**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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| **(Mark One)** |                                                                                                     |
|----------------|----------------------------------------------------------------------------------------------------------|
| **x**          | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
| ** **     | **For the Quarterly Period Ended June 30, 2007**                                                    |
| ** **     | **Or**                                                                                                   |
| **o**          | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**Forthe transition periodfrom                         to**

**Commissionfile number 000-33367**

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**UNITED ONLINE, INC.**

(Exact Name of Registrantas Specified in Its Charter)

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

 

**(818) 287-3000**

**(Registrant’s Telephone Number,Including Area Code)**

**Not applicable**

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

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated fileror non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)

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

 

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

Therewere 67,487,317 shares of the registrant’s common stock outstanding at July 31,2007.

 

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**INDEX**

| **PART I.**  | ** ** | ** ** | ** ** | **FINANCIAL INFORMATION**                                                                                                               | ** ** | ** ** | ** ** |
|-------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
|              |       | Item  1.   |       | Unaudited Condensed Consolidated Balance Sheets at  June 30, 2007 and December 31, 2006                                       |       | 3          |       |
|              |       |       |       | Unaudited  Condensed Consolidated Statements of Operations for the Quarters and Six  Months Ended June 30, 2007 and 2006           |       | 4          |       |
|              |       |       |       | Unaudited  Condensed Consolidated Statements of Comprehensive Income for the Quarters  and Six Months Ended June 30, 2007 and 2006 |       | 5          |       |
|              |       |       |       | Unaudited  Condensed Consolidated Statement of Stockholders’ Equity for the Six Months  Ended June 30, 2007                   |       | 6          |       |
|              |       |       |       | Unaudited  Condensed Consolidated Statements of Cash Flows for the Six Months Ended  June 30, 2007 and 2006                        |       | 7          |       |
|              |       |       |       | Notes to the  Unaudited Condensed Consolidated Financial Statements                                                                     |       | 8          |       |
|              |       | Item 2.    |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                             |       | 18         |       |
|              |       | Item 3.    |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                             |       | 34         |       |
|              |       | Item 4.    |       | Controls and  Procedures                                                                                                                |       | 35         |       |
| **PART II.** | ** ** | ** ** | ** ** | **OTHER INFORMATION**                                                                                                                   | ** ** | ** ** | ** ** |
|              |       | Item 1.    |       | Legal Proceedings                                                                                                                       |       | 36         |       |
|              |       | Item  1A.  |       | Risk  Factors                                                                                                                           |       | 37         |       |
|              |       | Item 2.    |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                            |       | 48         |       |
|              |       | Item  6.   |       | Exhibits                                                                                                                                |       | 49         |       |
| **SIGNATURES**    |       | 51         |       |

 

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

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

2

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**PART I—FINANCIALINFORMATION**

**ITEM 1.**   FINANCIALSTATEMENTS

**UNITEDONLINE, INC.UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS(in thousands)**

| ** **                                                                                                                                        | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                        | ** ** |                    | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Current assets:                                                                                                                                   |       |                    |       |                        |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                         |       |                    | $          | 19,698                      |       |   |   | $ | 19,252 |   |   |
| Short-term investments                                                                                                                            |       |                    | 171,703    |                        |       |   | 143,110 |   |   |
| Accounts receivable, net of allowance for doubtful  accounts of $2,244 and $1,324 at June 30, 2007 and December 31,  2006, respectively |       |                    | 30,259     |                        |       |   | 32,226 |   |   |
| Deferred tax assets, net                                                                                                                          |       |                    | 10,102     |                        |       |   | 11,705 |   |   |
| Other current assets                                                                                                                              |       |                    | 16,055     |                        |       |   | 13,426 |   |   |
| Total current assets                                                                                                                              |       |                    | 247,817    |                        |       |   | 219,719 |   |   |
| Property and  equipment, net                                                                                                                      |       |                    | 36,803     |                        |       |   | 34,296 |   |   |
| Deferred tax  assets, net                                                                                                                         |       |                    | 60,966     |                        |       |   | 59,655 |   |   |
| Goodwill                                                                                                                                          |       |                    | 132,712    |                        |       |   | 133,018 |   |   |
| Intangible  assets, net                                                                                                                           |       |                    | 46,967     |                        |       |   | 53,653 |   |   |
| Other assets                                                                                                                                      |       |                    | 4,373      |                        |       |   | 2,678 |   |   |
| Total assets                                                                                                                                      |       |                    | $          | 529,638                     |       |   |   | $ | 503,019 |   |   |
| **Liabilities and Stockholders’ Equity**                                                                                                     | ** ** |                    | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Current  liabilities:                                                                                                                             |       |                    |       |                        |       |   |   |   |   |
| Accounts payable                                                                                                                                  |       |                    | $          | 43,523                      |       |   |   | $ | 36,550 |   |   |
| Accrued liabilities                                                                                                                               |       |                    | 27,711     |                        |       |   | 39,547 |   |   |
| Member redemption liability                                                                                                                       |       |                    | 18,126     |                        |       |   | 15,835 |   |   |
| Deferred revenue                                                                                                                                  |       |                    | 61,207     |                        |       |   | 53,121 |   |   |
| Current portion of capital leases                                                                                                                 |       |                    | 17         |                        |       |   | 17 |   |   |
| Total current liabilities                                                                                                                         |       |                    | 150,584    |                        |       |   | 145,070 |   |   |
| Member redemption  liability                                                                                                                      |       |                    | 4,691      |                        |       |   | 4,154 |   |   |
| Deferred revenue                                                                                                                                  |       |                    | 4,432      |                        |       |   | 3,227 |   |   |
| Capital leases                                                                                                                                    |       |                    | 5          |                        |       |   | 13 |   |   |
| Other liabilities                                                                                                                                 |       |                    | 4,765      |                        |       |   | 3,589 |   |   |
| Total liabilities                                                                                                                                 |       |                    | 164,477    |                        |       |   | 156,053 |   |   |
| Commitments and  contingencies (see Note 9)                                                                                                       |       |                    |       |                        |       |   |   |   |   |
| Stockholders’ equity:                                                                                                                        |       |                    |       |                        |       |   |   |   |   |
| Common stock                                                                                                                                      |       |                    | 7          |                        |       |   | 7 |   |   |
| Additional paid-in capital                                                                                                                        |       |                    | 428,280    |                        |       |   | 439,383 |   |   |
| Accumulated other comprehensive loss                                                                                                              |       |                    | (183       | )                           |       |   | (245 | ) |   |
| Accumulated deficit                                                                                                                               |       |                    | (62,943    | )                           |       |   | (92,179 | ) |   |
| Total stockholders’ equity                                                                                                                   |       |                    | 365,161    |                        |       |   | 346,966 |   |   |
| Total liabilities  and stockholders’ equity                                                                                                  |       |                    | $          | 529,638                     |       |   |   | $ | 503,019 |   |   |

 

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

3

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

| ** **                                                                        | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                              | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues                                                                          |       | $                                     | 131,417    |                                          | $          | 134,900 |   | $ | 261,268 |   | $ | 262,232 |   |
| Operating  expenses:                                                              |       |                                  |       |                                          |       |   |   |   |   |
| Cost of Revenues (including stock-based  compensation, see Note 4)           | ** ** | 30,409                                |       | 31,146                                        |       | 59,656 |   | 61,036 |   |
| Sales and marketing (including stock-based  compensation, see Note 4)        |       | 42,712                                |       | 46,137                                        | ** ** | 88,737 |   | 89,556 |   |
| Product development (including stock-based  compensation, see Note 4)        |       | 13,065                                |       | 13,385                                        | ** ** | 26,536 |   | 26,201 |   |
| General and administrative (including stock-based  compensation, see Note 4) |       | 16,900                                |       | 17,422                                        |       | 32,389 |   | 33,668 |   |
| Amortization of intangible assets                                                 |       | 3,204                                 |       | 4,552                                         |       | 6,699 |   | 8,941 |   |
| Restructuring charges                                                             |       | 394                                   |       | —                                        |       | 394 |   | — |   |
| Total operating expenses                                                          |       | 106,684                               |       | 112,642                                       |       | 214,411 |   | 219,402 |   |
| Operating income                                                                  |       | 24,733                                |       | 22,258                                        |       | 46,857 |   | 42,830 |   |
| Interest and  other income, net                                                   |       | 1,881                                 |       | 1,354                                         |       | 3,581 |   | 3,070 |   |
| Interest expense                                                                  |       | (372                                  | )          | (411                                          | )          | (732 | ) | (2,127 | ) |
| Income before  income taxes                                                       |       | 26,242                                |       | 23,201                                        |       | 49,706 |   | 43,773 |   |
| Provision for  income taxes                                                       |       | 10,034                                |       | 11,616                                        |       | 20,470 |   | 20,537 |   |
| Income before  cumulative effect of accounting change                             |       | 16,208                                |       | 11,585                                        |       | 29,236 |   | 23,236 |   |
| Cumulative effect  of accounting change, net of tax                               |       | —                                |       | —                                        |       | — |   | 1,041 |   |
| Net income                                                                        |       | $                                     | 16,208     |                                          | $          | 11,585 |   | $ | 29,236 |   | $ | 24,277 |   |
| Basic net income per  share:                                                      |       |                                  |       |                                          |       |   |   |   |   |
| Income before cumulative effect of accounting change                              |       | $                                     | 0.24       |                                          | $          | 0.18 |   | $ | 0.44 |   | $ | 0.37 |   |
| Cumulative effect of accounting change, net of tax                                |       | —                                |       | —                                        |       | — |   | 0.01 |   |
| Basic net income  per share                                                       |       | $                                     | 0.24       |                                          | $          | 0.18 |   | $ | 0.44 |   | $ | 0.38 |   |
| Diluted net income per  share:                                                    |       |                                  |       |                                          |       |   |   |   |   |
| Income before cumulative effect of accounting change                              |       | $                                     | 0.23       |                                          | $          | 0.18 |   | $ | 0.43 |   | $ | 0.36 |   |
| Cumulative effect of accounting change, net of tax                                |       | —                                |       | —                                        |       | — |   | 0.01 |   |
| Diluted net  income per share                                                     |       | $                                     | 0.23       |                                          | $          | 0.18 |   | $ | 0.43 |   | $ | 0.37 |   |
| Shares used to  calculate basic net income per share                              |       | 66,685                                |       | 63,782                                        | ** ** | 66,159 |   | 63,150 |   |
| Shares used to calculate  diluted net income per share                            |       | 69,351                                |       | 65,955                                        | ** ** | 68,719 |   | 65,425 |   |

 

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

4

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

| ** **                                                                                                                                                                                                                               | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                                                                                                               | ** ** | **2007**                              | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                                                                                                                                                                                               |       | $                                     | 16,208     |                                          | $          | 11,585 |   | $ | 29,236 |   | $ | 24,277 |   |
| Unrealized gain  on short-term investments, net of tax of $6 and $48 for the  quarter and six months ended June 30, 2007, respectively, and $28 and  $23 for the quarter and six months ended June 30, 2006, respectively |       | 9                                     |       | 42                                            |       | 73 |   | 26 |   |
| Unrealized loss  on derivative, net of tax of $(60) for the six months ended June 30,  2006                                                                                                                                         |       | —                                |       | —                                        |       | — |   | (83 | ) |
| Foreign currency  translation                                                                                                                                                                                                            |       | (13                                   | )          | 9                                             |       | (11 | ) | 37 |   |
| Comprehensive income                                                                                                                                                                                                                     |       | $                                     | 16,204     |                                          | $          | 11,636 |   | $ | 29,298 |   | $ | 24,257 |   |

 

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

5

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**UNITEDONLINE, INC.**

**UNAUDITEDCONDENDSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**(inthousands)**

| ** **                                                       | ** ** | ** **            | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated ** | ** ** | ** **             | ** ** | ** **      | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-------------------|------------|-----------------------|------------|------------------------|------------|-----------------|------------|
| ** **                                                       | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**    | ** ** | **Other **       | ** ** | ** **             | ** ** | **Total ** | ** ** |
|                                                                  | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Comprehensive** | ** ** | **Accumulated**       | ** ** | **Stockholders’** | ** ** |
| ** **                                                       | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Income**            | ** ** | **Deficit**            | ** ** | **Equity**      | ** ** |
| Balance at January 1, 2007                                  |       | 65,805                |       |        | $          | 7                 |       |                  |       | $                      | 439,383    |            |       |   | $ | (245 | ) |   |   | $ | (92,179 | ) |   |   | $ | 346,966 |   |   |
| Exercises of stock options                                       |       | 897                   |       |        | —     |              |       |                  | 6,837      |                   |       |            | —     |   |   |   | — |   |   |   | 6,837 |   |   |
| Issuance of common stock through employee stock  purchase plan   |       | 419                   |       |        | —     |              |       |                  | 3,485      |                   |       |            | —     |   |   |   | — |   |   |   | 3,485 |   |   |
| Vesting of restricted stock units                                |       | 466                   |       |        | —     |              |       |                  | —     |                   |       |            | —     |   |   |   | — |   |   |   | — |   |   |
| Repurchases of restricted stock                                  |       | (125                  | )          |        | —     |              |       |                  | —     |                   |       |            | —     |   |   |   | — |   |   |   | — |   |   |
| Repurchases of common stock                                      |       | —                |       |        | —     |              |       |                  | (3,782     | )                      |       |            | —     |   |   |   | — |   |   |   | (3,782 | ) |   |
| Dividends paid on shares outstanding and restricted  stock units |       | —                |       |        | —     |              |       |                  | (28,174    | )                      |       |            | —     |   |   |   | — |   |   |   | (28,174 | ) |   |
| Stock-based compensation                                         |       | —                |       |        | —     |              |       |                  | 6,821      |                   |       |            | —     |   |   |   | — |   |   |   | 6,821 |   |   |
| Unrealized gain on short-term investments, net of tax            |       | —                |       |        | —     |              |       |                  | —     |                   |       |            | 73         |   |   |   | — |   |   |   | 73 |   |   |
| Foreign currency translation                                     |       | —                |       |        | —     |              |       |                  | —     |                   |       |            | (11        | ) |   |   | — |   |   |   | (11 | ) |   |
| Tax benefits from stock options                                  |       | —                |       |        | —     |              |       |                  | 3,710      |                   |       |            | —     |   |   |   | — |   |   |   | 3,710 |   |   |
| Net income                                                       |       | —                |       |        | —     |              |       |                  | —     |                   |       |            | —     |   |   |   | 29,236 |   |   |   | 29,236 |   |   |
| Balance at  June 30, 2007                                   |       | 67,462                |       |        | $          | 7                 |       |                  |       | $                      | 428,280    |            |       |   | $ | (183 | ) |   |   | $ | (62,943 | ) |   |   | $ | 365,161 |   |   |

 

Theaccompanying notes are an integral part of these unaudited condensed consolidated financial statements.

6

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**UNITED ONLINE, INC.**

**UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(inthousands)**

| ** **                                                                            | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                            | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Cash flows from operating activities:                                                 |       |                                          |       |   |   |
| Net income                                                                            | ** ** | $                                             | 29,236     |   | $ | 24,277 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:    | ** ** |                                          |       |   |   |
| Depreciation and  amortization                                                        | ** ** | 16,678                                        |       | 18,993 |   |
| Stock-based  compensation                                                             | ** ** | 6,821                                         |       | 10,833 |   |
| Provision for doubtful  accounts                                                      | ** ** | 1,093                                         |       | 146 |   |
| Deferred taxes                                                                        | ** ** | 550                                           |       | 806 |   |
| Tax benefits from stock  options                                                      | ** ** | 3,710                                         |       | 3,570 |   |
| Excess tax benefits from  stock-based compensation                                    | ** ** | (2,533                                        | )          | (2,583 | ) |
| Cumulative effect of  accounting change, net of tax                                   |       | —                                        |       | (1,041 | ) |
| Other                                                                                 | ** ** | 508                                           |       | 2,315 |   |
| Changes in operating assets and liabilities  (excluding the effects of acquisitions): | ** ** |                                          |       |   |   |
| Accounts receivable                                                                   | ** ** | 873                                           |       | 1,771 |   |
| Other assets                                                                          | ** ** | (4,324                                        | )          | 1,498 |   |
| Accounts payable and  accrued liabilities                                             | ** ** | (3,616                                        | )          | (9,355 | ) |
| Member redemption  liability                                                          | ** ** | 2,829                                         |       | 870 |   |
| Deferred revenue                                                                      | ** ** | 9,292                                         |       | 876 |   |
| Other liabilities                                                                     | ** ** | (71                                           | )          | (88 | ) |
| Net cash provided by  operating activities                                            | ** ** | 61,046                                        |       | 52,888 |   |
| Cash flows from investing activities:                                                 | ** ** |                                          |       |   |   |
| Purchases of property  and equipment                                                  | ** ** | (12,563                                       | )          | (13,953 | ) |
| Purchases of rights,  patents and trademarks                                          |       | —                                        |       | (509 | ) |
| Purchases of short-term  investments                                                  | ** ** | (164,505                                      | )          | (180,309 | ) |
| Proceeds from maturities  and sales of short-term investments                         | ** ** | 135,581                                       |       | 198,321 |   |
| Cash paid for  acquisitions, net of cash acquired                                     |       | —                                        |       | (60,528 | ) |
| Proceeds from sales of  assets, net                                                   | ** ** | 21                                            |       | — |   |
| Net cash used for  investing activities                                               | ** ** | (41,466                                       | )          | (56,978 | ) |
| Cash flows from financing activities:                                                 | ** ** |                                          |       |   |   |
| Payments on term loan                                                                 |       | —                                        |       | (54,209 | ) |
| Payments on capital  leases                                                           | ** ** | (8                                            | )          | (146 | ) |
| Proceeds from employee  stock purchase plan                                           | ** ** | 3,485                                         |       | 2,965 |   |
| Proceeds from exercises  of stock options                                             | ** ** | 6,837                                         |       | 5,037 |   |
| Repurchases of common  stock                                                          | ** ** | (3,782                                        | )          | (1,957 | ) |
| Payments for dividends                                                                | ** ** | (28,174                                       | )          | (26,242 | ) |
| Excess tax benefits from  stock-based compensation                                    | ** ** | 2,533                                         |       | 2,583 |   |
| Net cash used for  financing activities                                               | ** ** | (19,109                                       | )          | (71,969 | ) |
| Effect of exchange rate  changes on cash and cash equivalents                         | ** ** | (25                                           | )          | 24 |   |
| Change in cash and cash  equivalents                                                  | ** ** | 446                                           |       | (76,035 | ) |
| Cash and cash  equivalents, beginning of period                                       | ** ** | 19,252                                        |       | 100,397 |   |
| Cash and cash equivalents, end of period                                              | ** ** | $                                             | 19,698     |   | $ | 24,362 |   |

 

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

7

 

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**UNITED ONLINE, INC.**

**NOTES TO THE CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

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

**Descriptionof Business**

United Online, Inc. (“United Online” or the “Company”)is a leading provider of consumer Internet and media services through a numberof brands, including Classmates, MyPoints, NetZero and Juno. The Company’sprimary Content & Media services are social networking and onlineloyalty marketing. The Company’s primary Communications services are Internetaccess and email. On a combined basis, the Company’s Web properties attract asignificant number of Internet users each month and the Company offersmarketers a broad array of Internet advertising services as well as onlinemarket research and measurement services.

