliest date practicable. In addition, SFAS No. 154 makes a distinctionbetween retrospective application of an accounting principle and therestatement of financial statements to reflect the correction of an error. SFASNo. 154 is effective for accounting changes and corrections of errors madebeginning in the March 2006 quarter. The implementation of SFAS No. 154 did nothave a material impact on the Company’s financial position, results ofoperations or cash flows.

**2.**   ACQUISITION

*The Names Database*

In March 2006, the Company acquired The NamesDatabase for approximately $10.0 million in cash. The Names Database is asocial-networking service that acts as an intermediary between members,allowing them to send messages through the site to one another. The acquisitionwas accounted for under the purchase method in accordance with SFAS No. 141,*Business Combinations*. Theprimary reason for the acquisition was to acquire The Names Database’s memberrelationships and software to expand the Company’s social-networking business. TheNames Database’s results of operations are included in the consolidatedfinancial statements from the date of acquisition.

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Thepurchase price was allocated to the net assets acquired based on theirestimated fair values, including identifiable intangible assets. The purchaseprice allocation is considered final. The following table summarizes the netliabilities assumed and the intangible assets and goodwill acquired inconnection with the acquisition (in thousands):

| **Description**                                 | ** ** | ** ** | ** ** | **Estimated  Fair  Value** | ** ** | **Estimated  Amortizable  Life** | ** ** |
|-------------------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------------|------------|
| Net liabilities assumed:                        |       |       |       |                       |       |                             |       |   |   |
| Cash                                            |       |       | $          | 510                        |       |                             |       |   |   |   |
| Accounts receivable                             |       |       | 51         |                       |       |                             |       |   |   |
| Accounts payable and accrued liabilities        |       |       | (8         | )                          |       |                             |       |   |   |
| Deferred revenue                                |       |       | (541       | )                          |       |                             |       |   |   |
| Deferred income taxes                           |       |       | (545       | )                          |       |                             |       |   |   |
| Total net liabilities assumed                   |       |       | (533       | )                          |       |                             |       |   |   |
| Intangible assets  acquired:                    |       |       |       |                       |       |                             |       |   |   |
| Pay accounts                                    |       |       | 500        |                       |       |                             | 4 years    |   |   |
| Free accounts                                   |       |       | 600        |                       |       |                             | 10 years   |   |   |
| Advertising contracts and related relationships |       |       | 29         |                       |       |                             | 2 years    |   |   |
| Technology                                      |       |       | 245        |                       |       |                             | 5 years    |   |   |
| Proprietary rights                              |       |       | 134        |                       |       |                             | 5 years    |   |   |
| Other intangibles                               |       |       | 45         |                       |       |                             | 5 years    |   |   |
| Total intangible assets acquired                |       |       | 1,553      |                       |       |                             |       |   |   |
| Goodwill                                        |       |       | 8,980      |                       |       |                             |       |   |   |
| Total purchase  price                           |       |       | $          | 10,000                     |       |                             |       |   |   |   |

 

The weighted average amortizable life of the acquiredintangible assets is 6.6 years. The $9.0 million of goodwill acquired is notdeductible for tax purposes. The pro forma effect of the transaction isimmaterial to the consolidated financial statements.

**Cashpaid for acquisitions during the quarter ended March 31, 2006 included a $1.5million payment for PhotoSite, which was previously included in accruedliabilities at December 31, 2005.**

**3.**   BALANCE SHEETCOMPONENTS                         

**Short-TermInvestments**

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

| ** **            | ** ** | **March 31, 2006** | ** ** |
|-----------------------|------------|------------------------------|------------|
| ** **            | ** ** | **Amortized  Cost**          | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| U.S. corporate  notes |       | $                            | 9,011      |   |   | $ | — |   |   |   | $ | (17 | ) |   | $ | 8,994 |   |
| Government  agencies  |       | 144,242                      |       |   | — |   |   |   | (506 | ) |   | 143,736 |   |
| Total                 |       | $                            | 153,253    |   |   | $ | — |   |   |   | $ | (523 | ) |   | $ | 152,730 |   |

 

Gross unrealized gains and losses are presented net oftax in accumulated other comprehensive income on the consolidated balancesheets. The Company had no material realized gains or losses from the sale ofshort-term investments in the quarters ended March 31, 2006 and 2005.

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Thefollowing table summarizes the fair value and gross unrealized losses of ourshort-term investments, aggregated by type of investment instrument and lengthof time that individual securities have been in a continuous unrealized lossposition, at March 31, 2006 (in thousands):

| ** **            | ** ** | **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 |       | $                                      | 8,994      |                                    |       | $               | (17        | ) |   | $ | — |   |   | $ | — |   |   | $ | 8,994 |   |   | $ | (17 | ) |   |
| Government  agencies  |       | 26,745                                 |       |                                    | (24        | )               |       | 42,890 |   |   | (482 | ) |   | 69,635 |   |   | (506 | ) |   |
| Total                 |       | $                                      | 35,739     |                                    |       | $               | (41        | ) |   | $ | 42,890 |   |   | $ | (482 | ) |   | $ | 78,629 |   |   | $ | (523 | ) |   |

 

Our investment portfolio consists of both corporateand government securities that have a maximum maturity of four years. Thelonger the duration of these securities, the more susceptible they are tochanges in market interest rates and bond yields. As yields increase, thosesecurities 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. We expect to realize the full value of all these investments uponmaturity or sale.

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

| ** **                           | ** ** | **March 31, 2006** | ** ** |
|--------------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **Amortized  Cost**          | ** ** | **Estimated  Fair Value** | ** ** |
| Maturing within 1  year              |       | $                            | 35,780     |   | $ | 35,740 |   |
| Maturing between  1 year and 4 years |       | 45,160                       |       | 44,741 |   |
| Maturing after 4  years              |       | 72,313                       |       | 72,249 |   |
| Total                                |       | $                            | 153,253    |   | $ | 152,730 |   |

 

**Accounts Receivable**

At March 31, 2006,two customers comprised approximately 22% and 13% of the consolidated accountsreceivable balance. For the quarters ended March 31, 2006 and 2005, theCompany did not have any individual customers that comprised more than 10% oftotal revenues.

**Goodwill**

Thechanges in goodwill for the quarter ended March 31, 2006 were as follows(in thousands):

| Balance at  January 1, 2006                                     |   | $     | 80,499 |   |
|----------------------------------------------------------------------|--------|-------|--------|--------|
| Goodwill recorded in connection with The Names  Database acquisition |   | 8,980 |   |
| Balance at  March 31, 2006                                      |   | $     | 89,479 |   |

 

**Accrued Liabilities**

Accruedliabilities consist of the following (in thousands):

| ** **                                  | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Employee  compensation and related expenses |       |                     | $          | 13,428                      |       |   |   | $ | 20,353 |   |   |
| Income taxes  payable                       |       |                     | 7,832      |                        |       |   | 9,769 |   |   |
| Subscriber referral  fees                   |       |                     | 4,281      |                        |       |   | 4,281 |   |   |
| Other                                       |       |                     | 1,624      |                        |       |   | 1,846 |   |   |
| Total                                       |       |                     | $          | 27,165                      |       |   |   | $ | 36,249 |   |   |

 

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**Term Loan and Interest Rate Cap**

In January 2006, theCompany paid, in full, the outstanding balance on the term loan ofapproximately $54.2 million. Effective upon payment of the outstanding balance,the Credit Agreement terminated and is of no further force or effect. Inconnection with the repayment of the term loan in January 2006, theCompany terminated the interest rate cap. During the quarter ended March 31,2006, the Company recognized approximately $1.5 million in deferred financingcosts in connection with the repayment of the term loan.

**4.**   STOCKHOLDERS’EQUITY

*Common Stock Repurchases*

The Company’s Board ofDirectors authorized a common stock repurchase program that allows the Companyto repurchase shares of its common stock through open market or privatelynegotiated transactions based on prevailing market conditions and other factorsthrough December 31, 2006. At March 31, 2006, the Company hadrepurchased $139.2 million of its common stock under the program, leaving $60.8million 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 part of the Board approved repurchase program. Uponvesting, the Company currently does not collect the applicable withholdingtaxes for RSUs from employees. Instead, the Company automatically withholds,from the RSUs that vest, the portion of those shares with a fair market valueequal to the amount of the withholding taxes due. The Company then pays theapplicable withholding taxes in cash, which is accounted for as a repurchase ofcommon stock. In February 2006, approximately 129,000 shares were withheld fromRSUs that vested in order to pay the applicable employee withholding taxes.

***Dividends***

The Company’s Board ofDirectors declared a quarterly dividend of $0.20 per share in February 2006,which was paid on February 28, 2006 and totaled $12.9 million. In April 2006,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 12,2006 and the dividend is payable on May 31, 2006.

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**5.   EARNINGSPER SHARE**

Thefollowing table sets forth the computation of basic and diluted earnings pershare for the quarters ended March 31, 2006 and 2005 (in thousands, exceptper share amounts):

| ** **                                                                                | ** ** | **Quarter Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Numerator:                                                                                |       |                                   |       |   |   |
| Income before  cumulative effect of accounting change                                     |       | $                                      | 11,651     |   | $ | 11,487 |   |
| Cumulative effect  of accounting change, net of tax                                       |       | 1,041                                  |       | — |   |
| Net income                                                                                |       | $                                      | 12,692     |   | $ | 11,487 |   |
| Denominator:                                                                              |       |                                   |       |   |   |
| Weighted average  common shares—basic                                                |       | 62,986                                 |       | 60,868 |   |
| Less: weighted average common shares subject to  repurchase                               |       | (475                                   | )          | (475 | ) |
| Shares used to  calculate basic net income per share                                      |       | 62,511                                 |       | 60,393 |   |
| Add: Dilutive effect of stock options, restricted  stock and employee stock purchase plan |       | 2,378                                  |       | 2,645 |   |
| Shares used to  calculate diluted net income per share                                    |       | 64,889                                 |       | 63,038 |   |
| Basic net income  per share:                                                              |       |                                   |       |   |   |
| Income before cumulative effect of accounting change                                      |       | $                                      | 0.19       |   | $ | 0.19 |   |
| Cumulative effect of accounting change, net of tax                                        |       | 0.01                                   |       | — |   |
| Basic net income  per share                                                               |       | $                                      | 0.20       |   | $ | 0.19 |   |
| Diluted net  income per share:                                                            |       |                                   |       |   |   |
| Income before cumulative effect of accounting change                                      |       | $                                      | 0.18       |   | $ | 0.18 |   |
| Cumulative effect of change in accounting principle,  net of tax                          |       | 0.02                                   |       | — |   |
| Diluted net income per  share                                                             |       | $                                      | 0.20       |   | $ | 0.18 |   |

 

The diluted per sharecomputations exclude stock options, unvested common stock and restricted stockunits, which are antidilutive. The number of antidilutive shares for thequarters ended March 31, 2006 and 2005 was 5.3 million and 7.8million, respectively.

**6.   STOCK-BASEDCOMPENSATION PLANS**

*Stock-BasedCompensation Plans*

The Company has three active equity plans under whichit is authorized to grant stock options, restricted stock awards and RSUs.

Stock options granted to employees generally vest overa three or four-year period. Stock options granted to directors generally vestover a nine-month to three-year period, either monthly or annually. Stockoption grants expire after ten years unless cancelled earlier due totermination of employment or Board service. Certain stock option grants areimmediately exercisable for unvested shares of common stock, with the unvestedportion of the shares remaining subject to repurchase by the Company at theexercise price until the vesting period is complete.

RSUs granted to employees generally vest over afour-year period. RSUs granted to non-employee directors generally vest over aone-year period.

Upon the exercise of astock option award, the vesting of a RSU or the grant of restricted stock,common shares are issued from authorized but unissued shares. At March 31,2006, an aggregate of 27.6 

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millionshares were reserved under the Company’s plans, of which 2.5 million shareswere available for issuance at March 31, 2006.

*Stock-BasedCompensation Recognized*

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,** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|
| ** **                     | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Operating  expenses:           |       |                                   |       |   |   |
| Cost of revenues               |       | $                                      | 237        |   | $ | 25 |   |
| Sales and  marketing           |       | 944                                    |       | 100 |   |
| Product  development           |       | 1,466                                  |       | 63 |   |
| General and  administrative    |       | 2,322                                  |       | 887 |   |
| Total stock-based compensation |       | $                                      | 4,969      |   | $ | 1,075 |   |
| Tax benefit recognized         |       | $                                      | 1,056      |   | $ | 158 |   |

*Stock Options*

Thefair value of each option grant is estimated on the date of grant using theBlack-Scholes option-pricing model, consistent with the provisions of SFAS No. 123Rand SAB No. 107. Because option-pricing models require the use ofsubjective assumptions, changes in these assumptions can materially affect thefair value of the options. The assumptions presented in the table belowrepresent the weighted average of the applicable assumption used to value stockoptions at their grant date. The Company calculates expected volatility basedon historical volatility of the Company’s common stock. The expected term,which represents the period of time that options granted are expected to beoutstanding, is estimated based on historical exercise experience. The Companyevaluated historical exercise behavior when determining the expected termassumptions. The risk-free rate assumed in valuing the options is based on theU.S. Treasury yield curve in effect at the time of grant for the expected termof the option. The Company determines the expected dividend yield percentage bydividing the expected annual dividend by the market price of United Onlinecommon stock at the date of grant.

| ** **                | ** ** | **Quarter Ended  March 31,** | ** ** |
|---------------------------|------------|----------------------------------------|------------|
| ** **                | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Risk-free  interest rate  |       | 4.4                                    | %          | 4.2 | % |
| Expected life (in  years) |       | 3.8                                    |       | 5.0 |   |
| Dividend yield            |       | 6.1                                    | %          | 0.0 | % |
| Volatility                |       | 61.4                                   | %          | 94.8 | % |

 

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Thefollowing table summarizes activity during the quarter ended March 31,2006:

| ** **                           | ** ** | **Options  Outstanding** | ** ** | **Weighted  Average   Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|--------------------------------------|------------|--------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                           | ** ** | **(in thousands)**  | ** ** | ** **                                       | ** ** | **(in years)**                                     | ** ** | **(in thousands)**             | ** ** |
| Outstanding at  January 1, 2006 |       |                     | 11,628     |                                             |       |                                                    | $          | 13.31                               |       |   |   |   |   |   |   |   |   |   |
| Granted                              |       |                     | 138        |                                             |       |                                                    | 13.31      |                                |       |   |   |   |   |   |   |   |   |
| Exercised                            |       |                     | (670       | )                                                |       |                                                    | 3.91       |                                |       |   |   |   |   |   |   |   |   |
| Cancelled                            |       |                     | (75        | )                                                |       |                                                    | 11.27      |                                |       |   |   |   |   |   |   |   |   |
| Outstanding at  March 31, 2006  |       |                     | 11,021     |                                             |       |                                                    | 13.90      |                                |       |   | 6.70 |   |   |   | $ | 34,515 |   |   |
| Exercisable at  March 31, 2006  |       |                     | 9,098      |                                             |       |                                                    | 14.49      |                                |       |   | 6.21 |   |   |   | 30,760 |   |   |
|                                      |            |                          |            |                                                  |            |                                                         |            |                                     |            |  |  |  |  |  |  |  |  |  |  |

 

Total unrecognized compensation cost related tounvested stock options at March 31, 2006, prior to the consideration ofexpected forfeitures, is approximately $8.5 million and is expected to berecognized over a weighted-average period of 1.1 years.

The weighted average grantdate fair value of stock options granted during the three months ended March 31,2006 and 2005 was $4.65 and $7.84, respectively. The total intrinsic value ofoptions exercised during the three months ended March 31, 2006 and 2005was $5.8 million and $7.6 million, respectively. Cash received from theexercise of stock options was $2.6 million and $1.8 million, respectively, forthe three months ended March 31, 2006 and 2005. The tax benefits realizedfrom stock options exercised in the three months ended March 31, 2006 and2005 were approximately $1.7 million and $2.1 million, respectively.

*Restricted Stockand Restricted Stock Units*

At January 1, 2006, 475,000 restricted shares ofcommon stock with a weighted average grant date fair value of $19.91 wereoutstanding. The shares vest entirely at the end of a four-year vesting periodin January 2008.

Thefollowing table summarizes activity for RSUs during the quarter ended March 31,2006:

| ** **                           | ** ** | **RSUs  Outstanding**   | ** ** | **Weighted  Average Grant  Date Fair Value** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-------------------------------------------------------------|------------|
| ** **                           | ** ** | **(in thousands)** | ** ** | ** **                                                  | ** ** |
| Outstanding at  January 1, 2006 |       |                    | 1,642      |                                                        |       |   | $ | 10.78 |   |   |
| Granted                              |       |                    | 998        |                                                        |       |   | 12.79 |   |   |
| Vested                               |       |                    | (380       | )                                                           |       |   | 10.37 |   |   |
| Cancelled                            |       |                    | (81        | )                                                           |       |   | 10.60 |   |   |
| Outstanding at  March 31, 2006  |       |                    | 2,179      |                                                        |       |   | $ | 11.78 |   |   |

 

For the three months ended March 31, 2006, theCompany issued approximately 1.0 million RSUs at a weighted-average grant datefair value of $12.79. For the three months ended March 31, 2005, the Companyissued approximately 1.4 million RSUs at a weighted-average grant date fairvalue of $10.55. At March 31, 2006, the intrinsic value of outstanding restrictedstock and RSUs was approximately $34.1 million. Total unrecognized compensationcost related to unvested restricted stock and RSUs at March 31, 2006 priorto the consideration of expected forfeitures is approximately $26.1 million andis expected to be 

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recognizedover a weighted-average period of 1.5 years. The fair value of RSUs that vestedduring the three months ended March 31, 2006 was approximately $4.6million.

