UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

   X     Annual  report  pursuant  to  Section  13 or  15(d)  of the  Securities
------   Exchange Act of 1934 for the fiscal year ended June 30, 2006

         or

         Transition  report  pursuant  to Section 13 or 15(d) of the  Securities
-------  Exchange Act of 1934 for the transition period from ______ to _______.

                           Commission File No. 0-21527

                              VERTRUE INCORPORATED
             (Exact name of registrant as specified in its charter)

DELAWARE                                                  06-1276882
------------------------                    -----------------------------------
(State of Incorporation)                   (I.R.S. Employer Identification No.)

20 Glover Avenue
Norwalk, Connecticut                                                06850
---------------------------------------                         -----------
(Address of principal executive offices)                         (Zip Code)

                                 (203) 324-7635
                                 --------------
                         (Registrant's telephone number,
                              including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:  None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:  Common Stock, $0.01
                                                             Par Value

Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. [ ] Yes [X] No

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
[ ] Yes  [X] No

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

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a  non-accelerated  filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]   Accelerated filer [X]    Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No

The  aggregate  market  value of voting and  non-voting  common  equity  held by
non-affiliates of the registrant at December 31, 2005 was $258,129,671. This was
computed by reference to the closing price of the  registrant's  Common Stock on
December 31, 2005 For purposes of this  calculation,  all  directors,  executive
officers and shareholders reporting beneficial ownership of more than 10% of the
registrant's Common Stock are considered to be affiliates.

The  number of shares of Common  Stock  outstanding  as of August  28,  2006 was
9,688,778.

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy  Statement for the 2006 Annual Meeting of  Stockholders of
Vertrue Incorporated are incorporated by reference in Parts III of this report.


<PAGE>




                                      Index
<TABLE>
<CAPTION>


<S>  <C>                                                                                                                 <C>
Item 1.  Business.........................................................................................................3

Item 1A.  Risk Factors....................................................................................................8

Item 1B.  Unresolved Staff Comments......................................................................................14

Item 2.  Properties......................................................................................................14

Item 3.  Legal Proceedings...............................................................................................14

Item 4.  Submission of Matters to a Vote of Security Holders.............................................................14

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities....15

Item 6.  Selected Financial Data.........................................................................................16

Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations...........................16

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk.....................................................29

Item 8.  Financial Statements and Supplementary Data.....................................................................29

Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................29

Item 9A.  Controls and Procedures........................................................................................30

Item 9B.  Other Information..............................................................................................30

Item 10.  Directors and Executive Officers of the Registrant.............................................................30

Item 11.  Executive Compensation.........................................................................................30

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................30

Item 13.  Certain Relationships and Related Transactions.................................................................31

Item 14.  Principal Accountant Fees and Services.........................................................................31

Item 15.  Exhibits and Financial Statement Schedules.....................................................................31

SIGNATURES...............................................................................................................32

Exhibits.................................................................................................................33
</TABLE>




<PAGE>
                                     Part I

Item 1.  Business
         --------

OVERVIEW

Vertrue  Incorporated  and its  subsidiaries  ("Vertrue",  the "Company",  "we",
"our", or "us") is a leading internet marketing  services company.  We operate a
diverse group of marketing  businesses with a unified mission:  to provide every
consumer with access to savings and services that improve their daily lives.

Our   consumer   service   offerings   span   healthcare,   personal   property,
security/insurance,   discounts,   and  personals.  We  combine  unique  savings
opportunities from brand-name vendors and service providers to create compelling
value for  consumers.  To date,  over 18 million  consumers  have  enlisted  our
services, which represent the contributions of over 500,000 vendors.

We operate a group of businesses  that have a diverse mix of product and service
offerings that reach consumers through direct marketing  efforts.  We market our
services  through  internet  marketing,  inbound call marketing,  television and
newspaper  advertising,  direct mail, and outbound  telemarketing.  Our internet
marketing  efforts  have been an area of  significant  investment  over the last
three years. Virtually all of our services are now marketed online through a set
of diverse internet marketing channels.  These channels include portals,  search
advertising,  affiliate network partners,  and e-commerce partners.  We leverage
over a decade of direct  marketing  experience  to tailor our  online  marketing
efforts for maximum  productivity.  In addition  to  marketing  online,  we have
significantly  increased  the use of the  internet to deliver our  programs  and
provide service to consumers  online.  Online marketing as a percentage of total
marketing  expenditures has increased from 13% in 2004 to 39% in 2006.  Revenues
driven by these  marketing  investments  have also  increased.  Revenues  before
deferral generated through internet marketing efforts were 38% of total revenues
before  deferral in 2006,  compared to 14% in 2004.  Looking  ahead to 2007,  we
expect the internet channel to continue to grow.