**Basisof Presentation**

The accompanyingconsolidated financial statements for the quarters and six months ended June 30,2007 and 2006, which include United Online and its wholly-owned subsidiaries,are unaudited except for the balance sheet information at December 31,2006, which is derived from the audited consolidated financial statements filedon March 1, 2007 with the Securities and Exchange Commission (“SEC”) inthe Company’s Annual Report on Form 10-K for the year ended December 31,2006 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 bythe SEC. Accordingly, they do not include all of the information and notedisclosures required by GAAP for complete financial statements. The year-endcondensed balance sheet data was derived from audited financial statements, butdoes not include all disclosures required by GAAP. All significant intercompanyaccounts and transactions have been eliminated in consolidation. Theconsolidated financial statements, in the opinion of management, reflect alladjustments (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 of financial statements in accordancewith GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingentliabilities and the reported amounts of revenues and expenses. Actual resultscould differ from those estimates. These unaudited condensed consolidatedfinancial statements should be read in conjunction with the auditedconsolidated financial statements and related notes for the year ended December 31,2006 included in the Company’s Annual Report on Form 10-K filed on March 1,2007 with the SEC.

**RecentAccounting Pronouncements**

*Accountingfor Uncertainty in Income Taxes*

In July 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No. (“FIN”) 48,*Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109*, which clarifies theaccounting for uncertainty in income tax positions. This Interpretationrequires that the Company recognize, in the consolidated financial statements,the impact of a tax position that is more 

8

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likelythan not to be sustained upon examination based on the technical merits of theposition. The provisions of FIN 48 were effective for the Company beginning inthe March 2007 quarter, with any cumulative effect of a change inaccounting principle recorded as an adjustment to opening retained earnings.The implementation of FIN 48 did not have a material impact on the Company’sfinancial position, results of operations or cash flows.

*FairValue Measurements*

In September 2006, the FASB issued Statement ofFinancial Accounting Standard (“SFAS”) No. 157, *Fair ValueMeasurements*, which clarifies the definition of fair value,establishes guidelines for measuring fair value, and expands disclosuresregarding fair value measurements. SFAS No. 157 does not require any newfair value measurements and eliminates inconsistencies in guidance found invarious prior accounting pronouncements. SFAS No. 157 will be effectivefor the Company on January 1, 2008. The Company is currently evaluatingthe impact of adopting SFAS No. 157 on its financial position, results ofoperations and cash flows.

*FairValue Option*

In February 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities*, which permits entities to choose to measuremany financial instruments and certain other items at fair value that are notcurrently required to be measured at fair value. SFAS No. 159 will beeffective for the Company on January 1, 2008. The Company is currentlyevaluating the impact of adopting SFAS No. 159 on its financial position,results of operations and cash flows.

**2.   BALANCESHEET COMPONENTS**

**Short-TermInvestments**

Short-term investmentsconsist of the following (in thousands):

| ** **            | ** ** | **June 30, 2007** | ** ** |
|-----------------------|------------|-----------------------------|------------|
| ** **            | ** ** | **Amortized  Cost**         | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair Value** | ** ** |
| U.S. corporate  notes |       | $                           | —     |   |   | $ | — |   |   |   | $ | — |   |   | $ | — |   |
| Government  agencies  |       | 171,794                     |       |   | 42 |   |   |   | (133 | ) |   | 171,703 |   |
| Total                 |       | $                           | 171,794    |   |   | $ | 42 |   |   |   | $ | (133 | ) |   | $ | 171,703 |   |

 

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

 

Gross unrealized gains andlosses are presented net of tax in accumulated other comprehensive income onthe consolidated balance sheets. The Company had no material realized gains orlosses from the sale of short-term investments in the quarters and six monthsended June 30, 2007 and 2006.

9

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The following tablesummarizes the fair value and gross unrealized losses on the Company’sshort-term investments, aggregated by type of investment instrument and lengthof time that individual securities have been in a continuous unrealized lossposition, at June 30, 2007 and December 31, 2006 (in thousands):
|                       | ** ** | **June 30, 2007**            | ** ** |
|-----------------------|------------|----------------------------------------|------------|
| ** **            | ** ** | **Less than 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total** | ** ** |
| ** **            | ** ** | **Fair  Value**                        | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Gross  Unrealized  Losses** | ** ** |
| U.S. corporate  notes |       | $                                      | —     |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   | $ | — |   |   |
| Government agencies   |       | 43,134                                 |       |   | (26 | ) |   | 39,488 |   |   | (107 | ) |   | 82,622 |   |   | (133 | ) |   |
| Total                 |       | $                                      | 43,134     |   |   | $ | (26 | ) |   | $ | 39,488 |   |   | $ | (107 | ) |   | $ | 82,622 |   |   | $ | (133 | ) |   |

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

 

The Company’s investmentportfolio consists of both corporate and government securities, includingauction rate securities, that have a maximum maturity of four years. Auctionrate securities have long-term underlying maturities, typically 20 to 30 years,but have interest rates that are reset every 7, 28 or 35 days, at which timethe securities can typically be purchased or sold, creating a highly liquidmarket. The Company’s investment policy permits investments in auction ratesecurities with a maximum reset date of one year. The Company’s intent is notto hold these securities to maturity, but rather to use the interest rate resetfeature to provide liquidity as necessary. The Company’s investment in auctionrate securities provides higher yields than money market and other cashequivalent investments. The longer the duration of securities in the investmentportfolio, the more susceptible they are to changes in market interest ratesand bond yields. As yields increase, those securities purchased with a loweryield-at-cost show a mark-to-market unrealized loss. All unrealized losses aredue to changes in interest rates and bond yields.

Maturities of short-terminvestments were as follows (in thousands):

| ** **                           | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **Amortized  Cost**         | ** ** | **Estimated  Fair Value**  | ** ** | **Amortized  Cost** | ** ** | **Estimated  Fair Value** | ** ** |
| Maturing within 1  year              |       | $                           | 55,973     |                            | $          | 55,957 |   | $ | 24,502 |   | $ | 24,499 |   |
| Maturing between  1 year and 4 years |       | 39,791                      |       | 39,720                          |       | 34,930 |   | 34,781 |   |
| Maturing after 4  years              |       | 76,030                      |       | 76,026                          |       | 83,890 |   | 83,830 |   |
| Total                                |       | $                           | 171,794    |                            | $          | 171,703 |   | $ | 143,322 |   | $ | 143,110 |   |

 

**AccountsReceivable**

At June 30, 2007, two customers comprisedapproximately 15% and 11% of the consolidated accounts receivable balance. At December 31,2006, one customer comprised approximately 13% of the consolidated accountsreceivable balance. For the quarters and six months ended June 30, 2007and 2006, the Company did not have any individual customers that comprised morethan 10% of total revenues.

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**OtherCurrent Assets**

***Other currentassets consist of the following (in thousands):***

| ** **           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------|------------|-------------------|------------|-----------------------|------------|
| ** **           | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Prepaid expenses     |       | $                 | 10,140     |                  |       | $ | 8,696 |   |   |
| Inventory            |       | 2,254             |       |                  | 2,644      |   |   |
| Interest  receivable |       | 2,030             |       |                  | 1,379      |   |   |
| Other                |       | 1,631             |       |                  | 707        |   |   |
| Total                |       | $                 | 16,055     |                  |       | $ | 13,426 |   |   |

 

**Goodwilland Intangible Assets**

The change in goodwill forthe six months ended June 30, 2007 was as follows (in thousands):

| Balance at  December 31, 2006        |   | $    | 133,018 |   |
|-------------------------------------------|--------|------|---------|--------|
| Reduction of acquired deferred tax assets |   | (306 | )       |
| Balance at June 30,  2007            |   | $    | 132,712 |   |

 

The adjustment to goodwillwas primarily due to an increase in deferred tax assets for tax benefitsassociated with expense deductions and a reduction in deferred tax liabilitiesdue to an adjustment in the state income tax rate expected to apply to futurereversals of acquired book/tax basis differences.

Intangible assets consistof the following (in thousands):

| ** **                                       | ** ** | **June 30, 2007** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| ** **                                       | ** ** | **Cost**                    | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Pay accounts and  free accounts                  |       | $                           | 107,916    |   |   | $ | (81,170 | ) |   | $ | 26,746 |   |
| Trademarks and  trade names                      |       | 25,786                      |       |   | (8,182 | ) |   | 17,604 |   |
| Advertising  contracts and related relationships |       | 7,229                       |       |   | (6,678 | ) |   | 551 |   |
| Software and  technology                         |       | 5,340                       |       |   | (5,077 | ) |   | 263 |   |
| Patents, domain  names and other                 |       | 4,597                       |       |   | (2,794 | ) |   | 1,803 |   |
| Total                                            |       | $                           | 150,868    |   |   | $ | (103,901 | ) |   | $ | 46,967 |   |

 

| ** **                                       | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|
| ** **                                       | ** ** | **Cost**                        | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Pay accounts and  free accounts                  |       | $                               | 107,903    |   |   | $ | (76,810 | ) |   | $ | 31,093 |   |
| Trademarks and  trade names                      |       | 25,786                          |       |   | (6,839 | ) |   | 18,947 |   |
| Advertising  contracts and related relationships |       | 7,229                           |       |   | (6,130 | ) |   | 1,099 |   |
| Software and  technology                         |       | 5,340                           |       |   | (4,859 | ) |   | 481 |   |
| Patents, domain  names and other                 |       | 4,595                           |       |   | (2,562 | ) |   | 2,033 |   |
| Total                                            |       | $                               | 150,853    |   |   | $ | (97,200 | ) |   | $ | 53,653 |   |

 

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**Accrued Liabilities**

Accrued liabilitiesconsist of the following (in thousands):

| ** **                                  | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Employee  compensation and related expenses |       | $                       | 17,582     |                        |       | $ | 27,061 |   |   |
| Current income  taxes payable               |       | 7,034                   |       |                        | 9,305      |   |   |
| Other                                       |       | 3,095                   |       |                        | 3,181      |   |   |
| Total                                       |       | $                       | 27,711     |                        |       | $ | 39,547 |   |   |

 

**3.   STOCKHOLDERS’EQUITY**

*Common StockRepurchases*

The Company’s Board of Directors authorized a commonstock repurchase program that allows the Company to repurchase shares of itscommon stock through open market or privately negotiated transactions based on prevailingmarket conditions and other factors through December 31, 2007. AtJune 30, 2007, the Company had repurchased $139.2 million of its commonstock 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 counted aspurchases against the Board-approved repurchase program. Upon vesting, theCompany currently does not collect the applicable withholding taxes for RSUsfrom employees. Instead, the Company automatically withholds, from the RSUsthat vest, the portion of those shares with a fair market value equal to theamount of the withholding taxes due. The Company then pays the applicablewithholding taxes in cash, which is accounted for as a repurchase of commonstock. In the six months ended June 30, 2007 and 2006, approximately265,000 shares and 155,000 shares, respectively, were withheld from RSUs thatvested in order to pay the applicable employee withholding taxes.

*Dividends*

Dividends are paid oncommon shares and RSUs outstanding as of the record date.

In February and April 2007,the Company’s Board of Directors declared a quarterly cash dividend of $0.20per share of common stock. The dividends were paid on February 28, 2007and May 31, 2007 and totaled $13.7 million and $14.4 million,respectively. In July 2007, the Company’s Board of Directors declared aquarterly cash dividend of $0.20 per share of common stock. The record date forthe dividend is August 14, 2007, and the dividend will be paid on August 31,2007.

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

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**4.**                 STOCK-BASEDCOMPENSATION

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

| ** **                     | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                     | ** ** | **2007**                              | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Operating expenses:            |       |                                  |       |                                          |       |   |   |   |   |
| Cost of revenues               |       | $                                     | 254        |                                          | $          | 256 |   | $ | 448 |   | $ | 493 |   |
| Sales and  marketing           |       | 943                                   |       | 1,072                                         |       | 1,835 |   | 2,016 |   |
| Product  development           |       | 1,211                                 |       | 1,645                                         |       | 2,456 |   | 3,111 |   |
| General and  administrative    |       | 366                                   |       | 2,891                                         |       | 2,082 |   | 5,213 |   |
| Total stock-based compensation |       | $                                     | 2,774      |                                          | $          | 5,864 |   | $ | 6,821 |   | $ | 10,833 |   |
| Tax benefit  recognized        |       | $                                     | 1,158      |                                          | $          | 1,115 |   | $ | 2,036 |   | $ | 2,171 |   |

 

General and administrativestock-based compensation includes a $2.5 million benefit for the quarter andsix months ended June 30, 2007 as a result of equity award forfeitures relatedto the resignation of a former executive.

**Restricted Stock**

In June 2007, 125,000of the outstanding restricted shares of the Company’s common stock werecancelled. At June 30, 2007, 350,000 restricted shares of common stockwere outstanding. The restricted shares vest entirely at the end of a four-yearvesting period in January 2008.

**5.**                 INCOMETAXES

For the quarter and six months ended June 30,2007, the Company recorded a tax provision of $10.0 million and $20.5million, respectively on pre-tax income of $26.2 million and $49.7million, respectively, resulting in a year-to-date effective tax rate of 41.2%.For the quarter and six months ended June 30, 2006, the Company recorded atax provision of $11.6 million and $20.5 million, respectively, on pre-taxincome of $23.2 million and $43.8 million, respectively, resulting in ayear-to-date effective tax rate of 46.9%. The effective tax rates differ fromthe statutory rate primarily due to (1) stock-based compensation that islimited under Section 162(m) of the Internal Revenue Code, (2) foreignlosses, the benefit of which is not currently recognizable due to uncertaintyregarding realization, (3) employee stock purchase plan compensation, thebenefit of which is not currently recognized under SFAS No. 123R, but whichbenefit is currently recognized upon disqualified disposition, (4) thebenefit of federal tax exempt interest income and (5) the re-measurementof certain deferred tax assets in New York.

The Company adopted the provisions of FIN 48 on January 1,2007. As a result of the implementation of FIN 48, the Company recognized nomaterial adjustment in the liability for unrecognized income tax benefits. Atthe adoption date of January 1, 2007, the Company had $4.8 million of unrecognizedtax benefits, all of which would affect the Company’s effective tax rate ifrecognized. At June 30, 2007, the Company had $5.1 million of unrecognizedtax benefits.

The Company recognizes interest and penalties relatedto uncertain tax positions in income tax expense. At June 30, 2007, theCompany had $1.1 million of accrued interest related to uncertain tax positionsincluded in income taxes payable. At the adoption date of January 1, 2007,the Company had $0.9 million of accrued interest related to uncertain taxpositions included in income taxes payable.

The tax years 2003 through2006 remain open to examination by the major taxing jurisdictions to which theCompany is subject. The Company is not currently under examination in anyjurisdiction where 

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theCompany files tax returns. The Company has, however, been contacted by a statetax authority in connection with its intention to begin an examination for thetax years ended December 31, 2004 and 2005. At June 30, 2007, as a resultof the expiration of statute of limitations for specific jurisdictions, theCompany’s liability for unrecognized tax benefits for the related tax positionswill be reduced by approximately $0.1 million over the next twelve months.

**6.**                 NETINCOME PER SHARE

Thefollowing table sets forth the computation of basic and diluted net income pershare for the quarters and six months ended June 30, 2007 and 2006 (inthousands, except per share amounts):

| ** **                                                                                | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                | ** ** | **2007**                              | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Numerator:                                                                                |       |                                  |       |                                          |       |   |   |   |   |
| Income before  cumulative effect of accounting change                                     |       | $                                     | 16,208     |                                          | $          | 11,585 |   | $ | 29,236 |   | $ | 23,236 |   |
| Cumulative effect  of accounting change, net of tax                                       |       | —                                |       | —                                        |       | — |   | 1,041 |   |
| Net income                                                                                |       | $                                     | 16,208     |                                          | $          | 11,585 |   | $ | 29,236 |   | $ | 24,277 |   |
| Denominator:                                                                              |       |                                  |       |                                          |       |   |   |   |   |
| Weighted average  common shares—basic                                                |       | 67,153                                |       | 64,257                                        |       | 66,630 |   | 63,625 |   |
| Less: weighted average common shares subject to  repurchase                               |       | (468                                  | )          | (475                                          | )          | (471 | ) | (475 | ) |
| Shares used to  calculate basic net income per share                                      |       | 66,685                                |       | 63,782                                        |       | 66,159 |   | 63,150 |   |
| Add: Dilutive effect of stock options, restricted  stock and employee stock purchase plan |       | 2,666                                 |       | 2,173                                         |       | 2,560 |   | 2,275 |   |
| Shares used to  calculate diluted net income per share                                    |       | 69,351                                |       | 65,955                                        |       | 68,719 |   | 65,425 |   |
| Basic net income  per share:                                                              |       |                                  |       |                                          |       |   |   |   |   |
| Income before cumulative effect of accounting change                                      |       | $                                     | 0.24       |                                          | $          | 0.18 |   | $ | 0.44 |   | $ | 0.37 |   |
| Cumulative effect of accounting change, net of tax                                        |       | —                                |       | —                                        |       | — |   | 0.01 |   |
| Basic net income  per share                                                               |       | $                                     | 0.24       |                                          | $          | 0.18 |   | $ | 0.44 |   | $ | 0.38 |   |
| Diluted net  income per share:                                                            |       |                                  |       |                                          |       |   |   |   |   |
| Income before cumulative effect of accounting change                                      |       | $                                     | 0.23       |                                          | $          | 0.18 |   | $ | 0.43 |   | $ | 0.36 |   |
| Cumulative effect of change in accounting principle,  net of tax                          |       | —                                |       | —                                        |       | — |   | 0.01 |   |
| Diluted net income per share                                                              |       | $                                     | 0.23       |                                          | $          | 0.18 |   | $ | 0.43 |   | $ | 0.37 |   |

 

The diluted per share computations exclude those stockoptions, unvested common stock and RSUs which are antidilutive. The number ofantidilutive shares at June 30, 2007 and 2006 was 2.7 million and3.6 million, respectively.