*Employee StockPurchase Plan*

The Company has a 2001 Employee Stock Purchase Plan (“ESPP”),which expires in the year 2011, and under which approximately 5.8 millionshares of the Company’s common stock were reserved under the plan at March 31,2006. At March 31, 2006, 3.2 million shares were available for issuance.Under the ESPP, each eligible employee may authorize payroll deductions of upto 15% of their compensation to purchase shares of common stock on two “purchasedates” each year at a purchase price per share equal to 85% of the lower of (i) theclosing selling price per share of common stock on the employee’s entry dateinto the two-year offering period in which the purchase date occurs or (ii) theclosing selling price per share on the purchase date. Each offering period hasa twenty-four month duration and purchase intervals of six months.

Thefair value of ESPP shares was estimated using the Black-Scholes option pricingmodel with the following weighted average assumptions:

| ** **                | ** ** | **Quarter Ended  March 31,  2006** | ** ** |
|---------------------------|------------|----------------------------------------------|------------|
| Risk-free  interest rate  |       |                                         | 3.5%       |   |   |
| Expected life (in  years) |       |                                         | 0.5-2.0    |   |   |
| Dividend yield            |       |                                         | 9.0%       |   |   |
| Volatility                |       |                                         | 55.0%      |   |   |

 

The assumptions presented in the table above representthe weighted average of the applicable assumptions used to value ESPP shares.The Company calculates expected volatility based on historical volatility ofthe Company’s common stock. The expected term represents the amount of timeremaining in the 24-month offering period. The risk-free rate assumed invaluing the ESPP shares is based on the U.S. Treasury yield curve in effect atthe time of grant for the expected term. The Company determines the expecteddividend yield percentage by dividing the expected annual dividend by themarket price of United Online common stock at the date of grant.

For the quarters ended March 31,2006 and 2005, the Company recognized approximately $0.6 million and $0,respectively, of stock-based compensation expense related to the employee stockpurchase plan. Total unrecognized compensation cost related to the ESPP atMarch 31, 2006 is approximately $1.0 million and is expected to be recognizedover a weighted-average period of 0.6 years.

*Tender Offer*

In February 2006, theCompany announced its intention to offer eligible employees of the Company theopportunity to exchange any outstanding stock options granted to them whichhave an exercise price per share of the Company’s common stock at or above$16.00 (the “Eligible Options”) in return for RSUs. The number of RSUs thatwill be issued in exchange for each tendered Eligible Option will be based onthe per share exercise price of that option and will, in all events, be lessthan the number of shares subject to the tendered option. Eligible options withexercise prices between $16.00 and $20.00 will be exchanged based on a ratio ofone RSU for four eligible options. Eligible options with exercise pricesgreater than $20.00 will be exchanged based on a ratio of one RSU for five eligibleoptions. The exchange offer expired in April 2006, and approximately 1.8million shares of common stock underlying Eligible Options were exchanged forRSUs covering approximately 0.4 million shares of common stock in exchange forthe cancellation of the Eligible Options. The exchange will be accounted for asa modification under SFAS No. 123R in the June 2006 quarter.

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**7.   SEGMENTINFORMATION**

The Company complies with the reporting requirementsof SFAS No. 131, *Disclosures about Segments of an Enterpriseand Related Information*. Historically, the Company operated in oneprincipal operating segment, a provider of consumer Internet subscriptionservices through a number of brands, including NetZero, Juno, and Classmates.Effective in the March 2006 quarter, the Company is operating in two reportablesegments: Communications—consisting of its Internet access, email and VoIP services;and Content & Media—consisting of its social-networking, Web-hosting andphoto-sharing services. Unallocated corporate expenses are centrally managed atthe corporate level and consist of corporate-related expenses, depreciation,amortization of intangible assets and stock-based compensation. The Company hasrestated the prior periods to reflect the change in the composition of thereportable segments. Management has determined that segment income fromoperations, which excludes corporate expenses, depreciation, amortization of intangibleassets and stock-based compensation, is the appropriate measure for assessingperformance of its segments and for allocating resources among its segments.

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

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

 

| ** **                      | ** ** | **Quarter Ended March 31, 2005** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|
| ** **                      | ** ** | **Communications**                                   | ** ** | **Content & Media** | ** ** | **Total** | ** ** |
| Billable services               |       |                                                 | $          | 101,156 |   |   |   | $ | 15,072 |   |   | $ | 116,228 |   |
| Advertising                     |       |                                                 | 8,859      |   |   |   | 5,444 |   |   | 14,303 |   |
| Total revenues                  |       |                                                 | $          | 110,015 |   |   |   | $ | 20,516 |   |   | $ | 130,531 |   |
| Segment income from  operations |       |                                                 | $          | 32,821 |   |   |   | $ | 3,195 |   |   | $ | 36,016 |   |

 

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,** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Total segment  income from operations |       | $                                      | 39,762     |   | $ | 36,016 |   |
| Corporate expenses                    |       | (5,125                                 | )          | (4,504 | ) |
| Depreciation                          |       | (4,707                                 | )          | (3,474 | ) |
| Amortization of intangible assets     |       | (4,389                                 | )          | (5,978 | ) |
| Stock-based compensation              |       | (4,969                                 | )          | (1,075 | ) |
| Consolidated operating  income        |       | $                                      | 20,572     |   | $ | 20,985 |   |

 

Pursuant to SFAS No. 131,total segment assets have not been disclosed as this information is notreported to, or used by, the chief operating decision maker. The vast majorityof the Company’s revenues and related results of operations and identifiableassets are in the United States of America. The Company’s $89.5 million ofgoodwill is allocated entirely to the Content & Media segment.

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**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 theunderwriters agreed to allocate NetZero shares to those customers in theoffering in exchange for which the customers agreed to purchase additionalNetZero shares in the aftermarket at pre-determined prices. Plaintiffs areseeking injunctive relief and damages. Additional lawsuits setting forthsubstantially similar allegations were also served against NetZero on behalf ofadditional plaintiffs in April and May 2001. The case against NetZerowas consolidated with approximately 300 other suits filed against more than 300issuers that conducted their initial public offerings between 1998 and 2000,their underwriters and an unspecified number of their individual corporateofficers and directors. In a court order dated February 15, 2005, theDistrict Court granted preliminary approval of the issuer defendants’ proposedsettlement. On June 30, 2005, the United States Court of Appeals for theSecond Circuit granted the underwriter defendants’ petition for permission toappeal the District Court’s order granting plaintiffs’ motion for classcertification. A hearing on the settlement was held on April 24, 2006, andthe parties are awaiting the court’s ruling on the motion for final approval ofthe settlement.

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 asa result of Juno’s conduct in connection with the subscriber referralagreement. In addition, a dispute arose between Juno and UUNET Technologies, Inc.,an affiliate of MCI WorldCom Network Services, Inc., regarding the valueof services provided by UUNET, with UUNET claiming in excess of $1.0 millionand Juno claiming less than $0.3 million. On April 25, 2003, Juno, theCommittee of Unsecured Creditors, WorldCom and UUNET (allegedly the largestsecured creditor) entered into a Stipulation of Settlement, which provided forthe payment by Juno of $5.5 million in final settlement of all claims againstJuno. On September 11, 2003, the court issued an order approving theStipulation of Settlement. On September 12, 2005, the Second Circuit Courtof Appeals vacated the judgment of the bankruptcy court and remanded the caseto the bankruptcy court. Discovery in the adversary proceeding in thebankruptcy court has commenced. No trial date has been set. At March 31,2006, the Company had liabilities recorded of approximately $5.5 million inrespect of this matter.

On April 27, 2004, plaintiff MyMail Ltd. filed alawsuit in the United States District Court for the Eastern District of Texasagainst NetZero, Juno, NetBrands, America Online, Inc., AT&T,EarthLink, Inc., SBC Communications, Inc., and Verizon Communications, Inc.alleging infringement of plaintiff’s patent which purports to cover user accessto a computer network. On October 28, 2005, the court issued an ordergranting defendants’ motions for summary judgment of non-infringement of thepatent. MyMail has filed a notice of appeal of the trial court’s ruling. Thehearing date for the appeal has not been set.

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On March 6, 2006 plaintiff Anthony Piercy filed apurported 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. NetZero has not yet filed or served its formal response to thecomplaint.

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 the Company does not believe the outcomeof the above outstanding legal proceedings, claims and litigation will have amaterial adverse effect on its business, financial position, results ofoperations or cash flows, the results of litigation are inherently uncertainand the Company can provide no assurance that it will not be materially andadversely impacted by the results of such proceedings. The Company hasestablished a reserve for the Freewwweb matter discussed above and such reserveis reflected in the consolidated financial statements. There can be noassurance, however, that any of the reserves that have been established foroutstanding litigation are sufficient to cover the possible losses from suchlitigation.

The Company is subject tovarious other legal proceedings and claims that arise in the ordinary course ofbusiness. Management believes the amount and ultimate liability, if any, withrespect to these actions will not materially affect the Company’s business,financial position, results of operations or cash flows. There can be noassurance, however, that such actions will not be material or adversely affectthe Company’s business, financial position, results of operations or cashflows.

**9.**   SUBSEQUENTEVENT

On April 10, 2006, the Company acquired MyPoints.com,Inc., a leading provider of online loyalty marketing services, for $56.0million in cash. MyPoints offers advertisers and retailers direct marketingsolutions such as rewards-based Web shopping, targeted emails based onself-reported and behavioral data, and online surveys that pre-qualify itsmembers for targeted offers. MyPoints members are rewarded with points forclicking or shopping through MyPoints’ emails, for shopping through theMyPoints’ Web site, and for completing surveys. The points are then redeemablefor gift cards and other benefits with various partners.

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

**Overview**

We are a leading provider of consumer Internet andmedia services through a number of brands, including NetZero, Juno, Classmatesand MyPoints. Our Communications services include Internet access, email,Internet security and VoIP. Our Content & Media services includesocial networking, Web hosting, photo sharing and online loyalty marketing. Ona combined basis, our Web properties attract a significant number of Internetusers each month and we offer marketers a broad array of Internet advertisingproducts as well as online market research and measurement services.

On April 10, 2006, weacquired MyPoints, a leading provider of online loyalty marketing services, for$56.0 million in cash. We intend to report MyPoints within our Content &Media segment beginning in the June 2006 quarter.

**Segment Definitions**

Commencingin the March 2006 quarter, we are reporting our businesses in tworeportable segments:
| Segment                  | ** ** | ** **                                                                                                              | ** ** | **Internet Services** |
|--------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|
| Communications           |       | Internet access, email,  Internet security, family services and VoIP.                                                   |
| Content & Media |       | Social  networking, Web hosting, photo sharing and, beginning in the June 2006  quarter, online loyalty marketing. |

 

**Consumer Brands andServices**

***Communications***

We offer a variety of Communications-based services,both free of charge and subscription-based, under a number of brands,which include the following:

*InternetAccess:*   NetZero,Juno and BlueLight;

*VoIP:*   NetZero Voiceand NetZero FreeVoice;

*Email:**  *NetZeroMegaMail and Juno MegaMail; and

*Other Services:**  *NetZeroFamily Pack, Juno Family Pack and Norton Internet Security.

*Internet Access*

Our basic pay accessservices include Internet access and an email account and are offered throughvarious pricing plans, generally $9.95 per month. We also offer acceleratedaccess services which are bundled with additional benefits such as pop-upblocking, antivirus software, enhanced email storage and VoIP telephonycapabilities, generally for $14.95 per month. Our accelerated access servicesutilize technologies to reduce the time for certain Web pages to downloadto users’ computers when compared to our basic access services. We generallyoffer discounted pricing on our monthly access rates for subscribers that makeextended service commitments. NetZero and Juno also offer free access serviceswhich differ from their respective pay access services in that the hourly andcertain other limitations are set for the free services. In addition, the freeaccess services incorporate certain advertising initiatives, including apersistent advertising banner, not present on the pay services. Our accessservices are available in more than 9,000 cities across the United States andCanada.

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*VoIP*

NetZero Voice, a VoIPtelephony service, provides local and long distance calling over dial-up andbroadband Internet connections. We offer a free version of our VoIP service,NetZero FreeVoice, which enables users to make unlimited computer-to-computercalls and instant text message one another at no charge and includes a freevoicemail account integrated with email into one convenient message center. Ourpay VoIP service plans have all of the features of the free service and weoffer pricing plans at $3.95 and $14.95 per month which include a dedicatedphone number with unlimited inbound minutes and either 100 or unlimited monthlyoutbound minutes to the publicly switched telephone network (PSTN) within the U.S.,Canada and Puerto Rico. We also offer a “pay as you go” plan where PSTNcalling minutes can be purchased in $5, $10, $25 and $50 increments for aslittle as $0.02 per minute. In addition, NetZero Voice offers internationalPSTN calling at attractively priced rates per minute and a number of otherfeatures such as call forwarding.

*Email*

We offer free Web-basedemail services, including up to one gigabyte of storage, anti-spam protection,address book importing, photo viewing and more. NetZero and Juno offer premiumemail services under the MegaMail brand with expanded features and storagecapabilities through various pricing plans, generally $9.95 per year.

*Other Services*

The Family Pack bundlestogether leading third-party produced family-oriented Internet services and isoffered to subscribers for $4.95 per month. Our accelerated access servicesinclude Norton’s antivirus service free of charge and members can upgrade to amore complete Norton Internet Security package that includes antispyware,parental controls and other features for an additional $1.95 per month.

***Content& Media***

We offer a variety of Content & Media products andservices, both free of charge and subscription-based, under a number ofbrands, which include the following:

*SocialNetworking:**  *Classmates, StayFriends, TheNames Database and Klassträffen; 

*WebHosting:**  *FreeServers, 50megs,Bizhosting and Global Servers;

*OnlinePhotos:**  *PhotoSite; and

*Online Loyalty Marketing:*   MyPoints(as of April 2006).

*Social Networking*

Connecting millions ofusers primarily across the United States and, to a lesser extent, Germany,Sweden, Canada and other major English-speaking countries, including the UnitedKingdom and India, our social-networking services allow members to stay intouch with people from their past. Membership in our social-networking servicesis free and allows users to post a personal profile, access and search ourdatabase of other registered members within personally relevant onlinecommunities from school, work and the military. In addition to features of ourfree social-networking services, our pay services also enable subscribers tocommunicate with other members and are offered through various pricing plans,generally $39.00 per year or $15.00 for three months in the U.S. Our social-networkingproperties also contain advertising initiatives throughout their Web sites.

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*Web Hosting*

Our Web-hosting services,which include domain name registration services, are offered through variouspricing plans, generally from $1.99 to $9.99 per month. A limited,advertising-supported version of the service is offered free of charge.

*Online Photos*

PhotoSite is an onlinedigital photo-sharing service, which enables users to display photos, orderprints and create custom photo albums, Web logs and full computer screenslideshows on their own personal photo Web site. With PhotoSite, users cancatalog and store digital photos by subject matter, allowing convenientsearches of photos by other users. Prices for subscription services range from$1.99 per month to $4.99 per month and a limited version of the service isoffered free of charge.

*Online LoyaltyMarketing*

In April 2006, we acquiredMyPoints.com, Inc. MyPoints offers advertisers and retailers direct marketingsolutions such as rewards-based Web shopping, targeted emails based onself-reported and behavioral data, and online surveys that pre-qualify itsmembers for targeted offers. MyPoints members are rewarded with points forclicking or shopping through MyPoints’ emails, for shopping through the MyPoints’Web site, and for completing surveys. The points are then redeemable for giftcards and other benefits with various partners.

**Account Metrics**

AtMarch 31, 2006, we had approximately 5.1 million pay accounts and approximately18.7 million active accounts. A pay account represents a unique billingrelationship with a customer who subscribes to one or more of our pay services.“Active” accounts include total pay accounts as well as free users who havelogged onto our access, social-networking, email or VoIP services during thepreceding 31 days. Active accounts also include those free hosted Websites that have received at least one visit during the preceding 90 daysand the number of free photo-sharing users that logged on to the service at leastonce within the preceding 90 days. The following table sets forth (inthousands), for the periods presented, an analysis of our pay accounts. 

| ** **            | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** | **September 30,  2005** | ** ** | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** |
|-----------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|--------------------------|------------|
| Communications:       |       |                     |       |                        |       |                         |       |                    |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Access                |       |                     | 2,751      |                        |       |                         | 2,855      |                    |       |                     | 2,980      |   |   |   | 3,078 |   |   |   | 3,130 |   |   |
| Other                 |       |                     | 321        |                        |       |                         | 313        |                    |       |                     | 301        |   |   |   | 286 |   |   |   | 259 |   |   |
| Total                 |       |                     | 3,072      |                        |       |                         | 3,168      |                    |       |                     | 3,281      |   |   |   | 3,364 |   |   |   | 3,389 |   |   |
| Content &  Media: |       |                     |       |                        |       |                         |       |                    |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Social networking     |       |                     | 1,945      |                        |       |                         | 1,766      |                    |       |                     | 1,686      |   |   |   | 1,599 |   |   |   | 1,505 |   |   |
| Other                 |       |                     | 76         |                        |       |                         | 75         |                    |       |                     | 73         |   |   |   | 70 |   |   |   | 58 |   |   |
| Total                 |       |                     | 2,021      |                        |       |                         | 1,841      |                    |       |                     | 1,759      |   |   |   | 1,669 |   |   |   | 1,563 |   |   |
| Total pay  accounts   |       |                     | 5,093      |                        |       |                         | 5,009      |                    |       |                     | 5,040      |   |   |   | 5,033 |   |   |   | 4,952 |   |   |

 

In general, we count andtrack pay accounts and free accounts by unique member identifiers. Users havethe ability to register for separate services under separate brands and memberidentifiers independently. We do not track whether a pay account has purchasedmore than one of our services unless the account uses the same member identifier.As a result, total active free accounts may not represent unique free users. Inaddition, a free Web-hosting account is determined to be active if there was avisit to 

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the siteduring the preceding 90 days, and it may be that the creator of the siteno longer maintains or updates the site. As such, a free Web-hosting accountmay not represent an ongoing relationship with the person who set up theaccount. At any point in time, our pay account base includes a number ofaccounts receiving a free period of service as either a promotion or retentiontool, a number of accounts that have notified us that they are terminatingtheir service but whose service is still in effect and may also include a fewthousand internal test accounts. 