Our internet  marketing  services form a key component of a corporate  marketing
strategy.  Our corporate  clients use our programs to enhance  market  presence,
strengthen  customer affinity,  and generate  additional value to their existing
products  or  service  offerings.  In  addition  to our  client-based  marketing
efforts,  we also  market our  services  directly  to the  consumer  through our
proprietary  internet  sites.  These  sites  enable us to refine our  offerings,
target a broader  consumer  audience,  and generate  additional  revenue through
advertising.

Vertrue continues to develop a portfolio of proprietary internet sites to market
programs  directly  to  the  consumer.   These  sites  include  www.bargain.com,
www.privacymatters.com,           www.lavalife.com,          www.beyourbest.com,
www.doctorssayyes.com,  and  www.breastimplants4you.com.   These  sites  combine
unique  content  and access to  services.  In  addition,  by drawing  increasing
traffic  to these  sites we should be able to  generate  additional  advertising
revenue in the future.

Over the past three years we have  successfully  transformed our business into a
leading   internet   marketing   services   company.   Our  recent   growth  and
transformation is attributable to our sharp strategic focus on the Internet, the
development of our in house expertise on how to best market on the internet, and
several  strategic  acquisitions  that have enabled us to reach a broader market
both in terms of our  product  and  service  offerings  and  direct to  consumer
marketing expertise.

In April 2004, we broadened the scope of our business by acquiring Lavalife Inc.
("Lavalife"),  a personals service. As a result of this acquisition, we became a
leading global  provider of web-based and  interactive  voice  response  ("IVR")
based personals service.  The acquisition of Lavalife provides us with access to
a fast growing  consumer  category on the internet  while  expanding  our target
market.  The Company  cross-markets the products and services of the Company and
Lavalife.

In November  2004,  we  completed  the  acquisition  of certain of the assets of
Bargain Network, Inc. ("Bargain"),  a privately held provider of premier pricing
services  for homes and  vehicles.  We  acquired  Bargain in order to expand our
direct to consumer  marketing  presence  and to expand our  discounted  consumer
offerings to include personal property.

In January  2005, we completed  the  acquisition  of certain of the assets of My
Choice Medical Holdings, Inc. ("MCM"), a privately held advertising and practice
management  company serving cosmetic  surgeons  throughout the United States. We
acquired  MCM in order to expand our  consumer  offerings  to  include  cosmetic
surgery  and to  capitalize  on the success MCM has had in both paid and natural
search marketing.  We believe paid and natural search marketing could be an area
of significant growth in the future.


                                        3
<PAGE>

We have three reportable business segments:  Marketing Services,  Personals, and
Management Services.  The Marketing Services business segment primarily provides
discounted   products  and  services  to  consumers  and  generates   recurring,
membership-based  revenue.  The Personals  business segment provides web, phone,
and mobile  personals  services and  generates  transaction-based  revenue.  The
Management   Services   business  segment  provides   advertising  and  practice
management  services to healthcare  professionals  throughout the United States.
Revenues from the Marketing Services and Personals business segments represented
93% of our consolidated total revenues in 2006.

We were  incorporated in 1989 in Delaware under the name  Cardmember  Publishing
Corporation. On October 17, 1996, we completed an initial public offering of our
stock and changed our name to MemberWorks Incorporated.  On October 13, 2004, we
began  doing  business  as  Vertrue  Incorporated  and  on  November  18,  2004,
shareholders  approved an amendment to our charter formally changing our name to
Vertrue   Incorporated.   The  name   change  was   intended   to  reflect   the
ever-broadening base of services that we offer to our customers.

MARKETING SERVICES SEGMENT

Products.  Our  Marketing  Services  segment  designs  membership  programs that
provide consumers with everyday savings, event-oriented discounts, benefits that
provide consumers with peace of mind and access to information.  We partner with
leading,  brand name  merchants,  and with service  companies  to offer  members
valuable packages of members-only  benefits.  Programs are available in English,
French,  and  Spanish  and can be  customized  for  specific  clients,  customer
segments, or consumer  communities.  Our membership programs are packaged around
popular spending categories and offer potential savings greater than the program
fee. Our  membership  programs  fall into the following  four consumer  spending
categories:

Healthcare
Our health,  wellness,  and  self-improvement  programs  offer savings on nearly
every healthcare product and service, including prescription drugs, vitamins and
supplements,  eye glasses and contact  lenses,  hearing aides,  durable  medical
equipment,  and select consumer products. These programs also offer discounts on
professional services, including medical, dental, vision, hearing, chiropractic,
alternative  medicine,  elder care,  diet,  exercise,  and other personal health
services.   These   programs   offer  real   solutions  for  the  uninsured  and
underinsured.