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**7.   SEGMENTINFORMATION**

Revenue and income fromoperations by segment are as follows (in thousands):

| ** **                      | ** ** | **Quarter Ended June 30, 2007** | ** ** |
|---------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **Content & Media**                   | ** ** | **Communications** | ** ** | **Total** | ** ** |
| Billable services               |       |                                                | $          | 26,905 |   |   |   | $ | 70,220 |   |   | $ | 97,125 |   |
| Advertising                     |       |                                                | 22,807     |   |   |   | 11,485 |   |   | 34,292 |   |
| Total revenues                  |       |                                                | $          | 49,712 |   |   |   | $ | 81,705 |   |   | $ | 131,417 |   |
| Segment income  from operations |       |                                                | $          | 7,844 |   |   |   | $ | 32,787 |   |   | $ | 40,631 |   |

 

| ** **                      | ** ** | **Quarter Ended June 30, 2006** | ** ** |
|---------------------------------|------------|-----------------------------------------------------|------------|
| ** **                      | ** ** | **Content & Media**                   | ** ** | **Communications** | ** ** | **Total** | ** ** |
| Billable services               |       |                                                | $          | 21,697 |   |   |   | $ | 87,161 |   |   | $ | 108,858 |   |
| Advertising                     |       |                                                | 16,955     |   |   |   | 9,087 |   |   | 26,042 |   |
| Total revenues                  |       |                                                | $          | 38,652 |   |   |   | $ | 96,248 |   |   | $ | 134,900 |   |
| Segment income from  operations |       |                                                | $          | 7,357 |   |   |   | $ | 35,574 |   |   | $ | 42,931 |   |

 

| ** **                      | ** ** | **Six Months Ended June 30, 2007** | ** ** |
|---------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                      | ** ** | **Content & Media**                           | ** ** | **Communications** | ** ** | **Total** | ** ** |
| Billable services               |       |                                                        | $          | 50,259 |   |   |   | $ | 143,186 |   |   | $ | 193,445 |   |
| Advertising                     |       |                                                        | 43,628     |   |   |   | 24,195 |   |   | 67,823 |   |
| Total revenues                  |       |                                                        | $          | 93,887 |   |   |   | $ | 167,381 |   |   | $ | 261,268 |   |
| Segment income from  operations |       |                                                        | $          | 13,609 |   |   |   | $ | 65,621 |   |   | $ | 79,230 |   |

 

| ** **                      | ** ** | **Six Months Ended June 30, 2006** | ** ** |
|---------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                      | ** ** | **Content & Media**                           | ** ** | **Communications** | ** ** | **Total** | ** ** |
| Billable services               |       |                                                        | $          | 42,194 |   |   |   | $ | 177,820 |   |   | $ | 220,014 |   |
| Advertising                     |       |                                                        | 23,448     |   |   |   | 18,770 |   |   | 42,218 |   |
| Total revenues                  |       |                                                        | $          | 65,642 |   |   |   | $ | 196,590 |   |   | $ | 262,232 |   |
| Segment income from  operations |       |                                                        | $          | 13,651 |   |   |   | $ | 69,042 |   |   | $ | 82,693 |   |

 

A reconciliation of segment income from operations(which excludes corporate expenses, depreciation, amortization of intangibleassets and stock-based compensation) to consolidated operating income, is asfollows for each period presented (in thousands):

| ** **                            | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                            | ** ** | **2007**                              | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Segment income from  operations:      |       |                                  |       |                                          |       |   |   |   |   |
| Content & Media              | ** ** | $                                     | 7,844      |                                          | $          | 7,357 |   | $ | 13,609 |   | $ | 13,651 |   |
| Communications                        | ** ** | 32,787                                |       | 35,574                                        |       | 65,621 |   | 69,042 |   |
| Total segment  income from operations | ** ** | 40,631                                |       | 42,931                                        |       | 79,230 |   | 82,693 |   |
| Corporate expenses                    | ** ** | (4,686                                | )          | (4,912                                        | )          | (8,874 | ) | (10,037 | ) |
| Depreciation                          | ** ** | (5,234                                | )          | (5,345                                        | )          | (9,979 | ) | (10,052 | ) |
| Amortization of intangible assets     | ** ** | (3,204                                | )          | (4,552                                        | )          | (6,699 | ) | (8,941 | ) |
| Stock-based compensation              | ** ** | (2,774                                | )          | (5,864                                        | )          | (6,821 | ) | (10,833 | ) |
| Consolidated operating  income        | ** ** | $                                     | 24,733     |                                          | $          | 22,258 |   | $ | 46,857 |   | $ | 42,830 |   |

 

The Company manages its working capital on aconsolidated basis and does not allocate long-lived assets to segments. In addition,segment assets are not reported to, or used by, the chief operating decisionmaker and therefore, pursuant to SFAS No. 131, total segment assets havenot been disclosed. The 

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Company’s$132.7 million of goodwill is related entirely to purchase transactions inthe Content & Media segment.

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

**8.**                   RESTRUCTURING CHARGES

In the quarter and sixmonths ended June 30, 2007, the Company recorded restructuring charges of$0.4 million primarily for termination benefits paid to certain employeesassociated with our Web hosting and photo sharing businesses.

**9.**                 COMMITMENTSAND CONTINGENCIES

*Legal Contingencies*

In April 2001 and in May 2001, lawsuits werefiled in the United States District Court for the Southern District of New Yorkagainst NetZero, Inc. (“NetZero”), certain officers and directors ofNetZero and the underwriters of NetZero’s initial public offering, GoldmanSachs Group, Inc., BancBoston Robertson Stephens, Inc. and SalomonSmith Barney, Inc. A consolidated amended complaint, which is theoperative complaint, was filed in April 2002. The complaint alleges thatthe prospectus through 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. The case against NetZero was coordinatedwith approximately 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. On October 13, 2004, the district court certified a classin six of the other nearly identical actions (the “focus cases”). Theunderwriter defendants appealed the decision and the United States Court ofAppeals for the Second Circuit vacated the district court’s decision grantingclass certification on December 5, 2006. Plaintiffs filed a petition forrehearing. On April 6, 2007, the Second Circuit denied the petition, butnoted that plaintiffs could ask the district court to certify a more narrowclass than the one that was rejected. Prior to the Second Circuit’s decision,the majority of issuers, including NetZero, and their insurers had submitted asettlement agreement to the district court for approval. In light of the SecondCircuit opinion, the parties agreed that the settlement could no longer beapproved, and on June 25, 2007, the court approved a stipulation filed bythe plaintiffs and the issuers which terminated the proposed settlement. Theplaintiffs now plan to replead their complaints and move for classcertification again.

On March 6, 2006, plaintiff Anthony Piercy fileda purported consumer class action lawsuit in the Superior Court of the State ofCalifornia, County of Los Angeles, against NetZero claiming that NetZerocontinues to charge consumers fees after they cancel their Internet accessaccount. On July 27, 2006, plaintiff Donald E. Ewart filed a purportedconsumer class action lawsuit in the Superior Court of the State of California,County of Los Angeles, against NetZero containing substantially similarallegations to the Piercy case. Plaintiffs in both cases are seeking injunctiveand declaratory relief and damages. NetZero filed a response to both lawsuitsdenying the material allegations of the complaints. Both Mr. Piercy and Mr. Ewartsubsequently withdrew from the actions as class representatives. On March 16,2007, Barbara 

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Rasnake, Robert Du Vergerand Peter Chrisler were substituted as purported class representatives. On May 25,2007 the court consolidated the actions under the caption Rasnake v.NetZero, Inc., Case No. BC348461. On July 13, 2007, plaintiffsfiled a consolidated amended class action complaint, at which time PeterChrisler was also substituted as a purported class representative. Discovery iscontinuing and a trial date has not yet been set.

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. At June 30, 2007,the Company had not established reserves for any of the matters describedabove.

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

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

**Forward-LookingStatements**

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

**Overview**

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

**Segment Definitions**

Wereport our businesses in two reportable segments:
| Segment                   | ** ** | ** **                                                           | ** ** | **Internet Services** | ** ** |
|---------------------------|------------|----------------------------------------------------------------------|------------|----------------------------|------------|
| Content &  Media |       | Social  networking, loyalty marketing, Web hosting and photo sharing |       |
| Communications            |       | Internet access, email,  Internet security, family services and VoIP |       |

 

**Segment Services**

***Content & Media***

Our primary Content &Media services are online social networking under the Classmates brand andonline loyalty marketing under the MyPoints brand. Our Content & Mediaservices also include international social networking services under ourClassmates International subsidiary; The Names Database, a social networkingservice; as well as Web hosting and online photo sharing services; however, noneof these services generate material revenues. For additional informationregarding our Content & Media segment, see Note 7—“Segment Information”of the Notes to the Condensed Consolidated Financial Statements, which appearsin Part I, Item 1 of this Quarterly Report on Form 10-Q.

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*Online SocialNetworking*

Our online social networking services connect millionsof users primarily across the United States and, to a lesser extent, Canada,Germany, France and Sweden, among others. The primary focus of these serviceshas been to enable members to locate and reconnect with past acquaintances fromschool, work or military affiliations. Basic membership in our socialnetworking services is free and the vast majority of our social networkingaccounts are free accounts. A free account allows a user to engage in a varietyof activities on our Web sites including posting a personal profile andsearching our database for other registered members. We also offer pay serviceswhich, in general, allow the member to engage in a variety of additionalactivities, including communicating with other registered members. The majorityof our social networking revenues are derived from our pay services. Our socialnetworking services also contain advertising initiatives throughout their Websites. In general, pricing for our social networking services varies by serviceand term of membership, with most domestic pay accounts consisting of athree-month commitment for $15, a 12-month commitment for $39 or a 24-monthcommitment for $59, although the standard pricings of our international and TheNames Database services are lower.

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

*Online LoyaltyMarketing*

Our online loyalty marketing service provides advertisersan efficient means to reach a targeted online audience while providing ourmembers a compelling way to earn rewards while shopping and engaging in otheronline activities. Our loyalty marketing service provides advertisers onlinedirect marketing solutions such as rewards-based Web shopping, targeted emailsbased on self-reported and behavioral data, and online surveys that pre-qualifyour members for targeted offers. Our members are rewarded with points forclicking or shopping through our loyalty marketing service emails, for shoppingthrough the service’s Web site, and for completing surveys. The points are thenredeemable for gift cards and other benefits with various partners. Hundreds ofmajor brands have used our loyalty marketing service to market their productsand services. All of our loyalty marketing revenues are derived fromadvertising.

Our strategy for ourloyalty marketing services is to increase the number of members by generatingadditional awareness regarding the benefits of our loyalty marketing servicesand to encourage utilization of the service as an online shopping portal. Ourstrategy is also to increase the number of major advertisers on our service.

***Communications***

Our primary Communicationspay services are consumer Internet access and email under the NetZero and Junobrands. We offer several additional Communications pay services, such asInternet security services, but these additional services and brands do notgenerate significant revenues. For additional information regarding ourCommunications segment, see Note 7—“Segment Information” of the Notes to theCondensed Consolidated Financial Statements, which appears in Part I, Item1 of this Quarterly Report on Form 10-Q.

*Internet AccessServices*

Our Internet access services consist of both dial-upand broadband digital subscriber line (“DSL”) services. Our DSL services were launchedat the end of 2006 and we do not currently generate significant revenues fromour DSL services.

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

Our DSL services, which we purchase from third parties,are currently available in parts of 34 states and Washington, D.C. While weintend to expand our coverage area, our ability to do so will be dependent onacquiring services from additional third parties. In general, monthly pricingfor our DSL services ranges from $17.95 to $34.95, though we anticipate ourpricing may change and fluctuate by speed and coverage territory.

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

**Account Metrics**

At June 30,2007, we had approximately 5.1 million pay accounts and approximately 15.9 millionactive accounts. A pay account represents a unique billing relationship with amember who subscribes to one or more of our pay services. “Active” accountsinclude total pay accounts as well as all free access, social networking, and emailmembers who logged on to our services at least once during the preceding31 days. Active accounts also include the number of members of our loyaltymarketing service who earned or spent points within the preceding 90 days. Inanticipation of the previously announced curtailment of our photo sharing and VoIPservices, we have excluded the free accounts associated with these servicesfrom our active accounts reporting at June 30, 2007. In addition, tobetter reflect the activity level of our membership base, we have updated ouractive accounts definition to include Classmates International free accountsand exclude The Names Database and Web hosting free accounts. The followingtable sets forth (in thousands), for the dates presented, an analysis of ourpay accounts.
|                            | ** ** | **June 30,  2007** | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** | **September 30,  2006** | ** ** | **June 30,  2006** | ** ** |
|----------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------------------|------------|------------------------------|------------|-------------------------|------------|
| Content &  Media: |       |                    |       |                     |       |                        |       |                         |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Social networking          |       |                    | 2,710      |                     |       |                        | 2,433      |                         |       |                    | 2,169      |   |   |   | 2,079 |   |   |   | 2,029 |   |   |
| Other                      |       |                    | 88         |                     |       |                        | 87         |                         |       |                    | 86         |   |   |   | 85 |   |   |   | 81 |   |   |
| Total                      |       |                    | 2,798      |                     |       |                        | 2,520      |                         |       |                    | 2,255      |   |   |   | 2,164 |   |   |   | 2,110 |   |   |
| Communications:            |       |                    |       |                     |       |                        |       |                         |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Access                     |       |                    | 2,016      |                     |       |                        | 2,158      |                         |       |                    | 2,282      |   |   |   | 2,425 |   |   |   | 2,556 |   |   |
| Other                      |       |                    | 304        |                     |       |                        | 306        |                         |       |                    | 317        |   |   |   | 323 |   |   |   | 330 |   |   |
| Total                      |       |                    | 2,320      |                     |       |                        | 2,464      |                         |       |                    | 2,599      |   |   |   | 2,748 |   |   |   | 2,886 |   |   |
| Total pay  accounts        |       |                    | 5,118      |                     |       |                        | 4,984      |                         |       |                    | 4,854      |   |   |   | 4,912 |   |   |   | 4,996 |   |   |

 

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

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free period of service aseither a promotion or retention tool and a number of accounts that havenotified us that they are terminating their service but whose service is stillin effect.

We have made the decision to curtail our efforts withrespect to our VoIP services, and we are currently evaluating strategicalternatives for such services. Our VoIP services had approximately 10,000 payaccounts at June 30, 2007. We have made the decision to terminate ourphoto sharing services as of September 27, 2007. Our photo sharingservices had approximately 18,000 pay accounts at June 30, 2007.

**Results ofOperations**

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

Consolidatedinformation is as follows:
|                                                       | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                            | ** ** | **2007**                              | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Billable services                                     |       | $                                     | 97,125     |                                          | $          | 108,858 |   | $ | 193,445 |   | $ | 220,014 |   |
| Advertising                                           |       | 34,292                                |       | 26,042                                        |       | 67,823 |   | 42,218 |   |
| Total revenues                                        |       | 131,417                               |       | 134,900                                       |       | 261,268 |   | 262,232 |   |
| Operating expenses:                                   |       |                                  |       |                                          |       |   |   |   |   |
| Cost of revenues                                      |       | 30,409                                |       | 31,146                                        |       | 59,656 |   | 61,036 |   |
| Sales and marketing                                   |       | 42,712                                |       | 46,137                                        |       | 88,737 |   | 89,556 |   |
| Product development                                   |       | 13,065                                |       | 13,385                                        |       | 26,536 |   | 26,201 |   |
| General and administrative                            |       | 16,900                                |       | 17,422                                        |       | 32,389 |   | 33,668 |   |
| Amortization of intangible assets                     |       | 3,204                                 |       | 4,552                                         |       | 6,699 |   | 8,941 |   |
| Restructuring charges                                 |       | 394                                   |       | —                                        |       | 394 |   | — |   |
| Total operating expenses                              |       | 106,684                               |       | 112,642                                       |       | 214,411 |   | 219,402 |   |
| Operating income                                      |       | 24,733                                |       | 22,258                                        |       | 46,857 |   | 42,830 |   |
| Interest and  other income, net                       |       | 1,881                                 |       | 1,354                                         |       | 3,581 |   | 3,070 |   |
| Interest expense                                      |       | (372                                  | )          | (411                                          | )          | (732 | ) | (2,127 | ) |
| Income before  income taxes                           |       | 26,242                                |       | 23,201                                        |       | 49,706 |   | 43,773 |   |
| Provision for  income taxes                           |       | 10,034                                |       | 11,616                                        |       | 20,470 |   | 20,537 |   |
| Income before  cumulative effect of accounting change |       | 16,208                                |       | 11,585                                        |       | 29,236 |   | 23,236 |   |
| Cumulative effect  of accounting change, net of tax   |       | —                                |       | —                                        |       | — |   | 1,041 |   |
| Net income                                            |       | $                                     | 16,208     |                                          | $          | 11,585 |   | $ | 29,236 |   | $ | 24,277 |   |

 