**Results ofOperations**

The followingtables sets forth (with dollars in thousands), for the periods presented,selected historical statements of operations data. The information contained inthe tables below should be read in conjunction with Liquidity and CapitalResources and Financial Commitments included in this Item 2 as well as theconsolidated financial statements and notes thereto included elsewhere in thisQuarterly Report on Form 10-Q.

| ** **                                            | ** ** | **Quarter Ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Billable services                                     |       | $                                      | 111,156    |   | $ | 116,228 |   |
| Advertising                                           |       | 16,176                                 |       | 14,303 |   |
| Total revenues                                        |       | 127,332                                |       | 130,531 |   |
| Operating  expenses:                                  |       |                                   |       |   |   |
| Cost of revenues                                      |       | 29,890                                 |       | 27,779 |   |
| Sales and marketing                                   |       | 43,419                                 |       | 54,083 |   |
| Product development                                   |       | 12,816                                 |       | 9,106 |   |
| General and administrative                            |       | 16,246                                 |       | 12,600 |   |
| Amortization of intangible assets                     |       | 4,389                                  |       | 5,978 |   |
| Total operating expenses                              |       | 106,760                                |       | 109,546 |   |
| Operating income                                      |       | 20,572                                 |       | 20,985 |   |
| Interest and  other income, net                       |       | 1,716                                  |       | 1,417 |   |
| Interest expense                                      |       | (1,716                                 | )          | (2,002 | ) |
| Income before  income taxes                           |       | 20,572                                 |       | 20,400 |   |
| Provision for  income taxes                           |       | 8,921                                  |       | 8,913 |   |
| Income before  cumulative effect of accounting change |       | 11,651                                 |       | 11,487 |   |
| Cumulative effect  of accounting change, net of tax   |       | 1,041                                  |       | — |   |
| Net income                                            |       | $                                      | 12,692     |   | $ | 11,487 |   |

 

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Informationfor our two key segments is as follows:

| ** **                      | ** ** | **Communications**                         | ** ** | **Content & Media**          | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                      | ** ** | **Quarter Ended March 31,** | ** ** | **Quarter Ended March 31,** | ** ** |
| ** **                      | ** ** | **2006**                                   | ** ** | **2005**                                   | ** ** | **     2006     ** | ** ** | **     2005     ** | ** ** |
| Billable services               |       | $                                          | 90,659     |                                       | $          | 101,156 |   |   | $ | 20,497 |   |   |   | $ | 15,072 |   |   |
| Advertising                     |       | 9,683                                      |       | 8,859                                      |       |   | 6,493 |   |   |   | 5,444 |   |   |
| Total revenues                  |       | 100,342                                    |       | 110,015                                    |       |   | 26,990 |   |   |   | 20,516 |   |   |
| Operating  expenses:            |       |                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Cost of revenues                |       | 24,063                                     |       | 22,598                                     |       |   | 3,152 |   |   |   | 3,097 |   |   |
| Sales and marketing             |       | 30,285                                     |       | 43,851                                     |       |   | 12,130 |   |   |   | 10,078 |   |   |
| Product development             |       | 7,918                                      |       | 7,029                                      |       |   | 2,413 |   |   |   | 1,448 |   |   |
| General and administrative      |       | 4,608                                      |       | 3,716                                      |       |   | 3,001 |   |   |   | 2,698 |   |   |
| Total operating expenses        |       | 66,874                                     |       | 77,194                                     |       |   | 20,696 |   |   |   | 17,321 |   |   |
| Segment income  from operations |       | $                                          | 33,468     |                                       | $          | 32,821 |   |   | $ | 6,294 |   |   |   | $ | 3,195 |   |   |

 

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,** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Segment income from  operations:      |       |                                   |       |   |   |
| Communications                        |       | $                                      | 33,468     |   | $ | 32,821 |   |
| Content & Media              |       | 6,294                                  |       | 3,195 |   |
| Total segment  income from operations |       | 39,762                                 |       | 36,016 |   |
| Corporate expenses                    |       | (5,125                                 | )          | (4,504 | ) |
| Depreciation                          |       | (4,707                                 | )          | (3,474 | ) |
| Amortization of intangible assets     |       | (4,389                                 | )          | (5,978 | ) |
| Stock-based compensation              |       | (4,969                                 | )          | (1,075 | ) |
| Consolidated operating  income        |       | $                                      | 20,572     |   | $ | 20,985 |   |

 

**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 averagecalculated based on the number of pay accounts at the beginning and end of aperiod. ARPU is calculated by dividing billable services revenues for a periodby the average number of pay accounts for that period. ARPU may fluctuate fromperiod to period as a result of a variety of factors including changes in themix of pay subscriptions and their related pricing plans; the use ofpromotions, such as one or more free months of service, and discounted pricingplans to obtain or retain subscribers; increases or decreases in the price ofour services; the number of services subscribed to by each pay account; pricingand success of new pay services and the penetration of these types of servicesas a percentage of total pay accounts; and the timing of pay accounts beingadded or removed during a period.

*ConsolidatedBillable Services Revenues.*   Consolidatedbillable services revenues decreased by $5.1 million, or 4%, to $111.2 millionfor the quarter ended March 31, 2006, compared to $116.2 million for the 

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quarter ended March 31,2005. 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. Billable servicesrevenues from our Communications segment and from our Content & Mediasegment constituted 81.6% and 18.4%, respectively, of our consolidated billableservices revenues for the quarter ended March 31, 2006, compared to 87.0% and13.0%, respectively, for the quarter ended March 31, 2005. We anticipate thatthe decline in our billable services revenues will continue as the anticipatedgrowth in Content & Media billable services revenues will be insufficientto offset the declines in Communications billable services revenues. 

*CommunicationsBillable Services Revenues.***  **Communicationsbillable services revenues consist of fees charged to pay accounts for access,email, Internet security, antivirus and VoIP services, with substantially allfrom access. Communications billable services revenues decreased by $10.5million, or 10%, to $90.7 million for the quarter ended March 31, 2006,compared to $101.2 million for the quarter ended March 31, 2005. Thedecrease in billable services revenues was due to a 7% decrease in our averagenumber of pay accounts from 3,346,000 for the quarter ended March 31, 2005 to 3,120,000for the quarter ended March 31, 2006. The decrease is attributable to adecreased number of access accounts. Additionally, Communications billableservices revenues decreased due to a 4% decrease in ARPU from $10.08 for thequarter ended March 31, 2005 to $9.69 for the quarter ended March 31, 2006. Thedecrease in ARPU is primarily attributable to a decline in ARPU for our accessservices due to increased use of free months of service and promotional pricingto obtain or retain pay access accounts. We anticipate that the average numberof Communications pay accounts will continue to decline due to decreases inaccess accounts, and that the rate of decline in access accounts willaccelerate in the June 2006 quarter. We also anticipate further declines inARPU primarily as a result of discounted prices for extended servicecommitments on our access services, including providing our $14.95 acceleratedaccess services at $9.95 for a one year commitment. As a result of thesefactors, the rate of decline in Communications billable services revenues hasbeen increasing and will continue to increase, at least in the near term.

*Content & MediaBillable Services Revenues.***  **Content& Media billable services revenues consist of fees charged to pay accountsfor social-networking, Web-hosting and online photo-sharing services, with thevast majority related to social-networking accounts. Content & Mediabillable services revenues increased by $5.4 million, or 36%, to$20.5 million for the quarter ended March 31, 2006, compared to$15.1 million for the quarter ended March 31, 2005. The increase inContent & Media billable services revenues was due to a 25% increase in ouraverage number of pay accounts from 1,542,000 for the quarter ended March 31,2005 to 1,931,000 for the quarter ended March 31, 2006. Substantially all ofthis increase was associated with growth in our social-networking pay accountsprimarily as a result of organic growth and, to a lesser extent, theacquisition of pay accounts associated with the Names Database business inMarch 2006, which had approximately 58,000 pay accounts at the time of theacquisition. Billable services revenues from other Content & Media servicesremained relatively flat. Additionally, Content & Media billable services revenuesincreased due to a 9% increase in ARPU from $3.26 for the quarter ended March31, 2005 to $3.54 for the quarter ended March 31, 2006. The increase in ARPU isprimarily attributable to an increase in ARPU for our social-networkingservices due to a greater percentage of those pay accounts represented byhigher-priced, shorter-term pay service plans. We anticipate that Content &Media billable services revenues will continue to grow primarily as a result ofincreased social-networking pay accounts.

*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. Factors impacting our advertising revenuesgenerally include changes in orders from 

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significant customers, theperformance of our online marketing initiatives, the state of the online searchand advertising markets, seasonality, increases or decreases in our activeaccounts, and increases or decreases in advertising inventory available forsale. 

*ConsolidatedAdvertising Revenues.*   Consolidated advertisingrevenues increased by $1.9 million, or 13%, to $16.2 million for the quarterended March 31, 2006, compared to $14.3 million for the quarter ended March 31,2005. The increase was primarily attributable to increases in advertisingrevenues in our Content & Media segment and, to a lesser extent, ourCommunications segment. Advertising revenues from our Communications segmentand from our Content & Media segment constituted 59.9% and 40.1%,respectively, of our consolidated advertising revenues for the quarter endedMarch 31, 2006, compared to 61.9% and 38.1%, respectively, for the quarterended March 31, 2005.

*CommunicationsAdvertising Revenues.*   Communications advertisingrevenues increased by $0.8 million, or 9%, to $9.7 million for thequarter ended March 31, 2006, from $8.9 million for the quarter endedMarch 31, 2005. The increase was primarily attributable to improved pricing foradvertising inventory, partially offset by a decline in advertising inventoryand a decrease in revenue-related search queries due to a decline in our activeaccess accounts.

*Content & MediaAdvertising Revenues.***  **Content &Media advertising revenues increased by $1.1 million, or 19%, to $6.5 millionfor the quarter ended March 31, 2006, compared to $5.4 million for thequarter ended March 31, 2005. The increase was related to an increase inadvertising revenues generated from our social-networking services as a resultof improved pricing for our advertising inventory and increased inventoryprimarily due to growth in our active accounts, offset partially by a decreasein advertising revenues generated from our Web-hosting services. We expect asignificant increase in Content & Media advertising revenues in theJune 2006 quarter as a result of the acquisition of MyPoints.

***Cost ofRevenues***

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;and domain name registration fees. The majority of the costs that comprise ourCommunications cost of revenues are variable. As such, our Communications costof revenues as a percentage of revenues is highly dependent on our ARPU, ouraverage hourly telecommunications cost and usage, and our average customerbilling and support costs per pay account. Although the costs that comprise ourContent & Media cost of revenues are currently relatively fixed, as aresult of the acquisition of MyPoints, our Content & Media cost ofrevenues will become increasingly variable and such costs will increasesignificantly as a percentage of revenues.

*ConsolidatedCost of Revenues.*   Consolidated cost of revenuesincreased by $2.1 million, or 7.6%, to $29.9 million for the quarter endedMarch 31, 2006, compared to $27.8 million for the quarter endedMarch 31, 2005. The increase was primarily due to increased costs associatedwith our Communications segment as well as a $0.4 million increase indepreciation and a $0.2 million increase in stock-based compensation inconnection with the issuance of restricted stock units to employees and theadoption of Statement of Financial Accounting Standards (“SFAS”) No. 123R,*Share-Based Payment*, in theMarch 2006 quarter. Cost of revenues for our Communications segment andfor our Content & Media segment constituted 88.4% and 11.6%,respectively, of our total segment cost of revenues for the quarter endedMarch 31, 2006, compared to 87.9% and 12.1%, respectively, for the quarterended March 31, 2005.

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*CommunicationsCost of Revenues.*   Communications cost ofrevenues increased by $1.5 million, or 6%, to $24.1 million for the quarterended March 31, 2006, compared to $22.6 million for the quarter endedMarch 31, 2005. The increase was primarily due to $1.6 million in costsassociated with our VoIP service and a $1.1 million increase in networkpersonnel and overhead-related costs. These increases were partially offset bya $0.8 million decrease in telecommunications costs and a $0.4 million decreasein customer support and billing-related costs as a result of a decrease in thenumber of pay accounts. Telecommunications costs decreased as a result of adecrease in the average number of pay accounts, offset by an increase inaverage monthly usage per pay access account and a slight increase in averagehourly telecommunications costs. As a percentage of Communications revenues,Communications cost of revenues increased to 24.0% in the quarter endedMarch 31, 2006, compared to 20.5% in the quarter ended March 31,2005, primarily as a result of decreases in ARPU for our access servicescombined with the increased costs discussed above. We anticipate thatCommunications cost of revenues as a percentage of Communications revenues willcontinue to increase as a result of anticipated declines in ARPU forCommunications accounts.

*Content & MediaCost of Revenues.***  **Content &Media cost of revenues increased by $0.1 million, or 1.8%, to $3.2 millionfor the quarter ended March 31, 2006, compared to $3.1 million for thequarter ended March 31, 2005. The increase was related to increased costsassociated with our Web-hosting services. As a percentage of Content &Media revenues, Content & Media cost of revenues decreased to 11.7% inthe quarter ended March 31, 2006, compared to 15.1% in the quarter ended March 31,2005. The costs that comprise our Content & Media cost of revenues arerelatively fixed. As such, the decrease resulted primarily from an increase inContent & Media revenues.

***Salesand 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 salesand marketing expenses decreased by $10.7 million, or 19.7%, to $43.4 millionfor the quarter ended March 31, 2006, compared to $54.1 million for thequarter ended March 31, 2005. The decrease is primarily attributable to asignificant reduction in marketing expenses related to our Communicationssegment, partially offset by an increase in marketing expenses related to ourContent & Media segment and a $0.8 million increase in stock-basedcompensation in connection with the issuance of restricted stock units toemployees and the adoption of SFAS No. 123R in the March 2006quarter. Sales and marketing expenses related to our Communications segment andour Content & Media segment constituted 71.4% and 28.6%, respectively,of total segment sales and marketing expenses for the quarter ended March 31,2006 versus 81.3% and 18.7%, respectively, for the quarter ended March 31,2005.

*CommunicationsSales and Marketing Expenses.*   Communicationssales and marketing expenses decreased by $13.6 million, or 30.9%, to$30.3 million for the quarter ended March 31, 2006, compared to $43.9million for the quarter ended March 31, 2005. This decrease isattributable to a $14.9 million decline in advertising, promotion anddistribution costs related to our access services, of which $12.2 million wasdue to reductions in media and advertising costs, $1.9 million was due todecreased telemarketing expenses, and $0.7 million was due to reducedperformance fees paid to distribution partners. These decreases were partiallyoffset by a $0.8 million increase in VoIP marketing expenses and a $0.5 million

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increase in Communicationsoverhead and personnel expenses. Sales and marketing expenses as a percentageof Communications revenues declined to 30.2% in the quarter endedMarch 31, 2006 from 39.9% in the quarter ended March 31, 2005. Whileour advertising and media costs continue to represent the majority of oursegment marketing expenses, decreases in media and advertising costs hasincreased our reliance on distribution arrangements which are relatively moredifficult to change or replace and which we believe are currently the mostefficient means to acquire new pay accounts. As such, our flexibility to manageour marketing expenses without significantly impacting our ability to obtainnew pay accounts may be adversely impacted going forward. We believe decreasedmarketing expenses for access services has adversely affected the number of ourpay access accounts. We currently are budgeting further reductions in accessmarketing expenses, particularly access media and advertising expenses, whichwill likely adversely affect our ability to manage our marketing expenses andthe number of our pay access accounts going forward. If the impact to payaccounts is greater than anticipated, we may increase our marketing expenses,which would adversely impact our profitability.

*Content & Media Salesand Marketing Expenses.*   Content & Mediasales and marketing expenses increased by $2.1 million, or 20.4%, to $12.1million for the quarter ended March 31, 2006, compared to $10.1 millionfor the quarter ended March 31, 2005. The increase was the result of a$1.2 million increase in personnel and overhead-related expenses and a $0.8million increase in marketing, promotion and distribution costs related toacquiring and retaining accounts, particularly social-networking accounts. Thevast majority of non-personnel Content & Media marketing expenses areassociated with performance-based distribution arrangements. As a result of therate of growth in Content & Media revenues, sales and marketingexpenses as a percentage of Content & Media revenues declined to 44.9%in the quarter ended March 31, 2006 from 49.1% in the quarter ended March 31,2005. We anticipate further increases in segment sales and marketing expensesin the future, primarily associated with our social-networking business. Inaddition, we anticipate a significant increase in segment sales and marketingexpenses going forward, particularly those associated with selling expenses,due to the April 2006 acquisition of MyPoints.