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Informationfor our two reportable segments is as follows:
|                                 | ** ** | **Content & Media**     | ** ** | **Communications**                    | ** ** |
|---------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **Quarter Ended  June 30,** | ** ** | **Quarter Ended  June 30,** | ** ** |
| ** **                      | ** ** | **2007**                              | ** ** | **2006**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Billable services               |       | $                                     | 26,905     |                                  | $          | 21,697 |   | $ | 70,220 |   | $ | 87,161 |   |
| Advertising                     |       | 22,807                                |       | 16,955                                |       | 11,485 |   | 9,087 |   |
| Total revenues                  |       | 49,712                                |       | 38,652                                |       | 81,705 |   | 96,248 |   |
| Operating  expenses:            |       |                                  |       |                                  |       |   |   |   |   |
| Cost of revenues                |       | 10,178                                |       | 7,555                                 |       | 17,892 |   | 20,887 |   |
| Sales and marketing             |       | 20,975                                |       | 16,838                                |       | 20,703 |   | 28,166 |   |
| Product development             |       | 4,141                                 |       | 3,199                                 |       | 6,181 |   | 7,303 |   |
| General and administrative      |       | 6,180                                 |       | 3,703                                 |       | 4,142 |   | 4,318 |   |
| Restructuring charges           |       | 394                                   |       | —                                |       | — |   | — |   |
| Total operating expenses        |       | 41,868                                |       | 31,295                                |       | 48,918 |   | 60,674 |   |
| Segment income from  operations |       | $                                     | 7,844      |                                  | $          | 7,357 |   | $ | 32,787 |   | $ | 35,574 |   |

 
|                                 | ** ** | **Content & Media**             | ** ** | **Communications**                            | ** ** |
|---------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                      | ** ** | **Six Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
| ** **                      | ** ** | **2007**                                      | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Billable services               |       | $                                             | 50,259     |                                          | $          | 42,194 |   | $ | 143,186 |   | $ | 177,820 |   |
| Advertising                     |       | 43,628                                        |       | 23,448                                        |       | 24,195 |   | 18,770 |   |
| Total revenues                  |       | 93,887                                        |       | 65,642                                        |       | 167,381 |   | 196,590 |   |
| Operating expenses:             |       |                                          |       |                                          |       |   |   |   |   |
| Cost of revenues                |       | 19,534                                        |       | 10,708                                        |       | 35,588 |   | 44,950 |   |
| Sales and marketing             |       | 41,914                                        |       | 28,969                                        |       | 44,769 |   | 58,451 |   |
| Product development             |       | 8,303                                         |       | 5,612                                         |       | 13,184 |   | 15,221 |   |
| General and administrative      |       | 10,133                                        |       | 6,702                                         |       | 8,219 |   | 8,926 |   |
| Restructuring charges           |       | 394                                           |       | —                                        |       | — |   | — |   |
| Total operating expenses        |       | 80,278                                        |       | 51,991                                        |       | 101,760 |   | 127,548 |   |
| Segment income from  operations |       | $                                             | 13,609     |                                          | $          | 13,651 |   | $ | 65,621 |   | $ | 69,042 |   |

 

***A reconciliation of segment income from operations (whichexcludes corporate expenses, depreciation, amortization of intangible assetsand stock-based compensation) to consolidated operating income, is as followsfor each period presented (in thousands):***

| ** **                            | ** ** | **Quarter Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------|------------|---------------------------------------|------------|-----------------------------------------------|------------|
| ** **                            | ** ** | **2007**                              | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Segment income from  operations:      |       |                                  |       |                                          |       |   |   |   |   |
| Content & Media              | ** ** | $                                     | 7,844      |                                          | $          | 7,357 | ** ** | $ | 13,609 |   | $ | 13,651 |   |
| Communications                        | ** ** | 32,787                                |       | 35,574                                        | ** ** | 65,621 |   | 69,042 |   |
| Total segment  income from operations | ** ** | 40,631                                |       | 42,931                                        | ** ** | 79,230 |   | 82,693 |   |
| Corporate expenses                    | ** ** | (4,686                                | )          | (4,912                                        | )          | (8,874 | ) | (10,037 | ) |
| Depreciation                          | ** ** | (5,234                                | )          | (5,345                                        | )          | (9,979 | ) | (10,052 | ) |
| Amortization of intangible assets     | ** ** | (3,204                                | )          | (4,552                                        | )          | (6,699 | ) | (8,941 | ) |
| Stock-based compensation              | ** ** | (2,774                                | )          | (5,864                                        | )          | (6,821 | ) | (10,833 | ) |
| Consolidated operating  income        | ** ** | $                                     | 24,733     |                                          | $          | 22,258 | ** ** | $ | 46,857 |   | $ | 42,830 |   |

 

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***Quarter and Six Months Ended June 30, 2007Compared to Quarter and Six Months Ended June 30, 2006***

**Revenues**

*Billable ServicesRevenues*

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

*ConsolidatedBillable Services Revenues.*   Consolidated billable services revenuesdecreased by $11.7 million, or 11%, to $97.1 million for the quarter endedJune 30, 2007, compared to $108.9 million for the quarter ended June 30,2006. Consolidated billable services revenues decreased by $26.6 million, or12%, to $193.4 million for the six months ended June 30, 2007, compared to$220.0 million for the six months ended June 30, 2006. The decrease inbillable services revenues for the quarter and six months ended June 30,2007 was due to a decrease in billable services revenues from ourCommunications segment, partially offset by an increase in billable service revenuesfrom our Content & Media segment. Billable services revenues relatedto our Content & Media segment and our Communications segment constituted27.7% and 72.3%, respectively, of our consolidated billable services revenuesfor the quarter ended June 30, 2007, compared to 19.9% and 80.1%,respectively, for the quarter ended June 30, 2006. Billable servicesrevenues related to our Content & Media segment and our Communicationssegment constituted 26.0% and 74.0%, respectively, of our consolidated billableservices revenues for the six months ended June 30, 2007, compared to19.2% and 80.8%, respectively, for the six months ended June 30, 2006. Weanticipate that our consolidated billable services revenues will continue todecline as a result of expected continued declines in Communications billableservices revenues.

*Content &Media Billable Services Revenues.***  **Content & Mediabillable services revenues consist of fees charged to pay accounts for socialnetworking, Web hosting and photo sharing services, with substantially all suchrevenues generated from social networking. Content & Media billableservices revenues increased by $5.2 million, or 24%, to $26.9 million forthe quarter ended June 30, 2007, compared to $21.7 million for thequarter ended June 30, 2006. The increase in Content & Mediabillable services revenues was due to a 29% increase in our average number ofpay accounts from 2,066,000 for the quarter ended June 30, 2006 to2,659,000 for the quarter ended June 30, 2007. Substantially all of thisincrease in the number of pay accounts was due to an increase in the number ofsocial networking pay accounts, primarily attributable to the introduction of anew pay feature by Classmates in the fourth quarter of 2006. The increase inContent & Media billable services revenues was partially offset by a4% decrease in ARPU from $3.50 for the quarter ended June 30, 2006 to$3.37 for the quarter ended June 30, 2007. The decrease in ARPU is primarilyattributable to a greater percentage of pay accounts represented byinternational social networking pay accounts which have lower-priced subscriptionplans, and, to a lesser extent, to decreases in the average monthly revenuereceived from our Web hosting and photo sharing pay accounts. We anticipate oursocial networking pay accounts and Content & Media billable servicesrevenues will continue to grow, at least in the near term, although we expect ourgrowth in the number of pay accounts in the September 2007 quarter to declinemodestly from the growth we experienced in the June 2007 quarter.

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Content & Media billable services revenuesincreased by $8.1 million, or 19%, to $50.3 million for the six months June 30,2007, compared to $42.2 million for the six months ended June 30,2006. The increase in Content & Media billable services revenues wasdue to a 28% increase in our average number of pay accounts from 1,975,000 forthe six months ended June 30, 2006 to 2,526,000 for the six monthsended June 30, 2007. Substantially all of this increase in the number ofpay accounts was due to an increase in the number of social networking payaccounts, primarily attributable to the introduction of a new pay feature byClassmates in the fourth quarter of 2006. The increase in Content &Media billable services revenues was partially offset by a 7% decrease in ARPUfrom $3.56 for the six months ended June 30, 2006 to $3.32 for the sixmonths ended June 30, 2007. The decrease in ARPU is primarily attributableto a greater percentage of pay accounts represented by international socialnetworking pay accounts which have lower-priced subscription plans, and, to alesser extent, decreases in the average monthly revenue received from our Webhosting and photo sharing pay accounts.

*CommunicationsBillable Services Revenues.***  **Communications billableservices revenues consist of fees charged to pay accounts for access, email,Internet security and other services, with substantially all of such revenues generatedfrom Internet access. Communications billable services revenues decreased by$16.9 million, or 19%, to $70.2 million for the quarter ended June 30,2007, compared to $87.2 million for the quarter ended June 30, 2006. Thedecrease in billable services revenues was due to a 20% decrease in our averagenumber of pay accounts from 2,979,000 for the quarter ended June 30, 2006to 2,392,000 for the quarter ended June 30, 2007. The decrease in averagenumber of pay accounts is substantially attributable to a decrease in the numberof dial-up pay access accounts. The decrease in billable services revenues waspartially offset by a slight increase in ARPU from $9.75 for the quarter ended June 30,2006 to $9.78 for the quarter ended June 30, 2007. We anticipate that theaverage number of Communications pay accounts will continue to decline due todecreases in dial-up pay access accounts. We may experience declines in ARPUprimarily as a result of discounted prices for extended service commitments onour dial-up access services, including providing our $14.95 accelerated accessservices at $9.95 for a one-year commitment. We anticipate continued declinesin Communications billable services revenues.

Communications billableservices revenues decreased by $34.6 million, or 19%, to $143.2 millionfor the six months ended June 30, 2007, compared to $177.8 million for thesix months ended June 30, 2006. The decrease in billable services revenueswas due to a 19% decrease in our average number of pay accounts from 3,027,000for the six months ended June 30, 2006 to 2,459,000 for the six monthsended June 30, 2007, and a decrease in ARPU from $9.79 for the six monthsended June 30, 2006 to $9.70 for the six months ended June 30, 2007.The decrease in average number of pay accounts is substantially attributable toa decrease in the number of dial-up pay access 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 and online direct marketing solutions. Factorsimpacting our advertising revenues generally include changes in orders fromsignificant customers, the performance of our online marketing initiatives, thestate of the online search and advertising markets, seasonality, increases ordecreases in our active accounts, and increases or decreases in advertisinginventory available for sale. Advertising revenues also includepost-transaction revenues pursuant to an agreement whereby we generate revenuesby displaying a third party’s service offerings to our Classmates’ members uponcompletion of the paid subscription registration process.

*ConsolidatedAdvertising Revenues.*   Consolidated advertising revenues increasedby $8.3 million, or 32%, to $34.3 million for the quarter ended June 30,2007, compared to $26.0 million for the quarter ended June 30, 2006.Consolidated advertising revenues increased by $25.6 million, or 61%, to $67.8million for 

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the six months ended June 30,2007, compared to $42.2 million for the six months ended June 30, 2006.The increase was primarily attributable to increases in advertising revenues inour Content & Media segment and, to a lesser extent, ourCommunications segment. Advertising revenues related to our Content &Media segment and our Communications segment constituted 66.5% and 33.5%,respectively, of our consolidated advertising revenues for the quarter ended June 30,2007, compared to 65.1% and 34.9%, respectively, for the quarter ended June 30,2006. Advertising revenues related to our Content & Media segment andour Communications segment constituted 64.3% and 35.7%, respectively, of ourconsolidated advertising revenues for the six months ended June 30, 2007,compared to 55.5% and 44.5%, respectively, for the six months ended June 30,2006.

*Content &Media Advertising Revenues.***  **Content & Mediaadvertising revenues increased by $5.9 million, or 35%, to$22.8 million for the quarter ended June 30, 2007, compared to$17.0 million for the quarter ended June 30, 2006. The increase wasdue to revenues generated from our loyalty marketing service, which wasacquired in April 2006, and increased revenues generated from our post-transactionsales agreement as a result of significant growth in Content & Mediapay accounts. We anticipate that Content & Media advertising revenues willdecrease sequentially in the September 2007 quarter when compared to the June 2007quarter due to the September quarter being a seasonally slower quarter.

Content & Media advertising revenuesincreased by $20.2 million, or 86%, to $43.6 million for the sixmonths ended June 30, 2007, compared to $23.4 million for the sixmonths ended June 30, 2006. The increase was due to revenues generatedfrom our loyalty marketing service, increased revenues generated from our post-transactionsales agreement as a result of growth in Content & Media pay accounts,and increased revenues generated from our Web hosting business.

*CommunicationsAdvertising Revenues.*   Communications advertising revenues increasedby $2.4 million, or 26%, to $11.5 million for the quarter ended June 30,2007, from $9.1 million for the quarter ended June 30, 2006. Theincrease was primarily attributable to increases in search revenues and, to alesser extent, increases in advertising rates. Decreases in advertisinginventory as a result of a decrease in the number of our active accounts wereoffset by increased advertising rates. We anticipate that Communicationsadvertising revenues will be flat to slightly down, at least in the September2007 quarter when compared to the June 2007 quarter.

Communications advertisingrevenues increased by $5.4 million, or 29%, to $24.2 million for the sixmonths ended June 30, 2007, from $18.8 million for the six monthsended June 30, 2006. The increase was primarily attributable to increasesin search revenues and, to a lesser extent, increases in advertising rates.

**Cost of Revenues**

Cost of revenues includes telecommunications and datacenter costs; costs of providing rewards to members of our loyalty marketingservice; personnel and overhead-related costs associated with operating ournetworks 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; anddomain name registration fees. Historically, the costs that comprise ourContent & Media cost of revenues were relatively fixed. However, as aresult of our loyalty marketing service, which was acquired in April 2006,these costs have become more variable as the costs associated with this servicetend to fluctuate with revenues. 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.

*ConsolidatedCost of Revenues.*   Consolidated cost of revenues decreased by$0.7 million, or 2%, to $30.4 million for the quarter ended June 30,2007, compared to $31.1 million for the quarter ended June 30, 2006.The decrease was primarily due to decreased costs associated with ourCommunications 

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segment and a $0.4 milliondecrease in depreciation, partially offset by increased costs associated withour Content & Media segment. Cost of revenues related to our Content &Media segment and our Communications segment constituted 36.3% and 63.7%,respectively, of our total segment cost of revenues for the quarter ended June 30,2007, compared to 26.6% and 73.4%, respectively, for the quarter ended June 30,2006.

Consolidated cost of revenues decreased by$1.4 million, or 2%, to $59.7 million for the six months ended June 30,2007, compared to $61.0 million for the six months ended June 30, 2006.The decrease was primarily due to decreased costs associated with ourCommunications segment and a $0.8 million decrease in depreciation, partiallyoffset by increased costs associated with our Content & Media segment.Cost of revenues related to our Content & Media segment and ourCommunications segment constituted 35.4% and 64.6%, respectively, of our totalsegment cost of revenues for the six months ended June 30, 2007, comparedto 19.2% and 80.8%, respectively, for the six months ended June 30, 2006.

*Content &Media Cost of Revenues.***  **Content & Mediacost of revenues increased by $2.6 million, or 35%, to $10.2 millionfor the quarter ended June 30, 2007, compared to $7.6 million for thequarter ended June 30, 2006. The increase was primarily related to costsassociated with our loyalty marketing service and, to a lesser extent,increased costs associated with our social networking services. As a percentageof Content & Media revenues, Content & Media cost of revenuesincreased to 20.5% in the quarter ended June 30, 2007, compared to 19.5%in the quarter ended June 30, 2006, primarily due to the inclusion ofMyPoints revenues for the entire quarter in 2007 versus a partial quarter in2006. In addition, our loyalty marketing service cost of revenues as apercentage of revenues is higher relative to our social networking service costof revenues as a percentage of revenues.

Content & Media cost of revenues increased by$8.8 million, or 82%, to $19.5 million for the six months ended June 30,2007, compared to $10.7 million for the six months ended June 30,2006. The increase was primarily related to costs associated with our loyaltymarketing service, which was acquired in April 2006 and, to a lesserextent, increased costs associated with our social networking services. As apercentage of Content & Media revenues, Content & Media costof revenues increased to 20.8% in the six months ended June 30, 2007,compared to 16.3% in the six months ended June 30, 2006, primarily due to costsassociated with our loyalty marketing service.

*CommunicationsCost of Revenues.*   Communications cost of revenues decreased by$3.0 million, or 14%, to $17.9 million for the quarter ended June 30,2007, compared to $20.9 million for the quarter ended June 30, 2006.The decrease was primarily due to a $3.7 million decrease in telecommunicationscosts associated with our dial-up access, a $0.9 million decrease incustomer support and billing-related costs as a result of a decrease in thenumber of pay accounts and a $0.3 million decrease in costs associated with ourVoIP service. These decreases were partially offset by a $1.7 millionincrease in costs associated with our DSL service. As a percentage ofCommunications revenues, Communications cost of revenues increased slightly to21.9% in the quarter ended June 30, 2007, compared to 21.7% in the quarterended June 30, 2006.

Communications cost ofrevenues decreased by $9.4 million, or 21%, to $35.6 million for thesix months ended June 30, 2007, compared to $45.0 million for the sixmonths ended June 30, 2006. The decrease was primarily due to an$8.4 million decrease in telecommunications costs associated with ourdial-up access, a $2.7 million decrease in customer support andbilling-related costs as a result of a decrease in the number of pay accountsand a $1.1 million decrease in costs associated with our VoIP service. Thesedecreases were partially offset by a $2.4 million increase in costsassociated with our DSL service. As a percentage of Communications revenues,Communications cost of revenues decreased to 21.3% in the six months ended June 30,2007, compared to 22.9% in the six months ended June 30, 2006, primarilyas a result of decreased telecommunications costs.

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**Sales and Marketing**

Sales and marketing expenses include advertising andpromotion expenses; fees paid to distribution partners, third party advertisingnetworks and co-registration partners to acquire new accounts;personnel-related expenses for sales and marketing personnel; and telemarketingcosts incurred to acquire and retain pay accounts and up-sell pay accounts toadditional services. Advertising and promotion expenses include media, agencyand promotion expenses. Most of our marketing expenses are expensed in theperiod incurred except that media production costs are expensed the first timethe advertisement is run and media and agency fees are expensed over the periodthe advertising runs. Sales expenses are expensed in the period incurred or, inthe case of commissions paid to sales personnel, when the associatedadvertising revenue is recognized.

*ConsolidatedSales and Marketing Expenses.*   Consolidated sales and marketing expensesdecreased by $3.4 million, or 7%, to $42.7 million, or 32.5% ofconsolidated revenues, for the quarter ended June 30, 2007, compared to$46.1 million, or 34.2% of consolidated revenues, for the quarter ended June 30,2006. The decrease was primarily attributable to a significant reduction inmarketing expenses related to our Communications segment, partially offset byan increase in marketing expenses related to our Content & Mediasegment. Sales and marketing expenses related to our Content & Mediasegment and our Communications segment constituted 50.3% and 49.7%,respectively, of total segment sales and marketing expenses for the quarterended June 30, 2007 versus 37.4% and 62.6%, respectively, for the quarterended June 30, 2006.