***ProductDevelopment***

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.*   Consolidatedproduct development expenses increased by $3.7 million, or 40.7%, to $12.8million for the quarter ended March 31, 2006, compared to $9.1 million forthe quarter ended March 31, 2005. The increase was primarily attributableto increases in personnel-related expenses, a $1.4 million increase instock-based compensation in connection with the issuance of restricted stockunits to employees and the adoption of SFAS No. 123R in the March 2006quarter and a $0.5 million increase in depreciation. Product developmentexpenses related to our Communications segment and our Content & Mediasegment constituted 76.6% and 23.4%, respectively, of total segment productdevelopment expenses for the quarter ended March 31, 2006, compared to 82.9%and 17.1%, respectively, for the quarter ended March 31, 2005.

*CommunicationsProduct Development Expenses.***  **Communicationsproduct development expenses increased by $0.9 million, or 12.6%, to $7.9 millionfor the quarter ended March 31, 2006, compared to $7.0 million forthe quarter ended March 31, 2005. The increase was the result of a$0.7 million increase in compensation costs and a $0.2 million increase inoverhead-related costs. Capitalized compensation costs were $1.9 million and$0.9 million in the quarters ended March 31, 2006 and 2005, respectively.The increase in capitalized compensation costs is due to an increase in thenumber of projects in the 

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March 2006 quartercompared to the March 2005 quarter that meet the criteria forcapitalization. We anticipate that Communications product development expensesin the June 2006 quarter will approximate the expense reported in the March 2006quarter.

*Content & MediaProduct Development Expenses.***  **Content &Media product development expenses increased by $1.0 million, or 66.6%, to $2.4million for the quarter ended March 31, 2006, compared to $1.4 million forthe quarter ended March 31, 2005. The increase was primarily due to a $0.9million increase in personnel-related expenses. We anticipate that Content &Media product development expenses will increase significantly due to the April 2006acquisition of MyPoints and increased headcount related to oursocial-networking business.

***Generaland Administrative***

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, non-income taxes, insurance, andoccupancy and other overhead-related costs, as well as the expensesincurred and credits received as a result of certain legal settlements.

*ConsolidatedGeneral and Administrative Expenses.***  **Consolidated general and administrative expensesincreased by $3.6 million, or 28.9%, to $16.2 million for the quarter ended March 31,2006, compared to $12.6 million for the quarter ended March 31, 2005. Theincrease was primarily attributable to a $1.4 million increase in stock-basedcompensation in connection with the issuance of restricted stock units toemployees and the adoption of SFAS No. 123R in the March 2006quarter, a $0.7 million increase in personnel-related expenses, a $0.7 millionincrease in professional and consulting expenses, a $0.4 million increasein depreciation and a $0.4 million increase in other overhead expenses. Generaland administrative expenses related to our Communications segment and ourContent & Media segment constituted 60.6% and 39.4%, respectively, of totalsegment general and administrative expenses for the quarter ended March 31,2006, compared to 57.9% and 42.1%, respectively, for the quarter ended March 31,2005.

*CommunicationsGeneral and Administrative Expenses.*   Communicationsgeneral and administrative expenses increased by $0.9 million, or 24.0%, to $4.6 millionfor the quarter ended March 31, 2006, compared to $3.7 million forthe quarter ended March 31, 2005. The increase is primarily due to a $0.4million increase in personnel-related expenses as a result of highercompensation costs, a $0.3 million increase in professional and consulting fees,and a $0.2 million increase in other overhead expenses.

*Content &Media General and Administrative Expenses.***  **Content & Media general and administrativeexpenses increased by $0.3 million, or 11.2%, to $3.0 million for the quarterended March 31, 2006, compared to $2.7 million for the quarter ended March 31,2005. The increase is primarily due to a $0.3 million increase inoverhead-related expenses. We anticipate that Content & Media generaland administrative expenses will increase due to the April 2006acquisition of MyPoints.

*Unallocated Corporate Expenses.***  **Excluding stock-based compensation and depreciation,****unallocated corporate general and administrative expensesincreased by $0.6 million, or 14%, to $5.1 million for the quarter ended March 31,2006, compared to $4.5 million for the quarter ended March 31, 2005. Theincrease is primarily due to an increase in compensation costs and consultingfees.

***Amortizationof Intangible 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 SFAS No. 142, *Goodwill and Other Intangible Assets*, goodwill is 

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not being amortized but istested for impairment at a reporting unit level on an annual basis and betweenannual tests if an event occurs or circumstances change that would more likelythan not reduce the fair value of a reporting unit below its carrying valueamount.

Consolidated amortization of intangible assetsdecreased by $1.6 million, or 27%, to $4.4 million for the quarter ended March 31,2006, compared to $6.0 million for the quarter ended March 31, 2005. Thedecrease is primarily attributable to the accelerated amortization of certain intangibleassets in the March 2005 quarter.

***Interestand Other Income, Net***

Interest income consistsof earnings on our cash, cash equivalents and short-term investments. Otherincome and expense, net consists of realized gains and losses recognized inconnection with the sale of short-term investments. Interest and other income,net increased by $0.3 million, or 21%, to $1.7 million for thequarter ended March 31, 2006, compared to $1.4 million for thequarter ended March 31, 2005 as a result of higher interest rates andhigher average balances on our cash and cash equivalents and short-terminvestments. Net realized gains on our short-term investments were not significantfor the quarters ended March 31, 2006 and 2005.

***InterestExpense***

Interest expense consistsof interest expense on our term loan, capital leases and the amortization ofpremiums on certain of our short-term investments. Interest expense decreased by$0.3 million, or 14%, to $1.7 million for the quarter ended March 31,2006, compared to $2.0 million for the quarter ended March 31, 2005. Thedecrease was primarily the result of a decrease in interest expense andamortized deferred financing costs related to the term loan, which wasoutstanding during the entire March 2005 quarter. In January 2006, werepaid the remaining balance of $54.2 million on the term loan and expensed theremaining $1.5 million in deferred financing costs. The decrease was partiallyoffset by an increase in deferred financing fees amortized during the quarterended March 31, 2006 compared to the quarter ended March 31, 2005 inconnection with the repayment of the term loan.

***Provisionfor Income Taxes***

For the quarter ended March 31,2006, we recorded a tax provision of $8.9 million on pre-tax income of $20.6million, resulting in an annualized effective tax rate of 43.4%. For thequarter ended March 31, 2005, we recorded a tax provision of $8.9 millionon pre-tax income of $20.4 million, resulting in an annualized effective taxrate of 43.7%. The effective tax rates differ from the statutory rate primarilydue to compensation, including stock-based compensation, that was limited underSection 162(m) of the Internal Revenue Code (the “Code”) and foreignlosses, the benefit of which is not currently recognizable due to uncertaintyregarding realization. Additionally, in the quarter ended March 31, 2006,the annualized effective rate was increased due to Employee Stock Purchase Plancompensation, the benefit of which is not currently recognized under SFAS No.123R. This increase was completely offset by the benefit of federal exemptinterest income.

***CumulativeEffect of Change in Accounting Principle, Net of Tax***

In the quarter ended March 31,2006, we recorded a $1.1 million pretax benefit ($1.0 million, net of tax), asthe cumulative effect of a change in accounting principle upon the adoption ofFAS 123R to recognize the effect of estimating the number of awards grantedprior to January 1, 2006 that are not ultimately expected to vest.

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**Liquidity andCapital Resources**

Ourtotal cash, cash equivalent and short-term investment balances decreased by$69.1 million, or 28%, to $175.3 million at March 31, 2006compared to $244.4 million at December 31, 2005. Our summary cashflows for the quarters ended March 31, 2006 and 2005 were as follows (inthousands):

| ** **                                            | ** ** | **Quarter Ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                            | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| Net cash provided  by operating activities            |       | $                                      | 14,239     |   | $ | 31,685 |   |
| Net cash provided  by (used for) investing activities |       | (27,361                                | )          | 46 |   |
| Net cash used for  financing activities               |       | (64,734                                | )          | (43,507 | ) |
|                                                       |            |                                        |            |  |  |  |  |

 

Net cash providedby operating activities decreased by $17.4 million, or 55%, for thequarter ended March 31, 2006 compared to the quarter ended March 31,2005. The decrease is primarily the result of the following:

·       an$18.9 million net decrease in working capital accounts, including $12.7 millionrelated to accounts payable and accrued liabilities for payments during the March 20006quarter for employee bonuses, income taxes and media and promotion expenses.Additionally, working capital accounts were affected by decreases in prepaidsales and marketing expenses and decreases in deferred revenue as a result ofdecreases in pay access accounts, including multi-month access accounts, offsetpartially by an increase in multi-month social-networking accounts;

·       a$3.5 million decrease in tax benefits from stock-based compensation, of whichapproximately $1.4 million of the decrease is related to the adoption of SFAS123R, which requires a portion of the tax benefits from stock-basedcompensation to be presented in financing activities versus its historicalpresentation in operating activities; and

·       a$1.6 million decrease in amortization due to certain intangible assets relatedto the Classmates acquisition that, in order to better match the expense to theexpected cash flows from those assets, are amortized on an accelerated basis.

These decreaseswere partially offset by:

·       a$3.9 million increase in stock-based compensation due to the adoption of SFAS123R in the March 2006 quarter and the issuance of 1.3 million restrictedstock units to employees and directors during the twelve months ended March 31,2006;

·       a$1.2 million increase in depreciation due to increased capital expendituresduring 2005;

·       a$1.1 million increase in amortization of deferred financing fees associatedwith the repayment of the term loan in January 2006; and

·       a$0.2 million increase in net income, net of a $1.0 million cumulative effect ofa change in accounting principle in connection with the adoption of SFAS 123R.

Net cash used forinvesting activities increased by $27.4 million for the quarter ended March 31,2006 compared to the quarter ended March 31, 2005. The increase isprimarily the result of the following:

·       a$26.3 million increase in purchases of short-term investments, net of proceedsfrom maturities and sales of short-term investments;

·       a$3.6 million increase in capital equipment purchases and capitalized softwarecosts in connection with the development of new services and the ongoingoperations of our business; and

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·       a$2.5 million increase in cash paid for acquisitions for The Names Database andPhotoSite in March 2006 compared to the initial payment for PhotoSite in March 2005.

These increaseswere partially offset by:

·       a$5.0 million decrease in purchases of rights, patents and trademarks, primarilyrelated to the purchase of proprietary rights associated with the NetZerotrademark for $6.0 million, $5.5 million of which was paid in the March 2005quarter. The remaining $0.5 million was paid in January 2006.

We have invested significantly in our networkinfrastructure, software licenses, leasehold improvements, and computerequipment and we will need to make further significant investments in thefuture. Capital expenditures for the quarter ended March 31, 2006 were$7.1 million. We anticipate that our total capital expenditures for theremainder of 2006 will be in the range of $18 million to $21 million,including anticipated capital expenditures related to the MyPoints businessacquired in April 2006. The actual amount of future capital expendituresmay fluctuate due to a number of factors including, without limitation,potential future acquisitions and new business initiatives, which are difficultto predict and could change significantly over time. Additionally,technological advances may require us to make capital expenditures to developor acquire new equipment or technology in order to replace aging ortechnologically obsolete equipment.

Net cash used forfinancing activities increased by $21.2 million, or 49%, for the quarterended March 31, 2006 compared to the quarter ended March 31, 2005.The increase is primarily the result of the following:

·       a$23.4 million increase in payments on the term loan. In January 2006, wepaid, in full, the outstanding balance of the term loan of approximately $54.2million; and

·       paymentsof $12.9 million for dividends in the quarter ended March 31, 2006.

The increases wereoffset by:

·       a$12.6 million decrease in repurchases of common stock;

·       a$1.4 million increase in excess tax benefits from stock-based compensation as aresult of the adoption of SFAS 123R, which requires a portion of the taxbenefits from stock-based compensation to be presented in financing activitiesversus its historical presentation in operating activities; and

·       a$0.8 million increase in proceeds from exercises of stock options.

The payment of dividends will negatively impact cashflows from financing activities. In February 2006, our Board of Directorsdeclared a quarterly cash dividend of $0.20 per share of common stock, whichwas paid on February 28, 2006 and totaled $12.9 million. In May 2006,our Board of Directors declared a quarterly cash dividend of $0.20 per share ofcommon stock. The record date for the dividend is May 12, 2006, and thedividend is payable on May 31, 2006. The payment of future dividends isdiscretionary and will be subject to determination by the Board of Directorseach quarter following 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 our commonstock through open market or privately negotiated transactions based onprevailing market conditions and other factors through December 31, 2006. AtMarch 31, 2006, we had repurchased $139.2 million of our common stockunder the program, and the remaining available under the program was $60.8million.

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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 we award to employees. Upon vesting, we currentlyanticipate that we will not collect the applicable withholding taxes forrestricted stock units from employees. Instead, we will automatically withhold,from the restricted stock units that vest, the portion of those shares with afair market value equal to the amount of the withholding taxes due. We willthen pay the applicable withholding taxes in cash. Similar to repurchases ofcommon stock, the net effect of such withholding will adversely impact our cashflows. The amount remitted in February 2006, which was our first vestingof restricted stock units, was $1.6 million for which we withheld approximately129,000 shares of common stock that were underlying the restricted stock units.The amount we pay in future quarters will vary based on our stock price and thenumber of restricted stock units vesting during 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;to develop and acquire complementary services, businesses or technologies; torepurchase shares of our common stock if we believe market conditions to befavorable; to repurchase the common stock underlying restricted stock units andpay the withholding taxes due on vested restricted stock units; 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 enhancing existingservices or products, repurchasing our common stock, acquiring complementaryservices, businesses or technologies or funding significant capitalexpenditures. If we need to raise additional capital through public or privatedebt or equity financings, strategic relationships or other arrangements, itmight not be available to us in a timely manner, on acceptable terms, or atall. Our failure to raise sufficient capital when needed could have a materialadverse effect on our business, financial position, results of operations andcash flows, and could impair our ability to pay dividends. If additional fundswere raised through the issuance of equity securities, the percentage of stockowned by the then-current stockholders would be reduced. Furthermore, suchequity securities might have rights, preferences or privileges senior toholders of our common stock.

**FinancialCommitments**

Ourfinancial commitments are as follows at March 31, 2006 (in thousands):

| ** **                        | ** ** | ** ** | ** ** | **Apr–Dec** | ** ** | **Year Ending December 31,** | ** ** |
|-----------------------------------|------------|------------|------------|------------------|------------|---------------------------------------------|------------|
| **Contractual Obligations:** | ** ** | ** ** | ** ** | **Total**        | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
| Capital leases(1)                 |       | $          | 678        |             | $          | 313                                         |       | $ | 351 |   | $ | 14 |   | $ | — |   | $ | — |   | $ | — |   |   | $ | — |   |   |
| Operating leases                  |       | 44,029     |       | 5,789            |       | 6,580                                       |       | 6,587 |   | 5,819 |   | 4,454 |   | 3,815 |   |   | 10,985 |   |   |
| Telecommunications  purchases     |       | 16,295     |       | 7,767            |       | 8,528                                       |       | — |   | — |   | — |   | — |   |   | — |   |   |
| Media purchases                   |       | 3,795      |       | 3,795            |       | —                                      |       | — |   | — |   | — |   | — |   |   | — |   |   |
| Total                             |       | $          | 64,797     |             | $          | 17,664                                      |       | $ | 15,459 |   | $ | 6,601 |   | $ | 5,819 |   | $ | 4,454 |   | $ | 3,815 |   |   | $ | 10,985 |   |   |
|                                   |            |            |            |                  |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Includes$33,000 of imputed interest.

**Off-Balance Sheet Arrangements**

At March 31, 2006, 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 AccountingPronouncement**

In June 2005, theFASB issued SFAS No. 154, *Accounting Changes andError Corrections—a replacement of APB Opinion No. 20 and FASB StatementNo. 3*. SFAS No. 154 changes the requirements for theaccounting for and reporting of a change in accounting principle and applies toall voluntary changes in accounting principle. APB Opinion No. 20previously required that most voluntary changes in accounting principle berecognized by including in net income of the period of change the cumulativeeffect of changing to the new accounting principle. SFAS No. 154 requiresretrospective application to prior periods’ financial statements of changes inaccounting principle, unless it is impracticable to determine either the period-specificeffects or the cumulative effect of the change. When it is impracticable todetermine the period-specific effects of an accounting change on one or moreindividual prior periods presented, SFAS No. 154 requires that the newaccounting principle be applied to the balances of assets and liabilities as ofthe beginning of the earliest period for which retrospective application ispracticable and that a corresponding adjustment be made to the opening balanceof retained earnings for that period rather than being reported in an incomestatement. When it is impracticable to determine the cumulative effect ofapplying a change in accounting principle to all prior periods, SFASNo. 154 requires that the new accounting principle be applied as if itwere adopted prospectively from the earliest date practicable. In addition,SFAS No. 154 makes a distinction between retrospective application of anaccounting principle and the restatement of financial statements to reflect thecorrection of an error. SFAS No. 154 is effective for accounting changesand corrections of errors made beginning in the March 2006 quarter. Theimplementation of SFAS No. 154 did not have a material impact on ourfinancial position, results of operations or cash flows.

**Inflation**

Inflation did not have a material impact during thequarters ended March 31, 2006 and 2005, and we do not currently anticipatethat inflation will have a material impact on our results of operations goingforward.

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**ITEM 3.**                QUANTITATIVEAND QUALITATIVE 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-term investment portfolioconsisting of U.S. commercial paper, U.S. Government or U.S. Government Agencyobligations, municipal obligations, auction rate securities and money marketfunds. Our primary objective is the preservation of principal and liquiditywhile maximizing yield. The minimum long-term rating is A, and if along-term rating is not available, we require a short-term credit ratingof A1 and P1. The value of these investments may fluctuate with changes ininterest rates. However, we believe this risk is immaterial due to therelatively short-term nature of the investments.

We were exposed tointerest rate risk on a portion of the outstanding balance of our term loanthrough the date we repaid the outstanding balance in full, which was January 3,2006.

*Foreign CurrencyRisk*

We transact business in different foreign currenciesand may be exposed to financial market risk resulting from fluctuations inforeign currency exchange rates, particularly the Indian Rupee (INR) and the Euro,which may result in a gain or loss of earnings to us. The volatility of the INRand the Euro (and all other applicable currencies) are monitored throughout theyear. We face two risks related to foreign currency exchange: translation riskand transaction risk. Amounts invested in our foreign operations are 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 (as expressedin U.S. dollars) from foreign operations. Currency transaction gains or lossesarising from transactions in currencies other than the functional currency areincluded in operating expenses. While we have not engaged in foreign currencyhedging, we may in the future use hedging programs, currency forward contracts,currency options and/or other derivative financial instruments commonlyutilized to reduce financial market risks if it is determined that such hedgingactivities are appropriate to reduce risk.

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**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 InternalControls Over Financial Reporting*

There have not been any changes in the Company’sinternal controls over financial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during our most recent fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, the Company’s internal controls over financial 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. In a court order dated February 15, 2005, the DistrictCourt granted preliminary approval of the issuer defendants’ proposedsettlement. On June 30, 2005, the United States Court of Appeals for theSecond Circuit granted the underwriter defendants’ petition for permission toappeal the District Court’s order granting plaintiffs’ motion for classcertification. A hearing on the settlement was held on April 24, 2006, andthe parties are awaiting the court’s ruling on the motion for final approval ofthe settlement.

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 April 25,2003, Juno, the Committee of Unsecured Creditors, WorldCom and UUNET (allegedlythe largest secured creditor) entered into a Stipulation of Settlement, whichprovided for the payment by Juno of $5.5 million in final settlement ofall claims against Juno, and we have reserved $5.5 million in connectionwith this proceeding. On September 11, 2003, the court issued an orderapproving the Stipulation of Settlement. On September 12, 2005, the SecondCircuit Court of Appeals vacated the judgment of the bankruptcy court andremanded the case to the bankruptcy court. Discovery in the adversaryproceeding in the bankruptcy court has commenced. No trial date has been set.

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 purports to cover user accessto a computer network. On October 28, 2005, the court issued an ordergranting defendants’ motions for summary judgment of non-infringement of thepatent. MyMail has filed a notice of appeal of the trial court’s ruling. Thehearing date for the appeal has not been set.

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On March 6, 2006 plaintiff Anthony Piercy filed apurported 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. NetZero has not yet filed or served its formal response to thecomplaint.

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. We have established a reserve for the Freewwweb matterdiscussed above and such reserve is reflected in our consolidated financialstatements. We cannot assure you, however, that any of the reserves that havebeen established for outstanding litigation are sufficient to cover thepossible losses from such litigation.

We are subject to various other legal proceedings andclaims that arise in the ordinary course of business. We believe the amount,and ultimate liability, if any, with respect to these actions will notmaterially affect our business, financial condition, results of operations orcash flows. We cannot assure you, however, that such actions will not bematerial and will not adversely affect our business, financial condition,results of operations or cash flows.

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**ITEM 1A.**        RISKFACTORS

*Before deciding to invest in our company or tomaintain or increase your investment, you should carefully consider the risksdescribed below as well as the other information in this report and our otherfilings with the SEC. The risks and uncertainties described below are not theonly ones facing our company. Additional risks and uncertainties not presentlyknown to us or that we currently deem immaterial may also affect us. If any ofthese risks actually materialize, our business, financial position, results ofoperations and cash flows could be adversely impacted. In that event, themarket price of our common stock could decline and you may lose all or part ofyour investment.*

**Our business willsuffer if we are unable to compete effectively.**

*Internet AccessCompetition*

Competition in the Internet access market is intense.We compete with established online service and content providers such as AOL,AOL’s Netscape subsidiary and MSN; independent national ISPs such as EarthLinkand its PeoplePC subsidiary; companies combining their resources to offerInternet access in conjunction with other services such as Yahoo! and AT&TInternet Services, Yahoo! and Verizon, and AOL and Walmart.com; nationalcommunications companies and local exchange carriers such as AT&T WorldNet,Qwest Communications International, Inc. and Verizon; cable companies suchas Comcast Corporation, Cox Communications, Inc., Charter Communications, Inc.and Adelphia Communications Corporation; local telephone companies; andregional and local commercial ISPs. Also, a number of municipalities, such asSan Francisco, have announced their intention to make available wirelessbroadband access services to their communities free of charge or for discountedfees, and significant companies, including Google, are bidding to provide someor all of these services. While this form of competition is new and itspotential impact unknown, the availability of free or inexpensive wirelessbroadband services in major metropolitan markets could have a significantimpact upon the industry and on our Communications segment.

The number of U.S. households using broadband hasgrown significantly over the last few years and is expected to continue togrow. Broadband access, which includes cable, DSL, satellite and wireless,generally offers users faster connection and download speeds than dial-upaccess for monthly fees currently ranging from approximately $13 to $55 permonth, although offers for promotional periods have been as low as $10 permonth. Pricing for broadband services, particularly for introductorypromotional periods, services bundled with cable and telephone services, andservices with slower speeds, has been declining and the pricing gap betweenbroadband and dial-up access services has been narrowing with, in some cases,premium and value dial-up access services priced at or above pricing forcertain broadband services. For example, Verizon Yahoo! has offered DSL at$14.95 per month to customers who agree to a one-year commitment, although thecurrent offer is $17.99 per month with a one-year commitment, and AT&TYahoo! currently offers DSL at $12.99 per month to new customers who agree to aone-year commitment. As a result of broadband adoption, the total number ofdial-up accounts in the U.S. has declined and industry analysts predict that itwill continue to decline. The decline in the size of the dial-up market hasaccelerated and will likely continue to accelerate as broadband services becomemore widely available at lower prices and consumer adoption of broadbandapplications, such as online video, telephony and music downloads, which dependupon connections that provide significant bandwidth, increases. While we reviewthe possibility of offering broadband services from time to time, includingwireless services, we currently do not plan to offer broadband services on asignificant scale, which has adversely impacted, and will continue to adverselyimpact, our ability to compete for new subscribers and to retain existing subscribers.

The success of our Communications segment historicallyhas been based on offering dial-up Internet access services at prices below thestandard monthly pricing of the premium dial-up services of most of our 

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major competitors.Competition from broadband providers and value-priced providers such asUnited Online has resulted in significant declines in the number of subscribersto premium priced dial-up services over the last few years. In response to thiscompetition, many competitors have engaged, and may continue to engage, in moreaggressive pricing of their dial-up services under their premium-pricedbrands to obtain and retain users, such as offering discounted pricing orextended periods of free service such as six months free. AOL has previouslytested decreased price points on their dial-up service and may continue to doso in the future, although AOL recently increased the price of its premiumservice. Additionally, AOL, through its Netscape subsidiary, EarthLink, throughits PeoplePC subsidiary, and a number of small providers now offer value-pricedservices at prices similar to our prices and which are, in some cases, pricedbelow the prices of our services. Partially in response to this competition, wehave become more aggressive in offering discounted services and one or morefree months of services in order to obtain and retain pay access accounts.Despite these measures, our pay access base has declined and the rate ofdecline has been increasing. We experienced a net decline of approximately104,000 pay access accounts in the March 2006 quarter. We expect that therate of decline will accelerate. We believe increased competition, includingpricing competition, has adversely impacted our ability to obtain new payaccess accounts and to retain our existing accounts, will adversely impact ourability to minimize the decline in our pay access account base in the futureand has made it more difficult to maintain the current pricing of our services.

Price competition is particularly relevant to ourability to maintain our $14.95 standard monthly pricing for our pay accessaccounts bundled with accelerator service. Maintaining this price point iscritical to the profitability of our Communications segment. When we beganoffering this service in early 2003, many of our competitors either did notoffer a similar accelerator service or charged substantially more than wecharge for a similar service. Since that time, most of our competitors havestarted offering a similar service, and several competitors have eitherdecreased their price for these services or have bundled these services intotheir premium services with no additional fee. Many competitors now marketthese services as a feature of their value-priced services at noadditional cost and these services are now offered, in certain cases, at aprice point similar to or lower than our standard monthly price. In particular,Netscape has previously marketed their accelerator service as part of theirstandard $9.95 offering and currently markets this service at a $9.95 pricepoint with a 12-month commitment. PeoplePC currently offers theiraccelerator service combined with their standard value-priced offering at$5.47 per month for an introductory period of three months, and $10.95 permonth thereafter for an additional period of nine months. In addition, pricecompetition for broadband services has been growing and several providers, suchas AT&T Yahoo! and Verizon Yahoo!, have offered bundled broadband servicesat promotional prices similar to, or lower than, the prices of our acceleratedaccess services. We cannot assure you that broadband providers will notcontinue to offer promotional pricing for broadband services similar to orlower than the price of our accelerated access services. Increased competitionfor subscribers to accelerated access services and broadband services couldadversely impact the ability of our Communications segment to grow or maintainthe number of pay access accounts bundled with accelerator service, or couldcause us to lower the price for our accelerator service, which would adverselyimpact our revenues and profits. We have been offering our NetZero and Juno dial-upservices bundled with accelerator service at a $9.95 price point with a 12-monthcommitment. We are also offering additional features or services withoutadditional charge as part of our accelerated dial-up service, includingenhanced email features, antivirus protection, and a VoIP account with 100 freecomputer-to-telephone domestic long distance minutes per month, and we mayincorporate additional features or services in the future. Adding additionalfeatures increases our cost of providing the service which makes the serviceless profitable, although there is no assurance that additional features willmake the service more attractive to consumers or will enable us to maintain its$14.95 standard monthly price. The number of users paying us the standardmonthly price for our accelerated service has been decreasing and it is likelythat we will experience decreases in the average price paid for these bundledservices in the future.

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Premium-priced Internet access services, ingeneral, include a much wider variety of features than are included in value-pricedservices, and providers of premium-priced services continue to enhancethe features of their offerings in response to competition from broadband andvalue-priced providers. In particular, many premium-priced servicesinclude at no additional charge telephone technical support, proprietarycontent, parental controls, multiple accounts and email addresses, increasedemail storage, virus protection, firewalls, spyware protection and accelerateddial-up functionality. Some providers of value-priced offerings are alsoincorporating certain of these features into their offerings either at nocharge or for an incremental fee. In addition, certain providers ofpremium-priced services occasionally offer promotional pricing that is similarto the pricing of value-priced offerings. For example, EarthLink currently offersits premium-priced services at $9.95 per month for an introductory period ofsix months. While we offer some additional features to users at no charge orfor an incremental fee, we do not offer the range of features included inpremium-priced services and, in some cases, included in value-pricedservices. In particular, we do not offer our own proprietary content. Inaddition, the incremental fees that we charge for certain features are, in somecases, higher than the incremental fee, if any, charged by other value-pricedproviders for comparable features. Our decision not to offer a broader varietyof features and our charges for additional services or features, particularlyaccelerated functionality, virus protection and telephone technical support,may adversely impact our ability to compete and undermine our position as avalue-priced provider.

Many of our competitors have significantly greaterbrand recognition than we do and spend significantly more on marketing theirservices than we spend. As a result, we have not participated as extensively asour major competitors in a variety of large distribution channels, such asbeing pre-bundled on branded computers or being offered at retail outlets ofmany different major franchises. To the extent our competitors spendsignificantly more than we do in these and other channels, we are at acompetitive disadvantage. In addition, we have significantly decreased ourmarketing expenditures for our access services, primarily with respect toadvertising and media, and intend to further decrease these expenditures in thefuture. Decreased marketing of our access services has adversely impacted, andwill continue to adversely impact, our pay access account base. While we havenot decreased the marketing expenditures on distribution arrangements as muchas we have on advertising and media, the decreased advertising and mediaexpenditures may also adversely impact the efficacy of our distributionarrangements, which could cause our pay access account base to decrease at a fasterrate than we currently anticipate. We cannot assure you that the marketingresources we allocate to our access services will be sufficient for us tocompete effectively with our major competitors, and we believe our base ofaccess accounts will continue to decline at an increased rate, at least in thenear term.

We expect competition forpay access accounts to continue to intensify and cannot assure you that we willbe able to compete successfully. Our inability to compete effectively couldrequire us to make significant revisions to our services and pricingstrategies, which could result in increased costs, decreased revenues and theloss of pay access accounts, all of which could materially and adversely impactour financial condition, results of operations and cash flows.

*Competition in theOnline Relationships Market*

Competition for subscribers in the onlinerelationships market is intense and rapidly evolving. Our social-networkingservices compete directly against a small number of companies, includingReunion.com, Facebook.com and Monster.com’s Military.com service, offeringsimilar online social-networking services based on work, school and militarycommunities. Our social networking services also compete directly with manyschools, employers, Web sites, and associations that maintain their ownInternet-based alumni information services. In addition to this directcompetition, We compete for subscribers with companies offering a wide varietyof social-networking services including Web portals such as Yahoo!, MSN and AOLthat maintain chat rooms and are developing new Web community services such asYahoo! 360, MSN 

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Spaces and AOL PeopleConnection, and other community-based Web sites and personal networkingcommunities such as MySpace and Friendster. Some of these social-networkingservices, such as MySpace and Friendster, also have school-based communities orschool-related search capabilities as well as more sophisticated features thanours, such as personalized Web pages, instant messaging and blogs. In addition,many of these companies offer a wide variety of services in addition to theirsocial-networking services, which provides them with an additional competitiveadvantage in obtaining and retaining subscribers. Our social networkingservices are used primarily to locate and contact acquaintances from school,work or military affiliations, and our subscribers, in general, do not spend asignificant amount of time on the site for other purposes. Our strategy is toexpand the features and functionality of our social networking services, butthere can be no assurance we will be commercially successful in doing so.

Many consumers maintain simultaneous relationshipswith multiple communities, including Internet alumni networks and offline associations,and can easily shift their interest or their spending from one online oroffline provider to another. Competitors may be able to launch new businessesserving various communities at relatively low cost. Competitors may be able tohold themselves out as specialists in single communities, making them moreappealing to consumers or giving them a perceived competitive advantage. Inaddition, many social-networking services are free or only require payment ifcertain additional functionality is desired by the user. The continuedprevalence of free services could adversely impact our ability to market bothour free and pay social-networking services, maintain our current price levels,or maintain or grow our pay account base at current price levels, or at all.

Many competitors in thismarket have longer operating histories, larger customer bases, greater brandrecognition and significantly greater financial, marketing and other resourcesthan we do. In addition, we have relied extensively on Internet advertisingthrough portals and other Internet service providers, including AOL, MSN andYahoo!, to grow our free and pay accounts. A number of these companies arecompetitors of United Online with respect to Internet access and otherservices, and they may not be willing to retain the same advertisingrelationship going forward. To the extent we are not able to maintainadvertising relationships with these companies, our ability to obtain newsocial-networking pay and free accounts would be adversely impacted.

*Competition in the VoIPMarket*

Our consumer VoIP servicescompete in the market for consumer telephone services against competitors suchas established local and long distance telephone companies, cellular companiesand providers of VoIP services. VoIP services are a relatively new and emergingapplication and it is uncertain whether VoIP services will receive wide-spreadconsumer adoption. While we have not extensively marketed our VoIP services, wehave attracted only a small number of users to these services. Competitors forour VoIP services include established telecommunications and cable companies,certain of our current competitors for Internet access services including AOL,MSN and EarthLink, leading Internet companies including Yahoo!, Google and eBaythrough its Skype subsidiary, and a number of other companies that offerVoIP-based services as their primary business such as Vonage. Most of our majorcompetitors in the VoIP market have longer operating histories, larger customerbases, greater brand recognition and significantly greater financial, marketingand other resources than we do. Some of our competitors, such as Vonage, spenda significant amount of resources on marketing their services and participatein large, retail distribution channels. We currently do not intend to expendsignificant marketing resources on our VoIP services. We have expendedresources on producing television commercials and other marketing materials,and we may not realize a return on these investments. If we do choose to expendsignificant marketing resources on our VoIP services, there is no assurancethat such efforts will be commercially successful. We cannot assure you thatour marketing efforts will be effective, that our VoIP services will achievesignificant consumer adoption or, even if such services do achieve consumeradoption, that our VoIP services will generate growth in pay accounts, revenuesor profitability.

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*Competition inOnline Loyalty Marketing Business*

Our online loyaltymarketing business faces intense competition from both traditional and onlineadvertising and direct marketing businesses. We expect competition to increasedue to the lack of significant barriers to entry for online businessesgenerally. As we expand the scope of our product and service offerings, we maycompete with a greater number of media companies across a wide range ofadvertising and direct marketing services. Our ability to generate significantrevenue from advertisers and loyalty partners will depend on our ability todifferentiate ourselves through the services we provide and to obtain adequateparticipation from consumers in our online direct marketing and rewardsprograms. Currently, several companies offer competitive online products orservices, such as Coolsavings, Coupons.com and Eversave.com. In the future, wemay also face competition from larger offline loyalty point programs, suchthose operated by credit card companies or airlines, if they focus ondeveloping a stronger online presence. We have limited experience in thismarket and cannot assure you that we will be able to compete effectively.