Consolidated sales and marketing expenses decreased by$0.8 million, or 1%, to $88.7 million, or 34.0% of consolidatedrevenues, for the six months ended June 30, 2007, compared to$89.6 million, or 34.2% of consolidated revenues, for the six months endedJune 30, 2006. The decrease was primarily attributable to a significantreduction in marketing expenses related to our Communications segment, offsetalmost entirely by an increase in marketing expenses related to our Content &Media segment. Sales and marketing expenses related to our Content &Media segment and our Communications segment constituted 48.4% and 51.6%,respectively, of total segment sales and marketing expenses for the six monthsended June 30, 2007 versus 33.1% and 66.8%, respectively, for the sixmonths ended June 30, 2006.

*Content &Media Sales and Marketing Expenses.*   Content &Media sales and marketing expenses increased by $4.1 million, or 25%, to$21.0 million, or 42.2% of Content & Media revenues, for thequarter ended June 30, 2007, compared to $16.8 million, or 43.6% ofContent & Media revenues, for the quarter ended June 30, 2006.The increase was the result of a $3.1 million increase in costs related toacquiring free accounts, primarily social networking accounts and, to a lesserextent, loyalty marketing accounts, and a $1.1 million increase in personneland overhead-related expenses.

Content & Media sales and marketing expensesincreased by $12.9 million, or 45%, to $41.9 million, or 44.6% ofContent & Media revenues, for the six months ended June 30, 2007,compared to $29.0 million, or 44.1% of Content & Media revenues,for the six months ended June 30, 2006. The increase was the result of a$7.7 million increase in costs related to acquiring free accounts, primarilysocial networking accounts and, to a lesser extent, loyalty marketing accounts,costs associated with our loyalty marketing service which was acquired in April 2006and a $1.5 million increase in personnel and overhead-related expenses.

*CommunicationsSales and Marketing Expenses.*   Communications sales and marketing expensesdecreased by $7.5 million, or 26%, to $20.7 million, or 25.3% ofCommunications revenues, for the quarter ended June 30, 2007, compared to$28.2 million, or 29.3% of Communications revenues, for the quarter ended June 30,2006. This decrease is attributable to a $5.8 million decrease in advertisingcosts associated with our VoIP service and a $2.7 million decline inadvertising, promotion and distribution costs related to our access services,the majority of which was due to reductions in distribution, media andtelemarketing 

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costs. These decreaseswere partially offset by a $0.6 million increase in advertising costs relatedto our broadband services and a $0.3 million increase in personnel andoverhead-related expenses.

Communications sales andmarketing expenses decreased by $13.7 million, or 23%, to $44.8 million,or 26.7% of Communications revenues, for the six months ended June 30,2007, compared to $58.5 million, or 29.7% of Communications revenues, forthe six months ended June 30, 2006. This decrease is attributable to a$9.9 million decline in advertising, promotion and distribution costsrelated to our access services, the majority of which was due to reductions indistribution, media and telemarketing advertising costs and a $6.5 milliondecrease in advertising costs associated with our VoIP service. These decreaseswere partially offset by a $1.7 million increase in personnel andoverhead-related expenses and a $0.9 million increase in advertising costsrelated to our broadband services.

**Product Development**

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

*ConsolidatedProduct Development Expenses.*   Consolidated product development expensesdecreased by $0.3 million, or 2%, to $13.1 million for the quarter ended June 30,2007, compared to $13.4 million for the quarter ended June 30, 2006.The decrease was attributable to decreases in expenses in the Communicationssegment as well as a $0.4 million decrease in stock-based compensation,partially offset by increases in expenses in the Content & Mediasegment and a $0.3 million increase in depreciation. Product developmentexpenses related to our Content & Media segment and our Communicationssegment constituted 40.1% and 59.9%, respectively, of total segment productdevelopment expenses for the quarter ended June 30, 2007, compared to30.5% and 69.5%, respectively, for the quarter ended June 30, 2006.

Consolidated product development expenses increased by$0.3 million, or 1%, to $26.5 million for the six months ended June 30,2007, compared to $26.2 million for the six months ended June 30,2006. The increase was attributable to increases in expenses in the Content &Media segment and a $0.3 million increase in depreciation, partially offset bydecreases in expenses in the Communications segment as well as a $0.7 milliondecrease in stock-based compensation. Product development expenses related toour Content & Media segment and our Communications segment constituted38.6% and 61.4%, respectively, of total segment product development expensesfor the six months ended June 30, 2007, compared to 26.9% and 73.1%,respectively, for the six months ended June 30, 2006.

*Content &Media Product Development Expenses.***  **Content &Media product development expenses increased by $0.9 million, or 29%, to$4.1 million for the quarter ended June 30, 2007, compared to$3.2 million for the quarter ended June 30, 2006. The increase wasprimarily due to increases in personnel-related expenses.

Content & Media product development expensesincreased by $2.7 million, or 48%, to $8.3 million for the six monthsended June 30, 2007, compared to $5.6 million for the six monthsended June 30, 2006. The increase was primarily due to headcountassociated with our loyalty marketing service which was acquired inApril 2006 and increases in personnel-related expenses related to oursocial networking services.

*CommunicationsProduct Development Expenses.***  **Communications productdevelopment expenses decreased by $1.1 million, or 15%, to$6.2 million for the quarter ended June 30, 2007, compared to$7.3 million for the quarter ended June 30, 2006. The decrease wasprimarily the result of a $0.8 million 

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decrease inpersonnel-related expenses and a $0.4 million decrease in otheroverhead-related expenses. Capitalized software expenses decreased to $1.5million for the quarter ended June 30, 2007, compared to $2.2 million forthe quarter ended June 30, 2006 due to a decrease in the number ofdevelopment projects in 2007 compared to 2006.

Communications productdevelopment expenses decreased by $2.0 million, or 13%, to$13.2 million for the six months ended June 30, 2007, compared to$15.2 million for the six months ended June 30, 2006. The decreasewas primarily the result of a $1.4 million decrease in personnel-relatedexpenses and a $0.6 million decrease in other overhead-related expenses.Capitalized software expenses decreased to $3.3 million for the six monthsended June 30, 2007, compared to $3.9 million for the six months ended June 30,2006 due to a decrease in the number of development projects in 2007 comparedto 2006.

**General andAdministrative**

General and administrative expenses includepersonnel-related expenses for executive, finance, legal, human resources andinternal customer support personnel. In addition, general and administrativeexpenses include professional fees for 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.***  **Consolidatedgeneral and administrative expenses decreased by $0.5 million, or 3%, to$16.8 million for the quarter ended June 30, 2007, compared to$17.4 million for the quarter ended June 30, 2006. The decrease wasdue to a $2.5 million decrease in stock-based compensation primarily related tothe resignation of a former executive and decreases in unallocated corporateexpenses and expenses associated with our Communications segment. This decreasewas substantially offset by an increase in expenses associated with our Content &Media segment. General and administrative expenses related to our Content &Media segment and our Communications segment constituted 59.9% and 40.1%,respectively, of total segment general and administrative expenses for thequarter ended June 30, 2007, compared to 46.2% and 53.8%, respectively,for the quarter ended June 30, 2006.

Consolidated general and administrative expensesdecreased by $1.3 million, or 4%, to $32.4 million for the six monthsended June 30, 2007, compared to $33.7 million for the six monthsended June 30, 2006. This decrease was due to a $3.1 million decrease instock-based compensation primarily related to the resignation of a formerexecutive and equity awards granted prior to 2006 being expensed in connectionwith Financial Accounting Standards Board (“FASB”) InterpretationNo. (“FIN”) 28; and decreases in unallocated corporate expenses andexpenses associated with our Communications segment. The decrease was partiallyoffset by an increase in expenses associated with our Content & Mediasegment. General and administrative expenses related to our Content &Media segment and our Communications segment constituted 55.2% and 44.8%,respectively, of total segment general and administrative expenses for the sixmonths ended June 30, 2007, compared to 42.9% and 57.1%, respectively, forthe six months ended June 30, 2006.

*Content &Media General and Administrative Expenses.***  **Content &Media general and administrative expenses increased by $2.5 million, or67%, to $6.2 million for the quarter ended June 30, 2007, compared to$3.7 million for the quarter ended June 30, 2006. The increase was primarilydue to a $1.2 million increase in bad debt expense and increases inoverhead-related costs and consulting fees.

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Content & Media general and administrativeexpenses increased by $3.4 million, or 51%, to $10.1 million for thesix months ended June 30, 2007, compared to $6.7 million for the sixmonths ended June 30, 2006. The increase was primarily due to increases inbad debt expense for an uncollectible customer account, facilities and otheroverhead-related costs, compensation costs related to our loyalty marketingservice, which was acquired in April 2006, and consulting fees.

*CommunicationsGeneral and Administrative Expenses.*   Communicationsgeneral and administrative expenses decreased by $0.2 million, or 4%, to $4.1million for the quarter ended June 30, 2007, compared to $4.3 million forthe quarter ended June 30, 2006. The decrease was primarily due to adecrease in compensation costs.

Communications general and administrative expensesdecreased by $0.7 million, or 8%, to $8.2 million for the six months ended June 30,2007, compared to $8.9 million for the six months ended June 30, 2006. Thedecrease was due to a decrease in consulting fees and compensation costs.

*UnallocatedCorporate Expenses.***  **Excluding stock-basedcompensation and depreciation,****unallocatedcorporate general and administrative expenses decreased by $0.2 million,or 5%, to $4.7 million for the quarter ended June 30, 2007, comparedto $4.9 million for the quarter ended June 30, 2006. The decrease wasprimarily due to decreases in facilities and other overhead-related expenses,partially offset by increases in consulting fees and compensation costs.

Excluding stock-basedcompensation and depreciation,****unallocatedcorporate general and administrative expenses decreased by $1.2 million,or 12%, to $8.9 million for the six months ended June 30, 2007,compared to $10.1 million for the six months ended June 30, 2006. Thedecrease was primarily due to decreases in facilities and other overhead-relatedexpenses and consulting fees, partially offset by an increase in compensationcosts.

**Amortization ofIntangible Assets**

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

Consolidated amortizationof intangible assets decreased by $1.3 million, or 30%, to $3.2 millionfor the quarter ended June 30, 2007, compared to $4.6 million for thequarter ended June 30, 2006. Consolidated amortization of intangibleassets decreased by $2.2 million, or 25%, to $6.7 million for the sixmonths ended June 30, 2007, compared to $8.8 million for the sixmonths ended June 30, 2006. The decreases were primarily attributable tothe accelerated amortization of intangible assets in earlier years associatedwith the Classmates acquisition in November 2004, partially offset byincreased amortization related to intangible assets acquired in connection withthe acquisition of The Names Database in the March 2006 quarter and theacquisition of MyPoints in the June 2006 quarter.

**Interest and OtherIncome, Net**

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

Interest and other income,net increased by $0.5 million, or 39%, to $1.9 million for the quarter ended June 30,2007, compared to $1.4 million for the quarter ended June 30, 2006.Interest and other income, net increased by $0.5 million, or 17%, to $3.6million for the six months ended June 30, 2007, compared to 

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$3.1million for the six months ended June 30, 2006. The increases were due tohigher average cash balances and higher interest rates. Net realized gains onour short-term investments were not significant for the quarters and six monthsended June 30, 2007 and 2006.

**Interest Expense**

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

Interest expense for the quarters ended June 30,2007 and 2006 remained relatively flat at $0.4 million.

Interest expense decreasedby $1.4 million, or 66%, to $0.7 million for the six months ended June 30,2007, compared to $2.1 million for the six months ended June 30,2006. The decrease was primarily the result of decreases in interest expenseand amortized deferred financing costs related to the term loan. In January 2006,we expensed the remaining $1.5 million in deferred financing costs upon therepayment of the $54.2 million balance of the term loan.

**Provision forIncome Taxes**

For the quarter and sixmonths ended June 30, 2007, we recorded a tax provision of $10.0 millionand $20.5 million, respectively on pre-tax income of $26.2 million and $49.7million, respectively, resulting in a year-to-date effective tax rate of 41.2%.For the quarter and six months ended June 30, 2006, we recorded a taxprovision of $11.6 million and $20.5 million, respectively, on pre-tax incomeof $23.2 million and $43.8 million, respectively, resulting in a year-to-dateeffective tax rate of 46.9%. The effective tax rates differ from the statutoryrate primarily due to (1) stock-based compensation that is limited under Section 162(m) ofthe Internal Revenue Code, (2) foreign losses, the benefit of which is notcurrently recognizable due to uncertainty regarding realization, (3) employeestock purchase plan compensation, the benefit of which is not currentlyrecognized under SFAS No. 123R, but which benefit is currently recognizedupon disqualified disposition, (4) the benefit of federal tax exemptinterest income and (5) the re-measurement of certain tax deferred taxassets in New York.

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

In the six months ended June 30,2006, we recorded a $1.1 million pretax benefit ($1.0 million, net oftax) as the cumulative effect of a change in accounting principle upon theadoption of SFAS No. 123R, *Share-Based Payment,*to recognize the effect of estimating the number of awards granted prior to January 1,2006 that are not ultimately expected to vest.

**Liquidity andCapital Resources**

Ourtotal cash, cash equivalent and short-term investment balances increased by$29.0 million, or 18%, to $191.4 million at June 30, 2007,compared to $162.4 million at December 31, 2006. Our summary cashflows for the six months ended June 30, 2007 and 2006 were as follows (inthousands):

| ** **                                 | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| Net cash provided  by operating activities |       | $                                             | 61,046     |   | $ | 52,888 |   |
| Net cash used for  investing activities    |       | (41,466                                       | )          | (56,978 | ) |
| Net cash used for  financing activities    |       | (19,109                                       | )          | (71,969 | ) |
|                                            |            |                                               |            |  |  |  |  |

 

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Net cash providedby operating activities increased by $8.2 million, or 15%, for the six monthsended June 30, 2007 compared to the six months ended June 30, 2006.Cash provided by operating activities is driven by our net income adjusted fornon-cash items, including depreciation and amortization, stock-basedcompensation, deferred taxes and tax benefits from stock options and changes inworking capital. The increase was primarily the result of the following:

·                    a$9.0 million net increase in working capital account changes, including an$8.4 million increase in deferred revenue primarily due to increases in socialnetworking pay accounts, a $5.0 million decrease in current income taxespayable, a $10.7 million increase in accounts payable and accruedliabilities, a $5.8 million decrease in other assets primarily due to increasesin prepaid media expenses, a $2.0 million increase in member redemptionliability related to our loyalty marketing service, and a $1.3 milliondecrease in accounts receivable; and

·                    a$5.0 million increase in net income, excluding a $1.0 million cumulative effectof an accounting change in connection with the adoption of SFAS No. 123Rin the March 2006 quarter.

These increases were partially offset by a$6.3 million decrease in depreciation, amortization and stock-basedcompensation and a $1.5 million decrease in amortization of debt issuancecosts.

Net cash used forinvesting activities decreased by $15.5 million, or 27%, for the sixmonths ended June 30, 2007 compared to the six months ended June 30, 2006.The decrease was primarily the result of the following:

·                    a$60.5 million decrease in cash paid for acquisitions. We acquired MyPointsin April 2006 for $49.5 million, net of cash acquired; The Names Databasein March 2006 for $9.5 million, net of cash acquired; and we paid theremaining $1.5 million due in connection with the acquisition of our photosharing service in March 2006; and

·                    a$1.4 million decrease in purchases of property and equipment.

These decreases were offset by a $46.9 million increasein net purchases of short-term investments.

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 six months ended June 30, 2007 were$12.6 million. We anticipate that our total capital expenditures for theremainder of 2007 will be in the range of $15 million to $20 million.The actual amount of future capital expenditures may fluctuate due to a numberof factors including, without limitation, potential future acquisitions and newbusiness initiatives, which are difficult to predict and could changesignificantly over time. Additionally, technological advances may require us tomake capital expenditures to develop or acquire new equipment or technology inorder to replace aging or technologically obsolete equipment.

Net cash used for financing activities decreased by$52.8 million, or 73%, for the six months ended June 30, 2007compared to the six months ended June 30, 2006. The decrease was primarilythe result of payments on the term loan of $54.2 million in the March 2006quarter.

The payment of dividends will negatively impact cashflows from financing activities. In February and April 2007, ourBoard of Directors declared a quarterly cash dividend of $0.20 per share ofcommon stock. The dividends were paid on February 28, 2007 and May 31,2007 and totaled $13.7 million and $14.4 million, respectively. In July 2007,our Board of Directors declared a quarterly cash dividend of $0.20 pershare of common stock. The record date for the dividend is August 14, 2007and the dividend will be paid on August 31, 2007. The payment of futuredividends is discretionary and will be subject to determination by the Board ofDirectors each quarter following its review of our financial performance.

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Future cash flows from financing activities may alsobe affected by repurchases of common stock. Our Board of Directors authorized acommon stock repurchase program that allows us to repurchase shares of ourcommon stock through open market or privately negotiated transactions based onprevailing market conditions and other factors through December 31, 2007.At June 30, 2007, we had repurchased $139.2 million of our commonstock under the program, and the remaining amount available under the programwas $60.8 million.

Cash flows from financing activities may also benegatively impacted by the withholding of a portion of shares underlying therestricted stock units (“RSUs”) we award to employees. Upon vesting, wecurrently do not collect the applicable withholding taxes for RSUs fromemployees. Instead, we automatically withhold, from the RSUs that vest, theportion of those shares with a fair market value equal to the amount of thewithholding taxes due. We then pay the applicable withholding taxes in cash.Similar to repurchases of common stock, the net effect of such withholding willadversely impact our cash flows. The amounts remitted in the six months ended June 30,2007 and 2006 were $3.8 million and $2.0 million, respectively, for which wewithheld approximately 265,000 shares and 155,000 shares of common stock,respectively, that were underlying the RSUs. The amount we pay in futurequarters will vary based on our stock price and the number of RSUs vestingduring the quarter.

Based on our currentprojections, we expect to continue to generate positive cash flows fromoperations, at least in the near term. We intend to use our existing cash balancesand future cash generated from operations to fund dividend payments, ifdeclared by the Board; to develop and acquire complementary services,businesses or technologies; to repurchase shares of our common stock if webelieve market conditions to be favorable; to repurchase the common stockunderlying RSUs and pay the withholding taxes due on vested RSUs; and to fundfuture capital expenditures. We currently anticipate that our future cash flowsfrom operations and existing cash, cash equivalent and short-term investmentbalances will be sufficient to fund our operations over the next year, and inthe near term we do not anticipate the need for additional financing to fundour operations. However, we may raise additional debt or equity capital for a varietyof 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 were as follows at June 30, 2007 (in thousands):

| ** **                    | ** ** | ** ** | ** ** | **Apr-Dec** | ** ** | **Year Ending December 31,** | ** ** | ** ** | ** ** |
|-------------------------------|------------|------------|------------|-------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                    | ** ** | **Total**  | ** ** | **2007**    | ** ** | **2008**                                    | ** ** | **2009**   | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** |
| Capital leases(1)             |       | $          | 23         |        | $          | 9                                           |       | $          | 14         |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |   | $ | — |   |   |
| Operating leases              |       | 51,622     |       | 6,025       |       | 11,976                                      |       | 10,957     |       | 6,962 |   | 4,528 |   | 4,072 |   |   | 7,102 |   |   |
| Telecommunications  purchases |       | 14,583     |       | 5,782       |       | 6,790                                       |       | 1,102      |       | 909 |   | — |   | — |   |   | — |   |   |
| Media purchases               |       | 4,540      |       | 4,540       |       | —                                      |       | —     |       | — |   | — |   | — |   |   | — |   |   |
| Total                         |       | $          | 70,768     |        | $          | 16,356                                      |       | $          | 18,780     |   | $ | 12,059 |   | $ | 7,871 |   | $ | 4,528 |   | $ | 4,072 |   |   | $ | 7,102 |   |   |

 

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(1)          Includes$1 of imputed interest.

**Off-Balance SheetArrangements**

At June 30, 2007, wehad no off-balance sheet arrangements that have, or are reasonably likely tohave, a current or future material effect on our consolidated financialcondition, results of operations, liquidity, capital expenditures or capitalresources.

**Recent AccountingPronouncements**

*Accounting forUncertainty in Income Taxes*

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

*Fair ValueMeasurements*

In September 2006,the FASB issued SFAS No. 157, *Fair Value Measurements*,which clarifies the definition of fair value, establishes guidelines formeasuring fair value, and expands disclosures regarding fair valuemeasurements. SFAS No. 157 does not require any new fair valuemeasurements and eliminates inconsistencies in guidance found in various prioraccounting pronouncements. SFAS No. 157 will be effective for us on January 1,2008. We are currently evaluating the impact of adopting SFAS No. 157 onour financial position, results of operations and cash flows.

*Fair Value Option*

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

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

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

*Interest Rate Risk*

We have interest rate risk primarily related to ourinvestment portfolio.

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

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interestrates. However, we believe this risk is immaterial due to the relativelyshort-term nature of the investments.

*Foreign CurrencyRisk*

We transact business indifferent foreign currencies and may be exposed to financial market riskresulting from fluctuations in foreign currency exchange rates, particularlythe Indian Rupee (INR) and the Euro, which may result in a gain or loss ofearnings to us. The volatilities of the INR and the Euro (and all otherapplicable currencies) are monitored throughout the year. We face two risksrelated to foreign currency exchange: translation risk and transaction risk.Amounts invested in our foreign operations are translated into U.S. dollarsusing period-end exchange rates. The resulting translation adjustments are recordedas a component of accumulated other comprehensive income (loss) in stockholders’equity. Our foreign subsidiaries generally collect revenues and pay expenses incurrencies other than the U.S. dollar. Since the functional currencies of ourforeign operations are denominated in the local currency of our subsidiaries,the foreign currency translation adjustments are reflected as a component ofstockholders’ equity and do not impact operating results. Revenues and expensesin foreign currencies translate into higher or lower revenues and expenses inU.S. dollars as the U.S. dollar weakens or strengthens against othercurrencies. Therefore, changes in exchange rates may negatively affect ourconsolidated revenues and expenses (as expressed in U.S. dollars) from foreignoperations. Currency transaction gains or losses arising from transactions incurrencies other than the functional currency are included in operatingexpenses. While we have not engaged in foreign currency hedging, we may in thefuture use hedging programs, currency forward contracts, currency optionsand/or other derivative financial instruments commonly utilized to reducefinancial market risks if it is determined that such hedging activities areappropriate to reduce risk.

**ITEM 4.**                CONTROLSAND PROCEDURES

*Disclosure Controlsand Procedures*

Our management, with theparticipation of our Chief Executive Officer and Interim Chief FinancialOfficer, has evaluated the effectiveness of the Company’s disclosure controlsand procedures (as such term is defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the“Exchange Act”)) as of the end of the period covered by this report. Based onsuch evaluation, our Chief Executive Officer and Interim Chief Financial Officerhave concluded that, as of the end of such period, the Company’s disclosurecontrols and procedures are effective in recording, processing, summarizing andreporting, on a timely basis, information required to be disclosed by theCompany in the reports that it files or submits under the Exchange Act and areeffective in ensuring that information required to be disclosed by the Companyin the reports that it files or submits under the Exchange Act is accumulatedand communicated to the Company’s management, including the Company’s ChiefExecutive Officer and Interim Chief Financial Officer, as appropriate to allowtimely decisions regarding required disclosure.

*Changes in InternalControl Over Financial Reporting*

There have not been any changes in the Company’sinternal controls over financial reporting (as such term is defined in Rules 13a15(f) and 15d 15(f) under the Exchange Act) during our most recentfiscal quarter that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal controls over financial reporting.

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**PART II—OTHERINFORMATION**

**ITEM 1.**                LEGALPROCEEDINGS

InApril, 2001 and in May 2001, lawsuits were filed in the United StatesDistrict Court for the Southern District of New York against NetZero, Inc.(“NetZero”), certain officers and directors of NetZero and the underwriters ofNetZero’s initial public offering, Goldman Sachs Group, Inc., BancBostonRobertson Stephens, Inc. and Salomon Smith Barney, Inc. Aconsolidated amended complaint, which is the operative complaint, was filed in April 2002.The complaint alleges that the prospectus through which NetZero conducted itsinitial public offering in September 1999 was materially false andmisleading because it failed to disclose, among other things, that (i) theunderwriters had solicited and received excessive and undisclosed commissionsfrom certain investors in exchange for which the underwriters allocated tothose investors material portions of the restricted number of NetZero sharesissued in connection with the offering; and (ii) the underwriters had enteredinto agreements with customers whereby the underwriters agreed to allocateNetZero shares to those customers in the offering in exchange for which thecustomers agreed to purchase additional NetZero shares in the aftermarket atpre-determined prices. Plaintiffs are seeking injunctive relief and damages.The case against NetZero was coordinated with approximately 300 other suitsfiled against more than 300 issuers that conducted their initial publicofferings between 1998 and 2000, their underwriters and an unspecified numberof their individual corporate officers and directors. On October 13, 2004,the district court certified a class in six of the other nearly identicalactions (the “focus cases”). The underwriter defendants appealed the decisionand the United States Court of Appeals for the Second Circuit vacated thedistrict court’s decision granting class certification on December 5,2006. Plaintiffs filed a petition for rehearing. On April 6, 2007, theSecond Circuit denied the petition, but noted that plaintiffs could ask thedistrict court to certify a more narrow class than the one that was rejected.Prior to the Second Circuit’s decision, the majority of issuers, includingNetZero, and their insurers had submitted a settlement agreement to thedistrict court for approval. In light of the Second Circuit opinion, theparties agreed that the settlement could no longer be approved, and on June 25,2007, the court approved a stipulation filed by the plaintiffs and the issuerswhich terminated the proposed settlement. The plaintiffs now plan to repleadtheir complaints and move for class certification again.

On March 6,2006, plaintiff Anthony Piercy filed a purported consumer class action lawsuitin the Superior Court of the State of California, County of Los Angeles,against NetZero claiming that NetZero continues to charge consumers fees afterthey cancel their Internet access account. On July 27, 2006, plaintiffDonald E. Ewart filed a purported consumer class action lawsuit in the SuperiorCourt of the State of California, County of Los Angeles, against NetZerocontaining substantially similar allegations to the Piercy case. Plaintiffs inboth cases are seeking injunctive and declaratory relief and damages. NetZerofiled a response to both lawsuits denying the material allegations of thecomplaints. Both Mr. Piercy and Mr. Ewart subsequently withdrew fromthe actions as class representatives. On March 16, 2007, Barbara Rasnake,Robert Du Verger and Peter Chrisler were substituted as purported classrepresentatives. On May 25, 2007, the court consolidated the actions underthe caption *Rasnake v. NetZero, Inc.,* Case No. BC348461.On July 13, 2007, plaintiffs filed a consolidated amended class actioncomplaint, at which time Peter Chrisler was also substituted as a purportedclass representative. Discovery is continuing and a trial date has not yet beenset.

Thepending lawsuits involve complex questions of fact and law and may require theexpenditure of significant funds and the diversion of other resources todefend. Although we do not believe the outcome of the above outstanding legalproceedings, claims and litigation will have a material adverse effect on ourbusiness, financial condition, results of operations or cash flows, the resultsof litigation are inherently uncertain and we cannot assure you that we willnot be materially and adversely impacted by the results of such proceedings. AtJune 30, 2007, we had not established reserves for any of the mattersdescribed above.

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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.

**ITEM 1A.**        RISKFACTORS

*Before deciding to investin our Company or to maintain or increase your investment, you should carefullyconsider the risks described below as well as the other information in thisreport and our other filings with the SEC. The risks and uncertaintiesdescribed below are not the only ones facing our Company. Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also affect us. If any of these risks actually materialize, our business,financial position, results of operations and cash flows could be adversely impacted.In that event, the market price of our common stock could decline and you maylose all or part of your investment.*

We have updated the Risk Factors previously disclosedin Part I, Item IA in our Annual Report on Form 10-K for theyear ended December 31, 2006, which was filed with the Securities andExchange Commission on March 1, 2007, as set forth below.

**Our business will sufferif we are unable to compete effectively.**

*Competitionfor Internet Access Services.**  *Our principal Communicationsservices, our Internet access services, compete with many emerging and seasonedcompetitors, including the following:

·                    establishedonline service and content providers such as AOL, AOL’s Netscape subsidiary andMSN;

·                    independentnational Internet service providers (“ISPs”) such as EarthLink and its PeoplePCsubsidiary;

·                    companiescombining their resources to offer Internet access in conjunction with otherservices such as Yahoo! and AT&T Internet Services, and Yahoo! and Verizon;

·                    nationalcommunications companies and local exchange carriers such as AT&T Inc.,Qwest Communications International, Inc. and Verizon;

·                    cablecompanies such as Comcast Corporation, Time Warner Cable, Inc., CoxCommunications, Inc., and Charter Communications, Inc.;

·                    localtelephone companies;

·                    regionaland local commercial ISPs; and

·                    municipalities.

Ourprimary service offering is dial-up Internet access. Our historical success incompeting for Internet access subscribers has been based primarily on offeringdial-up access services at prices lower than the prices of our principalcompetitors. However, in the last few years the market has changed dramaticallydue to a variety of factors including increased availability of broadbandservices, decreases in broadband pricing and widespread consumer adoption ofapplications that require a broadband connection. Dial-up services do notcompete favorably with broadband services with respect to connection speed, anddial-up services no longer have a significant, if any, price advantage over certainbroadband services. As a result, dial-up services have an increasinglydifficult time competing with broadband services and the number of dial-upaccounts in the United States has been declining at an increasing rate. Inaddition to competition from broadband providers, competition among dial-upproviders has increased and neither our pricing nor 

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our features provide us with a significant competitiveadvantage, if any, over certain of our dial-up competitors. We expect thatcompetition, particularly with respect to price, both for broadband as well asdial-up services, will continue to intensify, and that our dial-up subscriberbase will continue to decrease, potentially at an increasing rate.

Inthe fourth quarter of 2006, we began offering broadband services by purchasingand reselling broadband services acquired through third party providers. Theproviders from whom we purchase such services are either our direct competitorsor acquire their services from our competitors. We currently have agreements withonly a limited number of providers and their services cover only a portion ofthe U.S. There is no assurance that we will be successful in entering into theagreements necessary to offer broadband services on a significant scale, thatwe will be able to maintain such agreements or that the pricing under suchagreements will enable us to profitably resell the services. Most of thelargest providers of broadband services, such as cable and telecommunicationscompanies, control their own networks and offer a wider variety of servicesthan we offer, including phone, data and video services and content. Theirability to bundle services and to offer broadband services at prices below theprice that we can profitably offer comparable services puts us at a competitivedisadvantage. Decreases in retail broadband pricing as a result of competitionwould adversely impact our ability to offer such services profitably or at acompetitive price. We only have a limited number of subscribers to ourbroadband services and there can be no assurance that our broadband serviceswill be commercially successful.

Inorder to compete effectively we may have to make significant revisions to ourservices, pricing and marketing strategies, and business model. For example, wemay have to lower our introductory rates, offer additional free periods ofservice, offer additional features at little or no additional cost to theconsumer, and/or reduce the standard pricing of our services. Measures such asthese could decrease our revenues and our average revenue per pay accessaccount. We may also have to allocate more marketing resources toward ouraccess services than we anticipate. All of the foregoing could adversely affectthe profitability of our access services which could materially and adverselyimpact our financial condition, results of operations and cash flows.

*Competition for OnlineSocial Networking Services.**  *The market for our services is competitive, and weexpect competition to significantly increase in the future. Our socialnetworking services compete with a wide variety of social networking Web sites,including broad social networking sites such as MySpace and Facebook; a numberof specialty sites, including LinkedIn, Reunion.com and Monster.com'sMilitary.com service, that offer similar online social networking servicesbased on school, work or military communities; and an increasing number ofschools, employers and associations that maintain their own Internet-basedalumni information services. We also compete with a wide variety of Web sitesthat provide users with alternative networks and ways of locating andinteracting with acquaintances from various affiliations, including Web portalssuch as Yahoo!, MSN and AOL, and online services designed to locate individualssuch as White Pages and US Search. As Internet search engines continue toimprove their technology and their ability to locate individuals, including byfinding individuals through their profiles on social networking sites, theseservices will increasingly compete with our services. As a result of the growthof the social networking market, a number of companies are attempting to enterour market, either directly or indirectly, some of which may become significantcompetitors in the future. In addition, many existing social networkingservices are broadening their offerings to compete with our services. As webroaden our services and evolve into a service used for meeting new people withsimilar interests or affiliations, we may compete with the increasing number ofsocial networking sites for special niches and areas of interest. For example,our recently launched dating feature competes with a number of online datingservices. 

Someof our competitors have longer operating histories, greater name and brandrecognition, larger customer bases, significantly greater financial, technical,sales and marketing resources, and engage in more extensive research anddevelopment than we do. Some of our competitors also have lower customeracquisition costs than we do and offer a wider variety of services and moresophisticated or compelling 

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features than ours.  In addition, we have relied extensively onInternet advertising through portals and other Internet service providers,including AOL, MSN and Yahoo!, to grow our free and pay accounts. A number ofthese companies are competitors of United Online with respect to Internet accessand other services, 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 newonline social networking pay and free accounts would be adversely impacted. Ifour competitors are more successful than we are in attracting users, ourability to maintain a large and growing user base will be adversely affected.Some of our social networking competitors have more compelling Web sites withmore extensive user generated content and offer their services free to theirusers. If our social networking services are not as compelling and we do notstay current with evolving consumer trends, we may not succeed in maintaining orincreasing our membership base. If our competitors provide similar services forfree, we may not be able to charge for any of our services. Competition couldhave a material adverse affect on our subscription revenues and advertisingrevenues from social networking services. Although our pay account base hasgrown in recent periods, there are no assurances that this rate of growth willcontinue, if at all. More intense competition could also require us to increaseour marketing expenditures. As a result of competition, our revenues andprofitability could be adversely affected.

*Competition for OnlineLoyalty Marketing Services.**  *Our online loyalty marketing service facescompetition for members from several other loyalty programs that offercompetitive online products and services, including Ebates, Upromise and ThankYouNetwork. We also face competition from offline loyalty rewards programs thathave a significant online presence, such as those operated by credit card,airline and hotel companies. The success of our loyalty marketing service isdependent upon our ability to maintain and expand our active member base. Thevast majority of our new member loyalty marketing accounts are derived from afew co-registration sources, which are services that provide new memberregistrations for MyPoints and unrelated third-party services. The loss of anyof these sources of new member registrations or a decrease in the number of newmembers acquired through these sources could have an adverse affect on ourloyalty marketing business. In addition, we generate a significant portion ofour loyalty marketing revenues from the activity of a small percentage ofMyPoints members. If the advertising campaigns directed to our MyPoints membersand the rewards offered are not sufficiently compelling, we may not be able tomaintain or increase the percentage of our MyPoints members who activelyparticipate in our programs. If we are unable to increase or maintain thenumber of new MyPoints members and encourage existing members to activelyparticipate in our programs, then our business and financial results could beadversely affected. Although our membership has grown in prior periods, thereare no assurances that our membership growth will continue or increase in thefuture. We have limited experience in this market and cannot assure you that wewill be able to compete effectively.

*Competition for Advertising Customers.**  *We are dependent upon advertisingrevenues for a significant portion of our revenues and profits. Internetadvertising techniques are evolving, and if our technology and ad servingtechniques do not keep up with the needs of advertisers, we will not be able tocompete effectively. We compete for advertising revenues with major ISPs, portalcompanies, social networking Web sites, content providers, large Webpublishers, Web search engine companies, content aggregation companies, directmarketing businesses, and various other companies that facilitate Internetadvertising. We also compete with traditional offline advertising media, suchas television, radio and print advertising, because most companies currentlyspend only a small portion of their advertising budgets on Internet-basedadvertising. Many of our competitors have longer operating histories, greatername recognition, larger user bases and significantly greater financial, technical,sales and marketing resources than we do. This may allow them to devote greaterresources to the development, promotion and sale of their products andservices. These competitors may also engage in more extensive research anddevelopment, offer more sophisticated or compelling products and services,undertake more far-reaching marketing campaigns and adopt more aggressivepricing policies. In certain instances, we generate advertising revenues from 

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companies who are also ourcompetitors. To the extent competitors who are also sources of significantadvertising revenue cease to do business with us, our revenues and profitscould suffer.