*Competition inAdditional Service Markets*

In addition to Internet access and VoIP services, ourCommunications segment also includes standalone premium email services and aprepackaged Family Pack offering. In addition to social-networking services,our Content & Media segment also includes Web-hosting and domainregistration services, digital photo-sharing services and online loyaltymarketing. While these additional services do not generate a significantportion of the revenues for the applicable segment, we are actively investingresources in certain of these services. Competition for users of premium emailservices is intense. The companies we compete with for Internet access accountsalso compete with us for premium email accounts. In addition, a number ofcompanies, including Yahoo!, MSN, AOL and Google, offer premium email services,in certain cases, for free. The market for premium email services is evolvingat a rapid pace and we cannot assure you that our offerings will be competitiveor commercially viable. While the personal Web-hosting business is fragmented,a number of significant companies, including Yahoo!, currently compete activelyfor these users. In addition, the personal Web-hosting industry is veryapplication specific, with many of the competitors focusing on specificapplications, such as photo sharing, to generate additional users. We have notexpended significant resources to marketing our digital photo sharing services,although we may allocate additional resources to improving and promoting theseservices going forward. Digital photo sharing is an extremely competitivemarket and there is no assurance our services will be able to competeeffectively. We cannot assure you that any of these additional services will becompetitive or will generate growth in pay accounts or revenues.

In addition, we haveevaluated, and expect to continue to evaluate, the development or acquisitionof new services. New services may subject us to competition from companies thathave more experience with such services, more established brands, and greaterfinancial, marketing and other resources to devote to such services. We cannotassure you that our new services, if any, will be competitive or will generategrowth in pay accounts or revenues.

*Competition for AdvertisingCustomers*

We are dependent uponadvertising revenues for a significant portion of our revenues and profits. Wecompete for advertising revenues with major ISPs, content providers, large Webpublishers, Web search engine and portal companies, Internet advertisingproviders, content aggregation companies, social-networking Web sites, andvarious other companies that facilitate Internet advertising. Many of ourcompetitors have longer operating histories, greater name recognition, largeruser bases and significantly greater financial, technical and sales andmarketing resources than we do. This may allow them to devote greater resourcesto the development, promotion and sale of their products and services. Thesecompetitors may also engage in more extensive research and development, offermore sophisticated 

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productsand services, undertake more far-reaching marketing campaigns and adopt moreaggressive pricing policies. We also compete with television, radio, cable andprint media for a share of advertisers’ total advertising budgets. In certaininstances, we generate advertising revenues from companies who are also ourcompetitors. In particular, our Communications segment generates significantadvertising revenues from Yahoo! Search. We compete directly with Yahoo! forInternet access, email, Web-hosting and online photo-sharing subscribers andindirectly for subscribers to our social-networking services. To the extentcompetitors who are also sources of significant advertising revenue cease to dobusiness with us, our revenues and profits could suffer.

**Our revenues maycontinue to decrease and our profitability may decrease.**

Decreases in our Communications revenues have beengreater than the increases in our Content & Media revenues. While weanticipate continued organic growth in our Content & Media revenuesand growth in these revenues as a result of our MyPoints acquisition, theorganic growth in Content & Media revenues will not be sufficient tooffset the anticipated increasing decline in our Communications revenues, atleast in the near term. Our ability to minimize decreases in our revenues is,other than through acquisitions, primarily dependent upon our ability tominimize decreases in our Communications revenues while increasing ourContent & Media revenues. We currently anticipate that our pay accessaccounts will continue to decline at an accelerated rate, although the rate ofdecline is likely to fluctuate from quarter to quarter depending on seasonalityand other factors. The average monthly revenue per pay account (“ARPU”) for ouraccess services, including our accelerated access services, has also declinedand we anticipate it will continue to decline, at least in the near term. Whilewe anticipate that advertising revenues from our Communications segment willremain relatively flat in the near term due to favorable advertising rates andother factors, over the long term these revenues will likely decline as aresult of decreased inventory as a result of decreases in our pay accessaccounts. We are budgeting our expenditures for 2006 based upon assumptionswith respect to growth in our Content & Media pay accounts, growth inadvertising revenues, and decreases in pay access accounts and ARPU for ouraccess services. If we are unable to grow our Content & Media payaccounts as anticipated, if ARPU for our access services declines more thananticipated, if we do not generate anticipated advertising revenues or if ourpay access base declines faster than anticipated, our profitability could bematerially and adversely impacted.

We have significantly decreased our Communicationsmarketing expenditures and anticipate further decreases in these expendituresin the near term. At the same time, we have more services in our Communicationssegment to market as a result of the introduction of our VoIP services. Theamount we have budgeted for Communications marketing may be insufficient toeffectively market all of the services in our Communications segment. Thenumber of pay access accounts may decline much faster than anticipated and wemay not increase the number of pay VoIP accounts. In addition, although weintend to continue to increase marketing expenditures for our Content &Media service offerings, social-networking services in particular, the totalnumber of Content & Media pay accounts may not grow as anticipated.Acceleration in the decline of pay access accounts or deceleration in thegrowth of Content & Media pay accounts could negatively impact ourrevenues and profitability in the near term and our prospects in the long term.If we choose to increase our marketing expenditures beyond what we currentlyanticipate, our profitability will likely be adversely affected, at least inthe near term.

Our ability to grow ormaintain our number of pay accounts may also be dependent on our success incommercializing new services that we either acquire or develop. To the extentwe are unable to successfully market our existing services to new users,successfully cross-market our services to existing users or successfullyacquire or develop and commercialize new services, our pay accounts couldcontinue to decline.

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**Our online loyaltymarketing business depends on our ability to maintain and expand an active membership base.**

The success of our onlineloyalty marketing business largely depends on our ability to maintain andexpand an active membership base. Our revenues are primarily driven by feespaid by advertisers and direct marketers based on specific actions taken by ourmembers. If we are unable to induce existing and new members to activelyparticipate in our programs, our business may be harmed. The attractiveness ofour program to current and potential members, advertisers and loyalty partnersdepends in large part on the attractiveness of the rewards and point redemptionopportunities that we offer. If the perceived value of our points decreases, wemay be required to offer more points to generate the same revenue, which couldadversely affect our results of operations relating to these services. Asignificant portion of the revenues from online loyalty marketing are generatedfrom the activity of a small percentage of our members, and we cannot assureyou that the number of active members will increase. Data security and privacyconcerns may cause consumers not to sign up for our program or cause ourmembers to stop using the service or resist providing the personal datanecessary to support our program’s profiling capability. In addition, weacquire a significant number of our new members through a few acquisitionchannels, and the loss of any of these channels or a decrease in the number ofnew members acquired through these channels could have an adverse affect ourbusiness. Although our membership has grown in prior periods, there are noassurances that our membership growth will continue or increase in the future.

**Our business issubject to fluctuations.**

Our results of operationsand changes in the number and mix of pay accounts from period to period havevaried in the past and may fluctuate significantly in the future due to avariety of factors, many of which are outside of our control and difficult topredict. A number of factors that may impact us are discussed in greater detailin this Form 10-Q, and these factors may affect us from period toperiod and may affect our long-term performance. As a result, you should notrely on period-to-period comparisons as an indication of future or long-termperformance. In addition, these factors create difficulties with respect to ourability to forecast our financial performance accurately. We believe that thesedifficulties in forecasting present even greater challenges for financialanalysts who publish their own estimates of our future financial results andaccount metrics. We cannot assure you that we will achieve the expectations orfinancial projections made by our management or by the financial analysts. Inthe event we do not achieve such expectations or projections, the price of ourcommon stock could be adversely affected.

**If we cannotidentify and complete acquisitions, we may not be able to grow and achieve our strategic objectives.**

One of our strategicobjectives is to acquire businesses, product lines or technologies which willprovide us with an opportunity to leverage our assets and core competencies, orwhich otherwise will be complementary to our existing businesses. It is likelythat we will not succeed in growing our revenues, at least in the near term,unless we are able to successfully complete acquisitions. The merger andacquisition market for companies offering Internet services is extremelycompetitive, particularly for companies who have demonstrated a profitablebusiness model with long-term growth potential. Recently, the public equitymarkets have been very receptive to companies with these characteristics. As aresult, in many cases, companies with these characteristics trade publicly orare privately valued at multiples of earnings, revenues, operating income andother metrics significantly higher than the multiples at which we are currentlyvalued. Acquisitions may require us to obtain additional debt or equityfinancing, which may not be available to us on reasonable terms, or at all.These and other factors may make it difficult for us to acquire additionalbusinesses, product lines or technologies at affordable prices, or at all, andthere is no assurance that we will be successful in completing additionalacquisitions.

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**We cannot assureyou that we will be able to successfully manage, integrate or grow our acquired businesses.**

In April 2004, weacquired the assets of About, Inc.’s Web-hosting business, in November 2004,we acquired Classmates, in March 2005, we acquired the assets of HomesteadTechnologies, Inc.’s online digital photo-sharing business, in March 2006,we acquired The Names Database, and in April 2006, we acquiredMyPoints.com, Inc. We do not have prior experience in most of these linesof business and may not be able to compete successfully in them. To the extentwe attempt to integrate various aspects of these businesses, we may not besuccessful. There may be unanticipated risks, liabilities and costs associatedwith these businesses, and we cannot assure you that these businesses will havea positive impact on our results of operations. In addition, we cannot assureyou that we will be successful in maintaining or growing their pay or freeaccounts.

**Even if we aresuccessful at acquiring additional businesses, product lines or technologies, acquisitions may not improveour results of operations and may adversely impact our business and financialcondition.**

We have evaluated,and expect to continue to evaluate, a wide variety of potential strategictransactions that we believe may complement our current or future businessactivities. We routinely engage in discussions regarding potential acquisitionsand any of these transactions could be material to our financial condition andresults of operations. However, we cannot assure you that the anticipatedbenefits of an acquisition will materialize. Acquiring a business, product lineor technology involves many risks, including:

·       disruptionof our ongoing business and diversion of resources and management time;

·       unforeseenobligations or liabilities;

·       difficultyassimilating the acquired customer bases, technologies and operations;

·       difficultyassimilating and retaining employees from the acquired business;

·       risksof entering markets in which we have little or no direct prior experience;

·       lackof controls, policies and procedures appropriate for a public company, and thetime and cost related to the remediation of such controls, policies andprocedures;

·       potentialimpairment of relationships with employees, users, or vendors as a result ofchanges in management; and

·       potentialdilutive issuances of equity, large write-offs either at the time of theacquisition or in the future, the incurrence of restructuring charges, theincurrence of debt, the amortization of identifiable intangible assets, and theimpairment of amounts capitalized as intangible assets if we should fail tosuccessfully further develop acquired technology.

Classmates has asubsidiary operating in Germany and we may seek to expand our internationalbusiness through acquisitions. Acquisitions of foreign businesses involve risksin addition to those mentioned above, including risks associated withpotentially unfamiliar economic, political and regulatory environments andintegration difficulties due to language, cultural and geographic differences.We cannot assure you that any further acquisitions we make will be successful.

**Our marketingactivities may not be successful.**

Our marketing activities may not be effective. We willbe required to incur significant marketing expenses to maintain or develop ourbrands. We have significantly decreased marketing expenditures for our accessservices and anticipate further reducing marketing expenditures for theseservices in the future. 

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While we currentlyanticipate increasing marketing expenditures for our social-networkingservices, we cannot assure you that any such increase will be effective inincreasing pay or active accounts for these services. We anticipate, in thenear term, that the decreases in pay accounts for our access services will notbe offset by increases, if any, in other pay accounts. We have increased thenumber of brands under which our services are marketed and increased the numberof services we offer. We may not have adequate resources to maintain all of ourbrands or promote all of our services. Our VoIP services, in particular, mayrequire significant marketing resources and we do not currently intend toallocate significant resources to market these services. Even if we choose toallocate significant marketing resources to these services, there is noassurance that our marketing activities will be successful.

We obtain a significantnumber of new pay access accounts through our offline distribution channels,primarily Best Buy. If the number of new pay accounts acquired through Best Buywere to decrease, such decrease could negatively impact the number of payaccess accounts and our Communications revenues and profitability could benegatively impacted.

**If we are unable toretain users, our business and financial results will suffer.**

Historically, we have lost an average of four to fivepercent of our pay accounts each month, which we refer to as churn, with churnin recent periods approximating five percent. Our churn percentage iscalculated based on the average number of pay accounts for a period. Theaverage number of pay accounts is a simple average calculated based on thenumber of pay accounts at the beginning and end of a period. We make certainnormalizing adjustments to the calculation of our churn percentage for periodsin which we add a significant number of pay accounts due to acquisitions. We donot include in our churn calculation those accounts cancelled during the firstthirty days of service unless the accounts have upgraded from free accounts,although a number of such accounts will be included in our account totals atany given measurement date. Subscribers who cancel one pay service butsubscribe to another pay service are not considered to have cancelled a payaccount and, as such, our overall churn rate is not necessarily indicative ofthe percentage of subscribers canceling any particular service. We haveexperienced, and will likely continue to experience, a higher percentage ofsubscribers canceling our accelerated access and social networking servicesthan is indicated by our churn rate, and the percentage of subscriberscanceling our social networking services has fluctuated significantly fromquarter to quarter due to seasonality and the timing of termination of multi-monthprograms. Our churn may be higher in future periods and will fluctuate fromperiod to period and from service to service. If we continue to experience ahigh percentage of pay accounts canceling our services, it will make it moredifficult to grow, maintain or minimize decreases in the number of pay accountsfor those services. If we experience an increased percentage of cancellations, ourrevenues and profitability may be adversely affected.

In addition, the number ofactive free accounts has a significant impact on our ability to attractadvertisers, on the number of advertising impressions we have available tosell, and on how many pay accounts we can potentially acquire through marketingour pay services to our active free accounts. Each month, a significant numberof free accounts become inactive and we may experience continued declines inthe number of active free accounts. In addition, a user may have more than oneaccount on more than one of our services, and we are not able to determine inmost cases the number of accounts held by an individual. As such, the actual numberof unique individuals using our services may be much lower than our totalnumber of accounts.

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**We may notsuccessfully develop and market new services in a timely or cost-effectivemanner; consumers oradvertisers may not accept our new products.**

We may not be able to compete effectively if we arenot able to adapt to changes in technology and industry standards or develop oracquire and successfully commercialize new and enhanced services. New servicesmay be dependent on our obtaining needed technology or services from thirdparties, which we may not be able to obtain in a timely manner, upon termsacceptable to us, or at all. Our ability to compete successfully will alsodepend upon the continued compatibility of our services with products offeredby various vendors, which we may not be able to achieve.

We have expended, and mayin the future expend, significant resources enhancing our existing services,such as our enhanced accelerator service, and developing, acquiring andimplementing new services, such as our VoIP services. Product developmentinvolves a number of uncertainties, including unanticipated delays andexpenses. New or enhanced services, such as our VoIP services and our enhancedaccelerator service, may have technological problems or may not be accepted byour consumers or advertisers. We cannot assure you that we will be successful indeveloping, acquiring or implementing new or enhanced services, or that new orenhanced services will be commercially successful.

**Our VoIP servicesmay not be commercially successful.**

Only a limited number ofusers have signed up for our VoIP services, and we have experienced losses inconnection with these services due to fraud and the costs of developing andoperating them. It is likely we will continue to expend significant resourcesdeveloping, enhancing, operating and marketing these services. We expect theseservices to continue to adversely impact our profitability, at least in thenear term. If our VoIP services are not commercially successful, we willcontinue to incur operating losses in connection with these services, whichwould negatively impact our financial condition and results of operations.

**Seasonal trends inInternet usage and advertising sales may cause fluctuations in our results of operations.**

Seasonal trends couldaffect revenues, operating expenses and the rate at which users sign up for ourservices. Decreased usage during seasonal periods could decrease advertisinginventory and search activity and adversely impact advertising revenue.Increased usage due to seasonality may result in increased telecommunicationscosts for such period. We have experienced lower usage of our access servicesin the summer months and this trend may continue. We also have experienced alower rate of people signing up for our access services during the spring andsummer months when compared to the fall and winter months, and this trend maycontinue. Seasonality may result in significant fluctuations in our results ofoperations and the number of users signing up for, or accessing, our services.

**We may be unable tomaintain or grow our advertising revenues, particularly if we lose key advertising relationships.Reduced advertising revenues may reduce our profits.**

Advertising and commerce revenues are an importantcomponent of our revenues and profitability. Our revenues from advertising havein the past fluctuated, and may in the future fluctuate, due to a variety offactors including, without limitation, changes in the online advertisingmarket, decreases in capital available to Internet and other companies, changesin our advertising inventory, changes in usage and the effect of keyadvertising relationships. The majority of our advertising revenues are derivedfrom our access services and decreases in our access account base will, overtime, result in decreased inventory advertising revenues. As discussed above,competition for advertising dollars is intense and our advertising revenues maydecline in future periods.

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A small number ofcustomers have accounted for, and may in the future account for, a significantportion of our advertising and commerce revenues. In the past, we haveexperienced a number of situations where significant advertising arrangementswere terminated early, were not renewed, were renewed at significantly lowerrates or were renegotiated during the term of the arrangement. We derived approximately24% of our total advertising and commerce revenues during the March 2006quarter from Internet search fees provided through our agreement with Yahoo!Search. Our agreement with Yahoo! Search expires in March 2007. Thecompetition among search services is increasing. If there were a significantdecrease in search fees from our agreement with Yahoo! Search due to usersusing competitive services or other factors, such decrease would adverselyimpact our results of operations. Our business, financial position, results ofoperations and cash flows may be materially and adversely affected if we areunable either to maintain or renew our significant agreements or to replacesuch agreements with similar agreements with new customers.