**Revenues and profitabilityof our Communications segment are expected to decrease.**

Substantially all of our Communications revenues andprofits come from our access services. As a result of expected continueddecreases in our pay access accounts and, potentially, the average monthlyrevenue per pay account, we expect that our Communications billable servicesrevenues and the profitability of this segment will decline over time. The rateof decline in billable services revenues has accelerated in some periods andmay continue to accelerate. Our Communications advertising revenues may declineas well due to decreases in our access accounts. Continued declines,particularly if such declines accelerate, in Communications revenues maymaterially and adversely impact the profitability of this segment and theCompany as a whole.

**Revenues and profitabilityof our Content & Media segment may not increase.**

A key element of our strategy involves thediversification from the declining access business to businesses with growthopportunities. We view the Content & Media segment as a growthopportunity. Both billable services revenues and advertising revenues are keycomponents in the profitability of this segment. We derive substantially all ofthis segment’s billable services revenues from pay accounts relating to oursocial networking services. We derive significant advertising revenues fromboth our social networking services as well as our loyalty marketing service.We have experienced periods where our advertising revenues and billableservices revenues have declined. There can be no assurance that we will besuccessful in increasing Content & Media advertising revenues orbillable services revenues in the future. If we are not successful in growingour revenues within this segment, it is likely to adversely affect ourdiversification strategy and our future prospects. Failure to increase revenuesin this segment could also adversely impact the profitability of this segmentand the Company as a whole.

**We may be unable tomaintain or grow our advertising revenues. Reduced advertising revenues mayreduce our profits.**

Advertising revenues are an increasingly 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, the effect of key advertisingrelationships, changes in our business models, changes in the onlineadvertising market, changes in our advertising inventory, and changes in usage.In particular, we derive significant revenues from search, an agreement with Webloyalty,Inc. for post-transaction sales and certain other advertising initiatives orpartners, and any termination, change or decrease in revenues from thesesources could have a material impact on our advertising revenues. Webloyaltyand some of its post-transaction partners are subject to a consumer classaction lawsuit relating to their post-transaction sales registration practices.There can be no assurance that we will maintain our post-transactionadvertising revenues or that our business will not be adversely impacted. In responseto competition, we also could be required to expend significant resources todevelop or enhance our advertising services, although there can be no assurancethat our efforts will be successful. From time to time, we have undertakeninitiatives that we believed would increase our advertising revenues but haveresulted in decreased advertising revenues. There can be no assurance ouradvertising initiatives will be effective, and our advertising revenues maydecline in future periods.

**Our business is subject tofluctuations.**

Our results of operations and changes in the numberand mix of pay accounts from period to period have varied in the past and mayfluctuate significantly in the future due to a variety of factors, many ofwhich are outside of our control and difficult to predict. A number of factorsthat may impact us are 

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discussed in greaterdetail in this Form 10-Q, and these factors may affect us fromperiod to period and may affect our long-term performance. As a result, youshould not rely on period-to-period comparisons as an indication of future orlong-term performance. In addition, these factors create difficulties withrespect to our ability to forecast our financial performance accurately. Webelieve that these difficulties in forecasting present even greater challengesfor financial analysts who publish their own estimates of our future financialresults and account metrics. We cannot assure you that we will achieve theexpectations or financial projections made by our management or by the financialanalysts. In the event we do not achieve such expectations or projections, theprice of our common stock could be adversely affected.

**Our marketing activitiesmay not be successful.**

We spend significant funds to market our services.From time to time, we may allocate our advertising expenditures to differentservices for various reasons, and these allocations may adversely impact someof our other services. Even if we choose to allocate significant marketingresources to a particular service, there is no assurance that our marketingactivities will be successful. We use online advertising to promote our socialnetworking and loyalty marketing services to potential new members. Most of ouronline advertising arrangements are structured such that we pay a fee for eachnew account registration generated through a particular advertisement. The costof online advertising has generally been increasing in recent periods, whichhas resulted in an increase in our marketing expenditures. If the cost of onlineadvertising continues to escalate, we may experience decreases in the number ofnew account registrations unless we increase our marketing expenditures. Attimes we have increased our profitability, in part, by decreasing our marketingexpenditures. Future decreases in our marketing expenditures could adverselyimpact our business. Future increases in our marketing expenditures couldadversely impact our profitability and there can be no assurance that ourmarketing activities will be successful in growing our businesses. We rely on avariety of distribution channels to obtain new accounts. If these channelsprove to be ineffective, or if the cost to acquire new accounts increases, ourfinancial results could be materially and adversely impacted.

**If we are unable to retainusers, our business and financial results will suffer.**

Historically,we have lost an average of four to five percent of our pay accounts each month,which we refer to as churn, with churn in recent periods approximating fivepercent. Our churn rate is calculated as the total number of pay accounts thatterminated or expired in a period divided by the average number of pay accountsfor the same period. The average number of pay accounts is a simple average ofthe number of pay accounts at the beginning and end of a period. We makecertain normalizing adjustments to the calculation of our churn percentage forperiods in which we add a significant number of pay accounts due toacquisitions. We do not include in our churn calculation those accountscancelled during the first thirty days of service unless the accounts haveupgraded from free accounts, although a number of such accounts will beincluded in our account totals at any given measurement date. Subscribers whocancel one pay service but subscribe to another pay service are not consideredto have cancelled a pay account and, as such, our overall churn rate is notnecessarily indicative of the percentage of subscribers canceling anyparticular service. We have experienced, and will likely continue toexperience, a higher percentage of subscribers canceling our accelerated accessservices than is indicated by our churn rate. In addition, the percentage ofsubscribers canceling our social networking services has fluctuatedsignificantly from quarter to quarter due to our mix of subscription terms,which affects the timing of subscription expirations. A significant majority ofour social networking pay accounts are on plans that automatically renew at theend of their subscription period. Our sales and marketing practices arecurrently subject to an inquiry by the United States Federal Trade Commission,or FTC, and any change in our renewal practices as a result of the inquiry orotherwise could have a material impact on our churn rate. Our churn may behigher in future periods and will fluctuate from period to period and fromservice to service. If we continue to experience a high percentage of payaccounts canceling our services, it will make it more difficult to grow,maintain or minimize decreases in the number of pay accounts for thoseservices. If we experience an 

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increased percentage of cancellations, our revenuesand profitability may be adversely affected. In addition, we could be requiredto increase our marketing expenditures to replace these lost subscribers, whichcould also adversely affect our profitability.

Each month, a significant number of free accountsbecome inactive and we may experience continued declines in the number ofactive free accounts. In addition, a user may have more than one account onmore than one of our services, and we are not able to determine in most cases thenumber of accounts held by an individual. As such, the actual number of uniqueindividuals using our services may be much lower than our total number ofaccounts.

**We may be unsuccessful atacquiring additional businesses, services or technologies. Even if we completean acquisition, it may not improve our results of operations and may adverselyimpact our business and financial condition.**

Oneof our strategic objectives is to acquire businesses, services or technologiesthat will provide us with an opportunity to leverage our assets and corecompetencies, or that otherwise will be complementary to our existingbusinesses. We may not succeed in growing or maintaining our revenues unless weare able to successfully complete acquisitions. The merger and acquisitionmarket for companies offering Internet services is extremely competitive,particularly for companies who have demonstrated a profitable business modelwith long-term growth potential. Companies with these characteristics tradepublicly or are privately valued at multiples of earnings, revenues, operatingincome and other metrics significantly higher than the multiples at which weare currently valued. Acquisitions may require us to obtain additional debt orequity financing, which may not be available to us on reasonable terms, or atall. 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.

We routinely engage in discussions regarding potentialacquisitions and any of these transactions could be material to our financialcondition and results of operations. However, we cannot assure you that theanticipated benefits of an acquisition will materialize or that any integrationattempts will be successful. Acquiring a business, product line or technologyinvolves many risks, including:

·                    disruption ofour ongoing business and significant diversion of management from day-to-dayresponsibilities;

·                    acquisitionfinancings that involve the issuance of potential dilutive equity or theincurrence of debt; 

·                    reduction ofcash and other resources available for operations and other uses; 

·                    unforeseenobligations or liabilities;

·                    difficultyassimilating the acquired customer bases, technologies and operations;

·                    difficultyassimilating and retaining employees from the acquired business;

·                    risks ofentering markets in which we have little or no direct prior experience;

·                    potentialimpairment of relationships with users, customers or vendors as a result ofchanges in management of the acquired business; and

·                    largewrite-offs either at the time of the acquisition or in the future, theincurrence of restructuring charges, the amortization of identifiableintangible assets, and the impairment of amounts capitalized as intangibleassets; and

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

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Any of these risks could harm our business andfinancial results. In addition, an acquisition of a foreign business involvesrisks in addition to those set forth above, including risks associated withpotentially unfamiliar economic, political and regulatory environments andintegration difficulties due to language, cultural and geographic differences.

**We may not successfullydevelop and market new services and features in a timely or cost-effectivemanner; consumers or advertisers may not accept our new services and features.**

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 and features. Newservices or features, such as our broadband services, may be dependent on ourobtaining needed technology or services from third parties, which we may not beable to obtain in a timely manner upon terms acceptable to us, or at all. Ourability to compete successfully will also depend upon the continuedcompatibility of our services with products and services offered by variousvendors, which we may not be able to achieve. We have expended, and may in thefuture expend, significant resources enhancing our existing services anddeveloping, acquiring and implementing new services or features, such as ourbroadband services and the recently launched or proposed new features anddesigns on our Classmates and MyPoints Web sites. Product development involvesa number of uncertainties, including unanticipated delays and expenses. New orenhanced services and features, including those proposed or recently launched, mayhave technological problems or may not be accepted by consumers or advertisers.For example, our VoIP and photo sharing services did not meet with commercialsuccess. We cannot assure you that we will be successful in developing,acquiring or implementing new or enhanced services or features, or that new orenhanced services or features will be commercially successful.

**Our access businessis dependent on our ability to effectively manage our telecommunications andnetwork capacities.**

Our access businesssubstantially depends on the capacity, affordability, reliability and securityof our telecommunications networks. We will have to accurately anticipate ourfuture telecommunications capacity needs within lead-time requirements. Only asmall number of telecommunications providers offer the network and dataservices we currently require, and we purchase most of our telecommunicationsservices from a few providers. Some of our telecommunications services areprovided pursuant to short-term agreements that the providers can terminate orelect not to renew. Vendors may experience significant financial difficultiesand be unable to perform satisfactorily or to continue to offer their services.The loss of vendors has resulted, and may result, in increased costs, decreasedservice quality and the loss of users. If we are unable to maintain, renew orobtain new agreements with the third party providers of our telecommunicationsservices, or to secure new or alternative arrangements with other providers, toprovide the scope, quantity, quality, type and pricing of services to meet ourcurrent and future needs, our business, financial position, results ofoperations and cash flows could be materially and adversely affected.

**Our business ishighly dependent on our billing and customer support systems, and on thirdparties for technical support and customer service, and our business may sufferif these systems do not function and we cannot perform and provide theseservices.**

Customer billing andservice are highly complex processes, and our systems must efficientlyinterface with other third parties’ systems such as the systems of credit cardprocessing companies and other companies to whom we outsource these functions.Our ability to accurately and efficiently bill and service our users isdependent on the successful operation of these systems. We have experiencedcustomer billing and service problems from time to time and may experienceadditional problems in the future. We currently outsource a majority of thelive technical and billing support functions. 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 that ourvendors become unable or unwilling to offer these services to us. Problems withour third party software applications, our internally developed software 

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applications,our credit card processors, our outsourced customer service vendors, other customerbilling and support vendors, and any other failures or errors in our customerbilling and service systems, could materially and adversely affect ourbusiness, financial position, results of operations and cash flows.

**If our software orhardware contains errors or fails, if we fail to operate our serviceseffectively or if we encounter difficulties integrating our systems andtechnologies, our business could 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, errors in the operation ofour systems, and technical and customer support issues associated with ourservices and software releases. This has resulted in, and may in the futureresult in, a number of adverse consequences, which have included or mayinclude:

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

·       lossof data or revenue;

·       injuryto reputation; and

·       diversionof development resources.

A number of our materialtechnologies and systems are based on different platforms. To the extent weattempt to integrate these technologies and systems, we may experience a numberof difficulties, errors, failures and unanticipated costs. In addition, ourbusiness relies on third-party software for various applications including,without limitation, our internal operations, our billing and customer support,our accelerated services, and our advertising products and services. Anysignificant failure of this software could materially and adversely affect ourbusiness, financial position, results of operations and cash flows. Ourservices also rely on their compatibility with other third-party systems,particularly operating systems. Incompatibility with future changes tothird-party software upon which our systems rely could materially affect ourability to deliver our services. We cannot assure you that we will notexperience significant technical problems with our services in the future.

**A security breachor inappropriate use of our network or services could expose us to claims or aloss 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 vendors. Unauthorized orinappropriate access to, or use of, our networks, computer systems and servicescould potentially jeopardize the security of confidential information,including credit card information, of our users and of third parties. Thirdparties have in the past used our networks, services and brand names toperpetrate crimes, such as identity theft or credit card theft, and may do soin the future. Users or third parties may assert claims of liability against usas a result of any failure by us to prevent security breaches, unauthorizeddisclosure of user information or other such activities. Although we use securitymeasures that we believe to be effective by industry standards, 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 ofcustomer and billing support services or other vendors will be adequate. Inaddition to potential legal liability, these activities may adversely impactour reputation or our revenues and may interfere with our ability to provideour services, all of which could adversely impact our business.

**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 

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beendisseminated through the Internet and have caused significant disruption toInternet users. Certain of these programs have disabled the ability ofcomputers to access the Internet, requiring users to obtain technical supportin order to gain access to the Internet. Other programs have had the potentialto damage or delete computer programs. The development and widespreaddissemination of harmful programs has the potential to seriously disruptInternet 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 and trade secrets are important to the success of ourbusiness. We principally rely upon patent, trademark, copyright, trade secretand contract laws to protect our proprietary technology. The protection of ourproprietary rights may require the expenditure of significant financial andinternal resources. We cannot assure you that we have taken adequate steps toprevent misappropriation of our rights. Our failure to adequately protect ourproprietary rights could adversely affect our brands.

**Legal actions,particularly those associated with proprietary rights, could subject us tosubstantial liability and expense and require us to change our businesspractices.**

We are currently, and have been in the past, party tovarious legal actions. These actions include, without limitation, claims byprivate parties in connection with consumer protection and other laws, claimsthat we infringe third party patents, claims in connection with employmentpractices, securities laws claims, breach of contract claims and otherbusiness-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. Variousgovernmental agencies may also assert claims or institute investigationsrelating to our business practices, such as our marketing, billing, customerretention, cancellation, refund or disclosure practices.

Defending against lawsuitsand investigations involves significant expense and diversion of management’sattention and resources from other matters. We may not prevail in existingclaims or claims that may be made in the future. The failure to successfullydefend against certain types of claims, including claims based on infringementof proprietary rights, could require us to change our business practices orobtain licenses from third parties, which licenses may not be available onacceptable terms, if at all. Lawsuits and investigations also involve the riskof significant settlements or judgments against us. Both the cost of defendingclaims, as well as the effect of settlements and judgments, could cause ourresults of operations to fluctuate significantly from period to period andcould materially and adversely affect our business, financial position, resultsof operations and cash flows.

**We may not realizethe benefits associated with our intangible assets and may be required torecord a significant charge to earnings if we are required to impair ourgoodwill or identifiable intangible assets.**

We are required, underaccounting principles generally accepted in the United States, to review ourintangible assets for impairment when events occur or circumstances change thatwould more indicate the fair value of a reporting unit below its carrying valueamount. Goodwill is required to be tested for impairment at least annually.Certain of our services are relatively new and have not generated significantrevenues. We have capitalized certain proprietary rights related to some ofthese services as well as certain costs incurred by us in connection with thedevelopment of these services. We have also capitalized goodwill and intangibleassets in connection with some of our acquisitions. If these services are notcommercially successful, we would likely be required to record an impairmentcharge for these assets 

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whichwould negatively impact our financial condition and results of operations. Forexample, in the fourth quarter of 2006, we had to write-down (impair) certainlong-lived assets associated with our VoIP services and certain goodwill andintangible assets associated with the acquisition of our photo-sharing service.We have experienced impairment losses in the past and we cannot assure you thatwe will not experience impairment losses in the future. Any such loss couldadversely and materially impact our financial condition and results ofoperations.

**Our ability tooperate our business could be seriously harmed if we lose members of our seniormanagement team or other key employees.**

Our business is largelydependent on the efforts and abilities of our senior management, particularlyMark R. Goldston, our chairman, president and chief executive officer, andother key 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.

**Changes in laws andregulation changes and new laws and regulations may adversely affect ourresults of operations.**

We are subject to a variety of international, federal,state and local laws and regulations, including those relating to issues suchas user privacy and data protection, defamation, pricing, advertising,taxation, sweepstakes, promotions, billing, content regulation, bulk email or “spam,”anti-spyware initiatives, security breaches and consumer protection. Compliancewith the various laws and regulations, which in many instances are unclear orunsettled, is complex. Any changes in such laws and regulations, the enactmentof any additional laws or regulations, or increased enforcement activity ofsuch laws and regulations, could significantly impact our costs or the mannerin which we conduct business, all of which could adversely impact our resultsof operations and cause our business to suffer.

The United States Federal Trade Commission, or FTC, andcertain state agencies have investigated Internet companies in connection withconsumer protection and privacy matters. The federal government has alsoenacted consumer protection laws, including laws protecting the privacy ofconsumers' nonpublic personal information. Our failure to comply with existinglaws, including those of foreign countries in which we operate, the adoption ofnew laws or regulations regarding the use of personal information or aninvestigation of our privacy practices could increase the costs of operatingour business.

In June 2007, we received a letter from the FTCadvising us that it was conducting an inquiry into Classmates’ activities inthe marketing and sale of subscriptions to consumers. We are in the process ofproviding the documents and information requested by the FTC which includedocuments related to our autorenewal practices. We cannot assure you that ourservices and business practices, or future changes to our services and businesspractices, will not subject us to claims and liability by governmental agenciesor private parties. To the extent that our services and business practiceschange as a result of claims or actions by governmental agencies, such as theFTC, or private parties, any such changes could materially and adversely affectour business, financial position, results of operations and cash flows.

Currently, ISPs areconsidered “information service” providers and regulations that apply totelephone companies and other telecommunications common carriers do not applyto our Internet access services. However, our Internet access services couldbecome subject to Federal Communications Commission and state regulation asInternet access services and telecommunications services converge. If theregulatory status of ISPs changes, our business may be adversely affected. TheInternet Tax Freedom Act, which placed a moratorium on new state and localtaxes on Internet commerce, is in effect through November 2007. However,future laws imposing taxes or other regulations on the provision of goods andservices over the Internet could make it substantially more expensive tooperate our business.

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**Our online socialnetworking services and online loyalty marketing service rely heavily on emailcampaigns, and any restrictions on the sending of emails could materially andadversely affect our business.**

Our online socialnetworking services and online loyalty marketing service deliver a significantnumber of emails to our members. In addition to any government laws andregulations, voluntary actions by third parties to block, impose restrictionson or charge for the delivery of emails through their email systems couldmaterially and adversely impact our business. In addition, from time to time,ISPs block bulk email transmissions or otherwise experience technicaldifficulties which result in the inability to transmit emails to our members.Restrictions on the sending of emails 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 network providers arevulnerable to damage from fires, earthquakes, floods, 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. Despite our implementation of network security measures, ourservers are also vulnerable to computer viruses, worms, physical and electronicbreak-ins, sabotage and similar disruptions from unauthorized tampering of ourcomputer systems. In addition, a significant portion of our critical computerequipment, including our data centers, is located in areas of the states ofCalifornia and Washington that are particularly susceptible to earthquakes, anda significant portion of our Classmates subsidiary’s computer equipment anddata centers are also located in a flood plain. We do not maintain redundantcapabilities for our Classmates and MyPoints services and any of these eventscould result in a significant and extended disruption of these services. Currently,we do not have a disaster recovery plan to address these and othervulnerabilities. As a result, it would be difficult to operate the Classmatesand MyPoints businesses in the event of disaster. While we maintain redundantcapabilities for our Internet access services, a disaster could result in asignificant and extended disruption of these services as well. Any prolongeddisruption of our services due to these or other events would severely impactor shut down our business. We do not carry earthquake or flood insurance, andthe property, business interruption and other insurance we do carry may not besufficient to cover, if at all, losses that may occur as a result of any eventswhich cause interruptions in our services.

**Our business couldbe severely impacted due to political instability or other factors in India.**

We have a significantnumber of employees located in our India office. Our product development,customer support and quality assurance operations would be severely disruptedif telecommunications issues, political instability, labor strife or otherfactors adversely impacted these operations or our ability to communicate withthese operations. Any disruption that continued for an extended period of timewould likely have a material adverse effect on our ability to service ourcustomers and develop our products and services. If we were to cease ouroperations in India and transfer these operations to another geographic area,such change could result in increased overhead costs which could materially andadversely impact our results of operations.

**We cannot predictour future capital needs and we may not 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, our business and its future prospects may suffer.

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**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 condition, results of operations and cashflows and such other factors as are deemed relevant by our board of directors.Our future cash flows may significantly decline due to, among other things,declines in our dial-up Internet access business, the payment of income taxesand other factors, and our cash balances will decline if we use our cash toacquire businesses or technologies, repurchase stock or for other purposes. Achange in our business needs, including working capital and funding foracquisitions, or a change in tax laws relating to dividends, could cause ourBoard of Directors to decide to cease the payment of, or reduce, the dividendin the future. We cannot assure you that we will continue to pay quarterly cashdividends, and if we 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 ourcommon stock has fluctuated significantly since our stock began trading on theNasdaq Stock Market in September 2001 and it is likely to continue to bevolatile with extreme volume fluctuations. In addition, the Nasdaq StockMarket, where most publicly-held Internet companies are traded, has experiencedsubstantial price and volume fluctuations. The broad market and industryfactors that influence or affect such fluctuations may harm the market price ofour common stock, regardless of our actual operating performance, and for thisor other reasons we could suffer significant declines in the market price ofour common stock.

**ITEM2.**                UNREGISTERED SALESOF EQUITY SECURITIES AND USE OF PROCEEDS

**Common StockRepurchases**

Our Board of Directors authorized a common stockrepurchase program that allows us to repurchase shares of our common stockthrough open market or privately negotiated transactions based on prevailingmarket conditions and other factors. From time to time, the Board of Directorshas increased the amount authorized for repurchase under this program. On April 22,2004, the Board of Directors authorized us to purchase up to an additional$100 million of our common stock through May 31, 2005 under theprogram, bringing the total amount authorized under the program to$200 million. On April 29, 2005, the Board of Directors extended theprogram through December 31, 2006. In January 2007, the Board furtherextended the program through December 31, 2007. At June 30, 2007, wehad repurchased $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 counted aspurchases against the Board-approved repurchase program. Upon vesting, theCompany currently does not collect the applicable withholding taxes for RSUsfrom employees. Instead, the Company automatically withholds, from the RSUsthat vest, the portion of those shares with a fair market value equal to theamount of the withholding taxes due. The Company then pays the applicablewithholding taxes in cash, which is accounted for as a repurchase of commonstock.

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Commonstock repurchases at June 30, 2007 were as follows (in thousands, exceptper share amounts):

| **Period**         | ** ** | ** ** | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price   Paid per Share** | ** ** | **Total Number of  Shares Purchased as  Part of a Publicly  Announced Program** | ** ** | **Maximum Approximate  Dollar Value that May  Yet be Purchased Under  the Program** | ** ** |
|--------------------|------------|------------|------------|------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
| 2001-2004          |       |       | 9,664      |                                                 |       |                                                   | $          | 12.92                                                                                                                   |       |                                                                                                                        |       | 9,664 |   |   |   | $ | 74,989 |   |   |
| February 2005 |       |       | 1,268      |                                                 |       |                                                   | 11.20      |                                                                                                                    |       |                                                                                                                        | 1,268      |   |   |   | 60,782 |   |   |
| February 2006 |       |       | 129        |                                                 |       |                                                   | 12.77      |                                                                                                                    |       |                                                                                                                        | —     |   |   |   | 60,782 |   |   |
| May 2006      |       |       | 26         |                                                 |       |                                                   | 11.87      |                                                                                                                    |       |                                                                                                                        | —     |   |   |   | 60,782 |   |   |
| August 2006   |       |       | 38         |                                                 |       |                                                   | 10.92      |                                                                                                                    |       |                                                                                                                        | —     |   |   |   | 60,782 |   |   |
| November 2006 |       |       | 22         |                                                 |       |                                                   | 13.88      |                                                                                                                    |       |                                                                                                                        | —     |   |   |   | 60,782 |   |   |
| February 2007 |       |       | 194        |                                                 |       |                                                   | 13.72      |                                                                                                                    |       |                                                                                                                        | —     |   |   |   | 60,782 |   |   |
| May 2007      |       |       | 71         |                                                 |       |                                                   | 15.89      |                                                                                                                    |       |                                                                                                                        | —     |   |   |   | 60,782 |   |   |
| Total              |       |       | 11,412     |                                                 |       |                                                   | $          | 12.77                                                                                                                   |       |                                                                                                                        |       | 10,932 |   |   |   |   |   |   |

 

 

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**ITEM 6.**                EXHIBITS

|           | ** ** | ** **                                                                                                                                                                                                                                                                                                  | ** ** | **Filed   with this**   | ** ** | **Incorporated by Reference to** | ** ** |
|-----------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------------------------------|------------|
| **No.**   | ** ** | ** **                                                                                                                                                                                                                                                                                                  | ** ** | **Exhibit Description** | ** ** | **Form 10-Q**                              | ** ** | **Form** | ** ** | **File No.** | ** ** | **Date Filed** | ** ** |
|  2.1 |       | Stock  Purchase Agreement, dated as of April 9, 2006, by and between United  Online, Inc. and UAL Corporation                                                                                                                                                                                     |       |                         |       |                                            |       | 8-K |   | 000-33367 |   | 4/13/2006 |   |
|  3.1 |       | Amended and  Restated Certificate of Incorporation                                                                                                                                                                                                                                                          |       |                         |       |                                            |       | 10-K |   | 000-33367 |   | 3/1/2007 |   |
|  3.2 |       | Amended and  Restated Bylaws                                                                                                                                                                                                                                                                                |       |                         |       |                                            |       | 10-K |   | 000-33367 |   | 3/1/2007 |   |
|  3.3 |       | Certificate of  Designation for Series A Junior Participating Preferred Stock (included  in exhibit 4.1 below)                                                                                                                                                                                    |       |                         |       |                                            |       | 10-K |   | 000-33367 |   | 3/1/2007 |   |
|  4.1 |       | Rights Agreement,  dated as of November 15, 2001, between the Company and U.S. Stock  Transfer Corporation, which includes the form of Certificate of Designation  for the Series A junior participating preferred stock as Exhibit A,  and the form of Rights Certificate as Exhibit B |       |                         |       |                                            |       | 10-K |   | 000-33367 |   | 3/1/2007 |   |
|  4.2 |       | Amendment  No. 1 to Rights Agreement, dated as of April 29, 2003, between the  Registrant and U.S. Stock Transfer Corporation                                                                                                                                                                     |       |                         |       |                                            |       | 10-Q |   | 000-33367 |   | 5/1/2003 |   |
| 10.1      |       | 2001 Amended and  Restated Employee Stock Purchase Plan                                                                                                                                                                                                                                                     |       |                         |       |                                            |       | 10-Q |   | 000-33367 |   | 5/3/2004 |   |
| 10.2      |       | 2001 Stock  Incentive Plan                                                                                                                                                                                                                                                                                  |       |                         | X          |                                            |       |   |   | 000-33367 |   | 8/9/2007 |   |
| 10.3      |       | Form of  Option Agreement for 2001 Stock Incentive Plan                                                                                                                                                                                                                                                |       |                         |       |                                            |       | 10-Q |   | 000-33367 |   | 10/27/2004 |   |
| 10.4      |       | Form of  Restricted Stock Unit Issuance Agreement for 2001 Stock Incentive Plan                                                                                                                                                                                                                        |       |                         |       |                                            |       | 10-Q |   | 000-33367 |   | 8/8/2005 |   |
| 10.5      |       | 2001 Supplemental  Stock Incentive Plan                                                                                                                                                                                                                                                                     |       |                         | X          |                                            |       |   |   | 000-33367 |   | 8/9/2007 |   |
| 10.6      |       | Form of  Option Agreement for 2001 Supplemental Stock Incentive Plan                                                                                                                                                                                                                                   |       |                         |       |                                            |       | 10-Q |   | 000-33367 |   | 10/27/2004 |   |
| 10.7      |       | Classmates  Online, Inc. Amended and Restated 1999 Stock Plan                                                                                                                                                                                                                                          |       |                         |       |                                            |       | S-8 |   | 333-121217 |   | 2/11/2005 |   |
| 10.8      |       | Classmates  Online, Inc. 2004 Stock Plan                                                                                                                                                                                                                                                               |       |                         |       |                                            |       | 10-Q |   | 000-33367 |   | 5/10/2005 |   |
| 10.9      |       | Form of  Option Agreement for Classmates Online, Inc. 2004 Stock Plan                                                                                                                                                                                                                             |       |                         |       |                                            |       | 10-Q |   | 000-33367 |   | 5/10/2005 |   |
| 10.10     |       | United  Online, Inc. 2007 Management Bonus Plan                                                                                                                                                                                                                                                        |       |                         |       |                                            |       | 10-Q |   | 000-33367 |   | 5/4/2007 |   |
| 10.11     |       | Employment Agreement  between the Registrant and Mark R. Goldston                                                                                                                                                                                                                                      |       |                         |       |                                            |       | 10-Q |   | 000-33367 |   | 5/4/2007 |   |
|           |            |                                                                                                                                                                                                                                                                                                             |            |                              |            |                                                 |            |  |  |  |  |  |  |  |  |

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| 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 |   |
| 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 |   | Employment  Agreement between the Registrant and Jeremy Helfand                                               |   |   |   |   |   | 10-Q   |   | 000-33367 |   | 8/9/2006 |   |
| 10.20 |   | Office Lease  between LNR Warner Center, LLC and NetZero, Inc.                                           |   |   |   |   |   | 10-Q   |   | 000-33367 |   | 5/3/2004 |   |
| 31.1  |   | Certification of  the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |   |   | X      |   |   |   |   | 000-33367 |   | 8/9/2007 |   |
| 31.2  |   | Certification of  the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |   |   | X      |   |   |   |   | 000-33367 |   | 8/9/2007 |   |
| 32.1  |   | Certification of  the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |   |   | X      |   |   |   |   | 000-33367 |   | 8/9/2007 |   |
| 32.2  |   | Certification of the  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |   |   | X      |   |   |   |   | 000-33367 |   | 8/9/2007 |   |

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized on August 9, 2007.
|          | UNITED ONLINE, INC. (Registrant) |
|----------|---------------------------------------|
|     | By:                                   | /s/  NEIL P. EDWARDS |
|     |                                  | Neil P. Edwards |
| * * | * *                              | *Interim  Chief Financial Officer  (as Principal Financial Officer)* |

 

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**EXHIBITINDEX**

|           | ** ** | ** **                                                                                                                                                                                                                                                                                                  | ** ** | **Filed   with this** | ** ** | **Incorporated by Reference to** | ** ** |
|-----------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------------------------|------------|
| **No.**   | ** ** | **Exhibit Description**                                                                                                                                                                                                                                                                                | ** ** | **Form 10-Q**         | ** ** | **Form**                                        | ** ** | **File No.** | ** ** | **Date Filed** | ** ** |
|  2.1 |       | Stock  Purchase Agreement, dated as of April 9, 2006, by and between United  Online, Inc. and UAL Corporation                                                                                                                                                                                     |       |                       |       |                                            |       | 8-K |   | 000-33367 |   | 4/13/2006 |   |
|  3.1 |       | Amended and  Restated Certificate of Incorporation                                                                                                                                                                                                                                                          |       |                       |       |                                            |       | 10-K |   | 000-33367 |   | 3/1/2007 |   |
|  3.2 |       | Amended and  Restated Bylaws                                                                                                                                                                                                                                                                                |       |                       |       |                                            |       | 10-K |   | 000-33367 |   | 3/1/2007 |   |
|  3.3 |       | Certificate of  Designation for Series A Junior Participating Preferred Stock (included  in exhibit 4.1 below)                                                                                                                                                                                    |       |                       |       |                                            |       | 10-K |   | 000-33367 |   | 3/1/2007 |   |
|  4.1 |       | Rights Agreement,  dated as of November 15, 2001, between the Company and U.S. Stock  Transfer Corporation, which includes the form of Certificate of Designation  for the Series A junior participating preferred stock as Exhibit A,  and the form of Rights Certificate as Exhibit B |       |                       |       |                                            |       | 10-K |   | 000-33367 |   | 3/1/2007 |   |
|  4.2 |       | Amendment  No. 1 to Rights Agreement, dated as of April 29, 2003, between the  Registrant and U.S. Stock Transfer Corporation                                                                                                                                                                     |       |                       |       |                                            |       | 10-Q |   | 000-33367 |   | 5/1/2003 |   |
| 10.1      |       | 2001 Amended and  Restated Employee Stock Purchase Plan                                                                                                                                                                                                                                                     |       |                       |       |                                            |       | 10-Q |   | 000-33367 |   | 5/3/2004 |   |
| 10.2      |       | 2001 Stock  Incentive Plan                                                                                                                                                                                                                                                                                  |       |                       | X          |                                            |       |   |   | 000-33367 |   | 8/9/2007 |   |
| 10.3      |       | Form of  Option Agreement for 2001 Stock Incentive Plan                                                                                                                                                                                                                                                |       |                       |       |                                            |       | 10-Q |   | 000-33367 |   | 10/27/2004 |   |
| 10.4      |       | Form of  Restricted Stock Unit Issuance Agreement for 2001 Stock Incentive Plan                                                                                                                                                                                                                        |       |                       |       |                                            |       | 10-Q |   | 000-33367 |   | 8/8/2005 |   |
| 10.5      |       | 2001 Supplemental  Stock Incentive Plan                                                                                                                                                                                                                                                                     |       |                       | X          |                                            |       |   |   | 000-33367 |   | 8/9/2007 |   |
| 10.6      |       | Form of  Option Agreement for 2001 Supplemental Stock Incentive Plan                                                                                                                                                                                                                                   |       |                       |       |                                            |       | 10-Q |   | 000-33367 |   | 10/27/2004 |   |
| 10.7      |       | Classmates  Online, Inc. Amended and Restated 1999 Stock Plan                                                                                                                                                                                                                                          |       |                       |       |                                            |       | S-8 |   | 333-121217 |   | 2/11/2005 |   |
| 10.8      |       | Classmates  Online, Inc. 2004 Stock Plan                                                                                                                                                                                                                                                               |       |                       |       |                                            |       | 10-Q |   | 000-33367 |   | 5/10/2005 |   |
| 10.9      |       | Form of  Option Agreement for Classmates Online, Inc. 2004 Stock Plan                                                                                                                                                                                                                             |       |                       |       |                                            |       | 10-Q |   | 000-33367 |   | 5/10/2005 |   |
| 10.10     |       | United  Online, Inc. 2007 Management Bonus Plan                                                                                                                                                                                                                                                        |       |                       |       |                                            |       | 10-Q |   | 000-33367 |   | 5/4/2007 |   |
| 10.11     |       | Employment  Agreement between the Registrant and Mark R. Goldston                                                                                                                                                                                                                                      |       |                       |       |                                            |       | 10-Q |   | 000-33367 |   | 5/4/2007 |   |

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| 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 |   |
| 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 |   | Employment  Agreement between the Registrant and Jeremy Helfand                                               |   |   |   |   |   | 10-Q   |   | 000-33367 |   | 8/9/2006 |   |
| 10.20 |   | Office Lease  between LNR Warner Center, LLC and NetZero, Inc.                                           |   |   |   |   |   | 10-Q   |   | 000-33367 |   | 5/3/2004 |   |
| 31.1  |   | Certification of  the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |   |   | X      |   |   |   |   | 000-33367 |   | 8/9/2007 |   |
| 31.2  |   | Certification of  the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 |   |   | X      |   |   |   |   | 000-33367 |   | 8/9/2007 |   |
| 32.1  |   | Certification of  the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |   |   | X      |   |   |   |   | 000-33367 |   | 8/9/2007 |   |
| 32.2  |   | Certification of the  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |   |   | X      |   |   |   |   | 000-33367 |   | 8/9/2007 |   |

 

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