**If our access accountsusage increases or our telecommunications costs increase, our business may suffer.**

Other than sales andmarketing, our telecommunications costs are our largest Communications expense.If the average monthly usage of our access users increases, or if our averagehourly telecommunications cost increases, the profitability of ourCommunications segment may be adversely impacted.

**Our access businessis dependent on a small number of telecommunications carriers. Our inability to maintainagreements at attractive rates with these carriers may negatively impact ourbusiness.**

Our access business substantially depends on thecapacity, affordability, reliability and security of our telecommunicationsnetworks. Only a small number of telecommunications providers offer the networkand data services we require, and most of our telecommunications services arecurrently purchased from Level 3 Communications, Verizon Pac-West, Qwest and O1Communications. Furthermore, in the past, several vendors have ceased operationsor ceased offering the services we require, causing us to switch vendors.Vendors may experience significant financial difficulties and be unable toperform satisfactorily or to continue to offer their services. Verizon, Level 3Communications, Pac-West and Qwest have significant amounts of debtobligations. The loss of vendors has resulted, and may in the future result, inincreased costs, decreased service quality and the loss of users. Inparticular, the failure of Level 3 Communications, Verizon, Pac-West, Qwest orO1 Communications to continue to provide the scope, quality and pricing ofservices currently provided could materially and adversely affect our businessand results of operations. Some of our telecommunications services are providedpursuant to short-term agreements that the providers can terminate or elect notto renew. In addition, each of our telecommunications carriers provides networkaccess to some of our competitors and could choose to grant those competitorspreferential network access or pricing. Certain of our telecommunicationsproviders compete with us in the market to provide consumer Internet access. Asa result, any or all of our current telecommunications service providers coulddiscontinue providing us with service at rates acceptable to us, or at all,which could materially and adversely affect our business, financial position,results of operations and cash flows.

Market rates fortelecommunications services used in our business have declined significantly inrecent years. General market forces, the failure of providers, regulatoryissues and other factors could result in increased rates. Any increase inmarket rates would increase the cost of providing our services and, ifsignificant, could have a material adverse effect on our business, financialposition, results of operations and cash flows.

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**If we fail tomanage our telecommunications or our internal network capacities, our access service levels may sufferor we may experience increased per-account costs.**

We will have to accurately anticipate our futuretelecommunications capacity needs within lead-time requirements. If we fail toprocure sufficient quantities of telecommunications services, we may be unableto provide our users with acceptable service levels. Conversely, if we purchaseexcessive amounts of telecommunications services we will have increased costs,which could decrease our profitability. We have experienced such overcapacityin the past, and we may experience overcapacity in the future. Our failure toeffectively manage telecommunications costs could adversely affect ourreputation as a quality provider of Internet services or could adversely affectour profitability.

In addition, we may fromtime to time experience increases in our telecommunications usage that exceedour then-available telecommunications capacity and the capacity of our internalservers. As a result, users may be unable to register or log on to ourservices, may experience a general slow-down in their Internet access or may bedisconnected from their sessions. Excessive user demand could also result insystem failures of our internal server networks, which would prevent us fromgenerating advertising revenues. Inaccessibility, interruptions or otherlimitations on the ability to access our services due to excessive user demand,or any failure of our servers to handle user traffic, could adversely effectour reputation, lead to subscriber cancellations and could adversely affect ourrevenues.

**Our business willsuffer if the scope or quality of service from our telecommunications carriers is inadequate.**

If our telecommunicationsservice providers deliver unacceptable service, the quality of our Internetaccess service would suffer. In this event, we would likely lose users who aredissatisfied with our service. Since we do not have direct control over ourtelecommunications carriers’ network reliability and the quality of theirservice, we cannot assure you that we will be able to provide consistentlyreliable Internet access for our users.

**Our business ishighly dependent on our billing and customer support systems, which are based on a combination of third-partysoftware and internally developed software.**

The software that operatesmost of our billing and customer support systems for our access service islicensed from Portal Software, Inc. and Remedy, a BMC Software company,and we use a combination of Portal, Remedy and other third-party andinternally developed software applications for such customer billing andsupport. The billing system for Classmates relies on a combination of softwarelicensed from Art Technology Group Inc. (“ATG”), other third-partysoftware applications as well as internally developed software applications.Customer billing and support is a highly complex process, and our systems mustefficiently interface with other third parties’ systems such as the systems ofcredit card processing companies and other companies to whom we outsourcebilling and support functions. Our ability to accurately and efficiently billand support our users is dependent on the successful operation of our billingand support systems and third parties’ systems upon which we rely. In addition,our ability to offer new pay services or alternative payment plans is dependenton our ability to customize our billing and support systems. Issues associatedwith these systems could cause a variety of problems including the failure tobill and collect from users on a timely basis, over-charging or under-chargingusers, inaccurate financial and customer data, excessive credit cardchargebacks or refunds, delays in new product or payment plan introductions andother billing-related errors. Such problems could lead to inaccuratereporting from time to time, which could adversely affect our business,financial position, results of operations and cash flows. We have experiencedbilling and support problems from time to time and may experience additionalproblems in the future. The failure of our software vendors to provide softwareupgrades and technical support, the failure of the Portal, Remedy, ATG orinternally developed software to operate accurately, problems with our creditcard processor or other billing and support vendors and 

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anyother failures or errors in our billing and support systems could materiallyand adversely affect our business, financial position, results of operationsand cash flows.

**We are dependent onthird parties for technical support and customer service and our business may suffer if they areunable to provide these services, cannot expand to meet our needs or terminatetheir relationships with us.**

Our business and financialresults depend, in part, on the availability and quality of our customersupport services. We outsource a majority of the live technical and billingsupport functions to ClientLogic Corporation. As a result, we maintain only asmall number of internal customer service personnel. We are not equipped toprovide the necessary range of customer service functions in the event thatClientLogic becomes unable or unwilling to offer these services to us. Attimes, users seeking live customer support have experienced lengthy waitingperiods to reach support personnel who are trained to provide the technical orbilling support they require. ClientLogic has also experienced outages andother issues in the past which resulted in inadequate service quality andsupport which adversely impacted our business. Maintaining desired customersupport levels may require significantly more support personnel than arecurrently available to us, or significantly greater expense than we choose toincur. If ClientLogic does not provide us with quality services, or if ourrelationship with ClientLogic terminates and we are unable to transition suchservices in-house or to a replacement vendor in an orderly, cost-effective andtimely manner, our reputation, business and results of operations would suffer.In addition, we prepay significant amounts in advance to ClientLogic under ouragreement with them, and any failure by them to perform the services for whichwe have prepaid would negatively impact our financial position.

**If our software orhardware contains errors or fails, if we fail to operate our serviceseffectively or if weencounter difficulties integrating our systems and technologies, our businesscould be seriously harmed.**

Our services, andthe hardware and software systems underlying our services, are complex. Oursystems may contain undetected errors or failures and are susceptible to humanerror. We have in the past encountered, and may in the future encounter,software and hardware errors, system design errors and errors in the operationof our systems. This has resulted in, and may in the future result in, a numberof adverse consequences, which have included or may include:

·       usersbeing disconnected from our services or being unable to access our services;

·       lossof data or revenue;

·       injuryto reputation; and

·       diversionof development resources.

We have experienced technical and customer supportissues associated with our services and software releases. These issues haveresulted in users discontinuing their service and have adversely impacted ourrevenues. A number of our material technologies and systems are based ondifferent platforms. To the extent we attempt to integrate these technologiesand systems, we may experience a number of difficulties, errors, failures andunanticipated costs. In addition, our business relies on third-partysoftware including, without limitation, software licensed from Oracle for ourinternal operations, software licensed from Portal and Remedy for billing andcustomer support, software licensed from SlipStream Data Inc. for ouraccelerated services, software licensed from certain third parties for our VoIPservices, and software licensed from certain third parties for our advertisingproducts and services. Any significant failure of this software couldmaterially and adversely affect our business, financial position, results ofoperations and cash flows. Our services also rely on their compatibility withother third-party systems, particularly operating systems.Incompatibility with future changes to third-party software upon whichour systems rely 

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could materially affectour ability to deliver our services. We cannot assure you that we will notexperience significant technical problems with our services in the future.

Our VoIP services aredependent upon internally developed software, licensed software and third partytelecommunications services, all of which are relatively new. Our VoIP serviceshave not yet been operated on a significant scale. There will be bugs and otherissues associated with these services. If we experience any materialdifficulties operating these services on a significant scale, or if the bugs orother issues we encounter with these services are material, our ability toobtain and maintain users will be adversely impacted.

**A security breachor inappropriate use of our network or services could expose us to claims or a loss of revenue.**

The success of ourbusiness depends on the security of our networks and, in part, on the securityof the network infrastructures of our third-party telecommunicationsservice providers, providers of customer support services and other vendors.Unauthorized or inappropriate access to, or use of, our networks, computersystems and services could potentially jeopardize the security of confidentialinformation, including credit card information, of our users and of thirdparties. Third parties have in the past used our networks, services and brandnames to perpetrate crimes, such as identity theft or credit card theft, andmay do so in the future. Users or third parties may assert claims of liabilityagainst us as a result of any failure by us to prevent security breaches,unauthorized disclosure of user information or other such activities. Althoughwe use security measures that we believe to be industry standard, we cannotassure you that the measures we take will be successfully implemented or willbe effective in preventing these types of activities. We also cannot assure youthat the security measures of our third-party network providers,providers of customer and billing support services or other vendors will beadequate. In addition to potential legal liability, these activities mayadversely impact our reputation or our revenues and may interfere with ourability to provide our services, all of which could adversely impact ourbusiness.

**Harmful softwareprograms such as viruses could disrupt our business.**

Our business is dependenton the continued acceptance of the Internet as an effective medium. Damagingsoftware programs, such as computer viruses, worms and Trojan horses, have fromtime to time been disseminated through the Internet and have caused significantdisruption to Internet users. Certain of these programs have disabled theability of computers to access the Internet, requiring users to obtaintechnical support in order to gain access to the Internet. Other programs havehad the potential to damage or delete computer programs. The development andwidespread dissemination of harmful programs has the potential to seriouslydisrupt Internet usage. If Internet usage is significantly disrupted for an extendedperiod of time, or if the prevalence of these programs results in decreasedresidential Internet usage, our business could be materially and adverselyimpacted. In addition, actions taken by us or our telecommunications providersto attempt to minimize the spread of harmful programs could adversely impactour users’ ability to utilize our services.

**Our failure toprotect our proprietary rights could harm our business.**

Our trademarks, patents, copyrights, domain names andtrade secrets are important to the success of our business. We principally relyupon patent, trademark, copyright, trade secret and contract laws to protectour proprietary technology. We cannot be certain that we have taken adequatesteps to prevent misappropriation of our rights. Our failure to adequatelyprotect our proprietary rights could adversely affect our brands.

Governmental agencies andtheir designees generally regulate the acquisition and maintenance of domainnames. The regulation of domain names in the United States and in foreigncountries is in flux and 

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maychange. As a result, we may be unable to acquire or maintain relevant domainnames in the countries that we conduct, or plan to conduct, business.Furthermore, the relationship between regulations governing domain names andlaws protecting trademarks and similar proprietary rights is unclear.Therefore, we may be unable to prevent third parties from acquiring domainnames that are similar to, infringe upon, dilute or otherwise decrease thevalue of our trademarks and other proprietary rights.

**Legal actions,particularly those associated with proprietary rights, could subject us to substantial liability andexpense and require us to change our business practices.**

We are currently, and have been in the past, party tovarious legal actions in the ordinary course of our business. These actionsinclude, without limitation, claims that we infringe third party patents,claims and investigations by governmental agencies and private parties inconnection with consumer protection and other laws, claims in connection withemployment practices, securities laws claims, breach of contract claims andother business related claims. The nature of our business could subject us toadditional claims for similar matters, as well as a wide variety of otherclaims including, without limitation, claims for defamation, negligence,trademark infringement, copyright infringement, and privacy matters.

Defending against lawsuitsinvolves significant expense and diversion of management’s attention andresources from other matters. We may not prevail in existing actions or actionsthat may be brought in the future. The failure to successfully defend againstcertain types of claims, including claims based on infringement of proprietaryrights, could require us to change our business practices or obtain licensesfrom third parties, which licenses may not be available on acceptable terms, ifat all. Lawsuits also involve the risk of significant settlements or judgmentsagainst us. Both the cost of defending claims, as well as the effect ofsettlements and judgments, could cause our results of operations to fluctuatesignificantly from period to period and could materially and adversely affectour business, financial position, results of operations and cash flows.

**We may not realizethe benefits associated with our intangible assets and may be required to record a significantcharge to earnings if we are required to impair our goodwill or identifiableintangible assets.**

We are required, under accounting principles generallyaccepted in the United States, to review our intangible assets for impairmentwhen events occur or circumstances change that would more likely than notreduce the fair value of a reporting unit below its carrying value amount.Goodwill is required to be tested for impairment at least annually. We haveexperienced impairment losses in the past and we cannot assure you that we willnot experience impairment losses in the future. Any such loss could adverselyand materially impact our financial condition and results of operations.

Our VoIP services and ourdigital photo-sharing services are relatively new and have not generatedsignificant revenues. We have capitalized certain proprietary rights related toour VoIP services as well as certain costs incurred by us in connection withthe development of our VoIP services. We have also capitalized goodwill andintangible assets in connection with the acquisitions of MyPoints, The Names Databaseand PhotoSite. If these services are not commercially successful, we wouldlikely be required to impair these assets which would negatively impact ourfinancial condition and results of operations.

**Our ability tooperate our business could be seriously harmed if we lose members of our senior management team or otherkey employees.**

Our business is largelydependent on the efforts and abilities of our senior management, particularlyMark Goldston, our chairman, chief executive officer and president, and otherkey personnel. Any of our officers or employees can terminate his or heremployment relationship at any time. The loss of these key employees or ourinability to attract or retain other qualified employees could seriously harmour business and prospects. We do not carry key person life insurance on any ofour employees.

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**Governmentregulation or taxation of the provision of Internet access, VoIP services andother services coulddecrease our revenues and increase our costs.**

Changes in the regulatory environment regarding theInternet could decrease our revenues and increase our costs. Currently, ISPsare considered “information service” providers rather than “telecommunications”providers, and regulations that apply to telephone companies and othertelecommunications common carriers currently do not apply to our Internetaccess services. However, our Internet access services could become subject toFederal Communications Commission (“FCC”) and state regulation as Internetaccess services and telecommunications services converge. If the regulatorystatus of ISPs changes, our business may be adversely affected.

Laws, regulations and legal liability issues regardingVoIP services are evolving at a rapid pace. Measures under consideration by the FCC, Congress, the courts and/or otherfederal and state agencies include, without limitation, new laws andregulations, or the interpretation of existing laws and regulations, regardingaccess to telephone numbers, taxes, contributions to the Universal ServiceFund, consumer protection rules, intercarrier compensation arrangements,consumer privacy, assistance to law enforcement, and the provision of E-911services.  Some or all of these measures,if adopted and determined to be applicable to our VoIP services, could make itsignificantly more expensive to operate some or all of our VoIP services andcould cause us to cease operating or enhancing some or all of our VoIPservices. For example, we do not believe we are required to offer E-911services with our existing VoIP services nor do we believe we must comply withthe Communications Assistance for Law Enforcement Act (CALEA), and we do notcurrently have the ability to offer E-911 services nor can we comply with CALEA.If the regulatory status of our VoIP service offerings changes or if we offernew VoIP services that subject us to additional laws and regulations, our VoIPservices may be materially and adversely affected.  In addition, while we intend to develop andimplement an international strategy for our VoIP services, foreign laws andregulations regarding the provision of VoIP services could adversely impact ourability to implement this strategy.

The Internet Tax FreedomAct, which placed a moratorium on new state and local taxes on Internetcommerce, has been extended through November 2007. However, future lawsimposing taxes or other regulations on the provision of goods and services overthe Internet could make it substantially more expensive to operate ourbusiness.

Our business is also subject to a variety of otherU.S. and foreign laws and regulations that could subject us to liabilities,claims or other remedies, such as laws relating to bulk email or “spam,” accessto various types of content by minors, anti-spyware initiatives, encryption,data protection, security breaches and consumer protection. Compliance withthese laws and regulations is complex and may impose significant additionalcosts on us. Certain of our services, particularly our social-networking andonline loyalty marketing services, are dependent on the ability send asignificant volume of emails to members through third parties’ emailsystems.  Additional governmentregulation regarding sending bulk email, as well as voluntary actions by thirdparties to restrict the delivery of emails through their email systems, couldadversely impact our business.  Forexample, AOL and Yahoo! recently announced their plans to reduce the amount ofbulk email sent through their email services by charging bulk email senders toguarantee the delivery of their messages.

In addition, theregulatory framework relating to Internet services is evolving and both thefederal government and states from time to time pass legislation that impactsour business. There are a number of legislative proposals before the UnitedStates Congress and various state legislative bodies that may relate to ourbusiness. It is likely that additional laws and regulations will be adoptedthat would affect our business. The adoption of additional laws and regulationsthat affect our competitors, for example, network neutrality proposals, couldalso have an effect our business. We cannot predict the impact that futureregulatory changes or developments may have on our business, financialcondition, results of 

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operationsor cash flows. The enactment of any additional laws or regulations, increasedenforcement activity of existing laws and regulations, or claims by individualscould significantly impact our costs or the manner in which we conductbusiness, all of which could adversely impact our results of operations andcause our business to suffer.

**Changes in, orinterpretations of, laws regarding consumer protection could subject us to liability or cause us tochange our practices.**

Consumer protection laws and enforcement actionsregarding advertising and user privacy, especially relating to children, arebecoming more prevalent. The FTC has conducted investigations into the privacypractices of companies that collect information about individuals on theInternet. The FTC has also investigated us and other ISPs in connection withmarketing, billing, customer retention, cancellation and disclosure practices.Juno and the FTC entered into a consent agreement, which was approved by theFTC on June 29, 2001, that provides for redress payments and specificdisclosures or notices regarding, among other things, the cost of its Internetaccess services, its cancellation terms and local versus long-distance charges,as well as the requirement to provide adequate customer support to processcancellations. We received an inquiry regarding our compliance with the consentagreement on October 14, 2005, and we submitted a response on December 14,2005. We have not received any further communication on this matter.

Various state agencies aswell as individuals have also asserted claims against, or instituted inquiriesinto, ISPs, including Juno and NetZero, in connection with marketing, billing,customer retention, cancellation and disclosure practices. We cannot assure youthat our services and business practices, or changes to our services andbusiness practices, will not subject us to claims and liability by privateparties, the FTC or other governmental agencies.

**Oursocial-networking and online loyalty marketing businesses rely heavily on emailcampaigns, and anyrestrictions on the sending of emails could materially and adversely affect ourbusiness.**

Our social-networking andonline loyalty marketing businesses deliver a significant number of emails toour members. Yahoo! and AOL recently announced that they will phase out theirIP-based whitelists and implement a pay-per-email program. Restrictions on thesending of emails, such as the contemplated pay-per-email program, wouldincrease our cost of revenue, which could materially and adversely affect ourbusiness and results of operations.

**Our business couldbe shut down or severely impacted by a catastrophic event.**

Our computer equipment andthe telecommunications infrastructure of our third-party networkproviders are vulnerable to damage from fire, earthquakes, power loss,telecommunications failures, terrorism and similar events. We have experiencedsituations where power loss and telecommunications failures have adverselyimpacted our services, although to date such failures have not been material toour operations. A significant portion of our computer equipment, includingcritical equipment dedicated to our Internet access services, is located at ourheadquarters in Woodland Hills, California and at facilities in and around LosAngeles, California; San Francisco, California; San Jose, California; Ashburn,Virginia; Renton, Washington and New York, New York. In the past, areas inCalifornia have experienced repeated episodes of diminished electrical powersupply, or “rolling blackouts.” A natural disaster, terrorism, power blackoutor other unanticipated problem at our headquarters or at a network hub, orwithin a third-party network provider’s network, could causeinterruptions in the services that we provide. Our systems are not fullyredundant. Any prolonged disruption of our services due to system failurescould result in user turnover and decreased revenues.

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**Our business could be severely impacted due topolitical instability or other factors in India.**

We have a significantnumber of employees located in our India office. Our operations in Indiaprimarily handle email customer support, product development and qualityassurance. A portion of our outsourced customer support is also based in India.Our product development, customer support and quality assurance operationswould be severely disrupted if telecommunications issues, political instabilityor other factors adversely impacted these operations or our ability tocommunicate with these operations. Any disruption that continued for anextended period of time would likely have a material adverse effect on ourability to service our customers and develop our products since it would take asignificant period of time to transition these operations internally or to anoutside vendor. If we were to cease our operations in India and transfer theseoperations to another geographic area, such change could result in increasedoverhead costs which could materially and adversely impact our results ofoperations.

**We cannot predict our future capital needs and we maynot be able to secure additional financing.**

We may need to raiseadditional funds in the future to fund our operations, for acquisitions ofbusinesses or technologies or for other purposes. Additional financing may notbe available on terms favorable to us, or at all. If adequate funds are notavailable or not available when required in sufficient amounts or on acceptableterms, we may not be able to devote sufficient cash resources to continue toprovide our services in their current form, acquire additional users, enhanceor expand our services, respond to competitive pressures or take advantage ofperceived opportunities, and our business and its future prospects may suffer.

**We may stop payingquarterly cash dividends on our common stock.**

Commencing with the secondquarter of 2005, we have declared and paid a quarterly cash dividend of $0.20per share of common stock. The payment of future dividends is discretionary andwill be subject to determination by our board of directors each quarterfollowing its review of our financial performance. Our future cash flows willsignificantly decline from what we experienced in 2005 due to the payment ofincome taxes and other factors, and our cash balances will decline if we useour cash to acquire businesses, repurchase stock or for other purposes. Wecannot assure you that we will continue to pay quarterly cash dividends, and ifwe do not, our stock price could be negatively impacted.

**We haveanti-takeover provisions that may make it difficult for a third party toacquire us.**

Provisions of ourcertificate of incorporation, our bylaws and Delaware law could make itdifficult for a third party to acquire us, even if doing so might be beneficialto our stockholders because of a premium price offered by a potential acquirer.In addition, our board of directors adopted a stockholder rights plan, which isan anti-takeover measure that will cause substantial dilution to a person whoattempts to acquire our company on terms not approved by our board ofdirectors.

**Our stock price hasbeen highly volatile and may continue to be volatile.**

The market price of our common stock has fluctuatedsignificantly since our stock began trading on the Nasdaq National Market in September 2001and it is likely to continue to be volatile with extreme volume fluctuations.In addition, the Nasdaq National Market, where most publicly held Internetcompanies are traded, has experienced substantial price and volumefluctuations. These broad market and industry factors may harm the market priceof our common stock, regardless of our actual operating performance, and forthis or other reasons we could suffer significant declines in the market priceof our common stock.

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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. At March 31, 2006, we hadrepurchased $139.2 million of our common stock under the program, leaving$60.8 million remaining under the program.

Shares withheld from restricted stock units (“RSUs”)awarded to employees upon vesting to pay applicable withholding taxes on theirbehalf are considered common stock repurchases, but are not part of the Boardapproved 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, 2006 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** | ** ** |
|--------------------|------------|------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| August 2001   |       |       | 138        |                                                 |       |                                             | $          | 1.67                                                                                                                    |       |                                                                                                                        |       | 138 |   |   |   | $ | 9,770 |   |   |
| November 2001 |       |       | 469        |                                                 |       |                                             | 1.77       |                                                                                                                    |       |                                                                                                                        | 469        |   |   |   | 8,940 |   |   |
| February 2002 |       |       | 727        |                                                 |       |                                             | 3.38       |                                                                                                                    |       |                                                                                                                        | 727        |   |   |   | 6,485 |   |   |
| August 2002   |       |       | 288        |                                                 |       |                                             | 7.51       |                                                                                                                    |       |                                                                                                                        | 288        |   |   |   | 27,820 |   |   |
| February 2003 |       |       | 193        |                                                 |       |                                             | 9.43       |                                                                                                                    |       |                                                                                                                        | 193        |   |   |   | 26,005 |   |   |
| May 2003      |       |       | 281        |                                                 |       |                                             | 13.51      |                                                                                                                    |       |                                                                                                                        | 281        |   |   |   | 22,207 |   |   |
| November 2003 |       |       | 2,024      |                                                 |       |                                             | 19.76      |                                                                                                                    |       |                                                                                                                        | 2,024      |   |   |   | 48,706 |   |   |
| February 2004 |       |       | 2,887      |                                                 |       |                                             | 16.86      |                                                                                                                    |       |                                                                                                                        | 2,887      |   |   |   | — |   |   |
| May 2004      |       |       | —     |                                                 |       |                                             | —     |                                                                                                                    |       |                                                                                                                        | —     |   |   |   | 100,000 |   |   |
| August 2004   |       |       | 2,657      |                                                 |       |                                             | 9.41       |                                                                                                                    |       |                                                                                                                        | 2,657      |   |   |   | 74,989 |   |   |
| February 2005 |       |       | 1,268      |                                                 |       |                                             | 11.20      |                                                                                                                    |       |                                                                                                                        | 1,268      |   |   |   | 60,782 |   |   |
| February 2006 |       |       | 129        |                                                 |       |                                             | 12.77      |                                                                                                                    |       |                                                                                                                        | —     |   |   |   | 60,782 |   |   |
| Total              |       |       | 11,061     |                                                 |       |                                             | $          | 12.74                                                                                                                   |       |                                                                                                                        |       | 10,932 |   |   |   |   |   |   |

 

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**ITEM6.   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                                                                                                                                                                                                                                                          |       |                  |       | 8-K                                |   | 000-33367 |   | 10/1/2001 |
| 3.2   |       | Amended and Restated  Bylaws                                                                                                                                                                                                                                                                                |       |                  |       | 8-K                                |   | 000-33367 |   | 10/1/2001 |
| 3.3   |       | Certificate of  Designation for Series A Junior Participating Preferred Stock (included  in exhibit 4.1 below)                                                                                                                                                                                    |       |                  |       | 8-K                                |   | 000-33367 |   | 11/23/2001 |
| 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 |       |                  |       | 8-K                                |   | 000-33367 |   | 11/23/2001 |
| 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-Q                               |   | 000-33367 |   | 11/14/2001 |
| 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-Q                               |   | 000-33367 |   | 11/14/2001 |
| 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.  2006 Management Bonus Plan                                                                                                                                                                                                                                                        |       |                  |       | 8-K                                |   | 000-33367 |   | 3/30/2006 |
| 10.11 |       | Amended and Restated  Employment Agreement between the Registrant and Mark R. Goldston                                                                                                                                                                                                                 |       |                  |       | 10-KT                              |   | 000-33367 |   | 2/5/2004 |
| 10.12 |       | Amended and Restated  Employment Agreement between the Registrant and Charles S. Hilliard                                                                                                                                                                                                              |       |                  |       | 10-KT                              |   | 000-33367 |   | 2/5/2004 |
| 10.13 |       | Amended and Restated Employment Agreement between  the Registrant and Frederic A. Randall, Jr.                                                                                                                                                                                                    |       |                  |       | 10-KT                              |   | 000-33367 |   | 2/5/2004 |

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| 10.14 |   | Employment Agreement between the Registrant and Matt  Wisk                                                                                                                                                                                                                            |   |   |   | 10-Q   |   | 000-33367 |   | 8/8/2005   |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|-----------|--------|------------|
| 10.15 |   | Employment Agreement  between the Registrant and Ted Cahall                                                                                                                                                                                                                           |   |   |   | 10-Q   |   | 000-33367 |   | 8/8/2005   |
| 10.16 |   | Employment Agreement  between the Registrant and Jon Fetveit                                                                                                                                                                                                                          |   |   |   | 10-Q   |   | 000-33367 |   | 8/8/2005   |
| 10.17 |   | Employment Agreement  between the Registrant and Gerald Popek                                                                                                                                                                                                                         |   |   |   | 10-Q   |   | 000-33367 |   | 8/8/2005   |
| 10.18 |   | Employment Agreement  between the Registrant and Robert Taragan                                                                                                                                                                                                                       |   |   |   | 10-Q   |   | 000-33367 |   | 8/8/2005   |
| 10.19 |   | Office Lease between LNR  Warner Center, LLC and NetZero, Inc.                                                                                                                                                                                                                   |   |   |   | 10-Q   |   | 000-33367 |   | 5/3/2004   |
| 10.20 |   | Credit Agreement, dated  as of December 3, 2004, among United Online, the Lenders party thereto from  time to time, Deutsche Bank Trust Company Americas, as Administrative Agent,  and Deutsche Bank Securities Inc., as Lead Arranger (the “Credit  Agreement”) |   |   |   | 8-K    |   | 000-33367 |   | 12/3/2004  |
| 10.21 |   | First Amendment to  Credit Agreement, dated as of December 13, 2004                                                                                                                                                                                                              |   |   |   | 8-K    |   | 000-33367 |   | 12/14/2004 |
| 10.22 |   | Second Amendment to  Credit Agreement, dated as of March 11, 2005                                                                                                                                                                                                                |   |   |   | 10-K   |   | 000-33367 |   | 3/16/2005  |
| 31.1  |   | Certification of the  Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                         |   | X      |   |   |   | 000-33367 |   | 5/10/2006  |
| 31.2  |   | Certification of the  Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                         |   | X      |   |   |   | 000-33367 |   | 5/10/2006  |
| 32.1  |   | Certification of the  Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                         |   | X      |   |   |   | 000-33367 |   | 5/10/2006  |
| 32.2  |   | Certification of the Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                          |   | X      |   |   |   | 000-33367 |   | 5/10/2006  |

 

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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 10, 2006.
|          | UNITED  ONLINE, INC. |
|----------|---------------------------|
|     | By:                       | /s/  CHARLES S. HILLIARD |
|     |                      | Charles S.  Hilliard |
| * * | * *                  | *Executive  Vice President, Finance 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                                                                                                                                                                                                                                                          |       |                      |       |                                            |       | 8-K |   | 000-33367 |   | 10/1/2001 |   |
| 3.2     |       | Amended and  Restated Bylaws                                                                                                                                                                                                                                                                                |       |                      |       |                                            |       | 8-K |   | 000-33367 |   | 10/1/2001 |   |
| 3.3     |       | Certificate of  Designation for Series A Junior Participating Preferred Stock (included  in exhibit 4.1 below)                                                                                                                                                                                    |       |                      |       |                                            |       | 8-K |   | 000-33367 |   | 11/23/2001 |   |
| 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 |       |                      |       |                                            |       | 8-K |   | 000-33367 |   | 11/23/2001 |   |
| 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-Q |   | 000-33367 |   | 11/14/2001 |   |
| 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-Q |   | 000-33367 |   | 11/14/2001 |   |
| 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. 2006 Management Bonus Plan                                                                                                                                                                                                                                                        |       |                      |       |                                            |       | 8-K |   | 000-33367 |   | 3/30/2006 |   |
| 10.11   |       | Amended and  Restated Employment Agreement between the Registrant and Mark R.  Goldston                                                                                                                                                                                                                |       |                      |       |                                            |       | 10-KT |   | 000-33367 |   | 2/5/2004 |   |
| 10.12   |       | Amended and  Restated Employment Agreement between the Registrant and Charles S.  Hilliard                                                                                                                                                                                                             |       |                      |       |                                            |       | 10-KT |   | 000-33367 |   | 2/5/2004 |   |
| 10.13   |       | Amended and Restated  Employment Agreement between the Registrant and Frederic A.  Randall, Jr.                                                                                                                                                                                                   |       |                      |       |                                            |       | 10-KT |   | 000-33367 |   | 2/5/2004 |   |

 

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|         | ** ** | ** **                                                                                                                                                                                                                                                                            | ** ** | **Filed  with this** | ** ** | **Incorporated by Reference to** | ** ** |
|---------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|-------------------------------------------------|------------|
| **No.** | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                          | ** ** | **Form 10-Q**        | ** ** | **Form**                                        | ** ** | **File No.** | ** ** | **Date Filed** | ** ** |
| 10.14   |       | Employment  Agreement between the Registrant and Matt Wisk                                                                                                                                                                                                                            |       |                      |       |                                            |       | 10-Q |   | 000-33367 |   | 8/8/2005 |   |
| 10.15   |       | Employment  Agreement between the Registrant and Ted Cahall                                                                                                                                                                                                                           |       |                      |       |                                            |       | 10-Q |   | 000-33367 |   | 8/8/2005 |   |
| 10.16   |       | Employment  Agreement between the Registrant and Jon Fetveit                                                                                                                                                                                                                          |       |                      |       |                                            |       | 10-Q |   | 000-33367 |   | 8/8/2005 |   |
| 10.17   |       | Employment  Agreement between the Registrant and Gerald Popek                                                                                                                                                                                                                         |       |                      |       |                                            |       | 10-Q |   | 000-33367 |   | 8/8/2005 |   |
| 10.18   |       | Employment  Agreement between the Registrant and Robert Taragan                                                                                                                                                                                                                       |       |                      |       |                                            |       | 10-Q |   | 000-33367 |   | 8/8/2005 |   |
| 10.19   |       | Office Lease  between LNR Warner Center, LLC and NetZero, Inc.                                                                                                                                                                                                                   |       |                      |       |                                            |       | 10-Q |   | 000-33367 |   | 5/3/2004 |   |
| 10.20   |       | Credit Agreement,  dated as of December 3, 2004, among United Online, the Lenders party  thereto from time to time, Deutsche Bank Trust Company Americas, as Administrative  Agent, and Deutsche Bank Securities Inc., as Lead Arranger (the “Credit  Agreement”) |       |                      |       |                                            |       | 8-K |   | 000-33367 |   | 12/3/2004 |   |
| 10.21   |       | First Amendment  to Credit Agreement, dated as of December 13, 2004                                                                                                                                                                                                              |       |                      |       |                                            |       | 8-K |   | 000-33367 |   | 12/14/2004 |   |
| 10.22   |       | Second Amendment  to Credit Agreement, dated as of March 11, 2005                                                                                                                                                                                                                |       |                      |       |                                            |       | 10-K |   | 000-33367 |   | 3/16/2005 |   |
| 31.1    |       | Certification of  the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                         |       |                      | X          |                                            |       |   |   | 000-33367 |   | 5/10/2006 |   |
| 31.2    |       | Certification of  the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                         |       |                      | X          |                                            |       |   |   | 000-33367 |   | 5/10/2006 |   |
| 32.1    |       | Certification of  the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                         |       |                      | X          |                                            |       |   |   | 000-33367 |   | 5/10/2006 |   |
| 32.2    |       | Certification of the  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                         |       |                      | X          |                                            |       |   |   | 000-33367 |   | 5/10/2006 |   |

 

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