Personal Property
Our personal  property  programs  offer  consumers  online access to listings of
discounted homes and autos.  Members also have access to complementary  services
such as a mortgage  center,  roadside  assistance,  lemon checker,  and extended
warranties.

Security and Insurance
Our security and  insurance  programs  offer  discounts on products and services
that enhance the  consumer's  sense of security and  well-being.  These programs
provide  access to services that help manage privacy and  protection,  including
identity  theft  insurance,  credit  card  registration,  and credit  reporting,
scoring,  and  monitoring.  Our insurance  programs offer  competitively  priced
insurance  products,  including life,  supplemental  health,  accidental  death,
short-term and long-term  disability,  warranty,  and identity  theft  insurance
coverage.  Our other  program  benefits  include  24-hour  protection  services,
roadside assistance, and financial, tax and retirement consultation services.

Discounts
Our  discount  programs  offer  exclusive  access to  members-only  savings with
leading  brand  name  merchants  covering  a wide  range  of  consumer  spending
categories, including travel, transportation,  entertainment,  dining, shopping,
home  improvement,  and small  business.  Savings are available  both online and
offline through discounted gift cards, coupons, promotion codes, and rebates.

Marketing  and  Distribution.  We market all of our programs  online  through an
array of internet  marketing  channels.  These  channels are more cost effective
than traditional  direct  marketing  methods and provide  immediate  feedback to
refine marketing strategies. Our primary internet marketing channels include:

Portals
Vertrue  maintains  strong  advertising  relationships  with  the  top  internet
portals.  Our marketing  efforts with portals primarily include the placement of
banner ads driving traffic to our  proprietary  internet sites. In 2006, we were
ranked among the top 20 in online impressions as measured by Nielsen/NetRatings.
Recently we have been pursuing the  integration  of banner ads with  proprietary
content to improve response rates.


                                        4
<PAGE>

Affiliate Network Partners
We advertise through large promotional-based  networks such as the Vendare Group
and  Commission  Junction that drive traffic from the entire  spectrum of online
channels  to  their  internet  properties  delivering  customers  and  leads  to
advertisers.  This type of advertising is a low risk,  high reward channel as we
pay these networks on a pay for performance basis.

E-commerce Partners
We partner  with  leading  e-commerce  vendors to market  our  programs  through
post-transaction  upsell  opportunities.  We are able to leverage our  partners'
brands to increase conversion rates. Our broad spectrum of product offerings and
flexibility  allow us to market  membership  programs that are  complementary or
attractive to the customer base of the various e-commerce vendors.

Search Advertising
Vertrue also maintains strong  relationships  with major and second-tier  search
engines for  sponsored  marketing  links.  We continue to grow and  optimize our
marketing performance on several thousand keyword searches.

In addition to our internet marketing channels, Vertrue also employs traditional
direct  marketing  methods to market our programs.  These  include  inbound call
marketing,  newspaper and magazine advertising,  television advertising,  direct
mail, and outbound telemarketing.

Our inbound call marketing  occurs when our partners'  inbound  callers who meet
certain  criteria are offered our membership  programs by the partner's  service
representative  or by one of our membership  service  representatives  through a
call  transfer.  We pay the  partner  either a royalty  for  initial and renewal
membership fees or a fee per marketing offer or per sale.

Our membership programs are also delivered through loyalty arrangements with our
client  partners.  Our  Marketing  Services  segment  works with its  clients to
incorporate  elements  from one or more of the standard  membership  programs to
design a custom  program for the client.  The client  then either  provides  the
customized  membership  program to its  customers  as a  value-added  feature or
resells the customized  membership  program.  In some cases, the client provides
loyalty  memberships  to its  customers  free of  charge  and pays the  periodic
membership  fee for each  customer's  membership.  In other  cases,  the  client
charges a reduced fee to its customer.  Under these loyalty programs,  we do not
pay for the marketing costs incurred to solicit memberships. Instead, the client
offering the memberships is responsible for the marketing.  Our loyalty programs
provide  clients  with a wide  range of  benefits  to offer or  market  to their
customers  and include  stand-alone  benefits,  reward  point  accumulation  and
management,  gift certificates,  merchandise,  and travel reward redemption. Our
versatility in designing  loyalty  strategies and providing turnkey execution is
essential in supporting and promoting our clients' brands.

Vendors.  Our  Marketing  Services  segment has  established  a large network of
vendor  relationships  that  deliver the  discounts  and services in each of our
various membership  programs.  We evaluate and engage only those vendors who can
deliver high quality products and services.  Our participating vendors generally
benefit by  obtaining  access to a large  number of  demographically  attractive
consumers  in a  cost  effective  manner  while  incurring  minimal  incremental
marketing costs. Specifically, our vendors gain access and marketing exposure to
our  membership  base,  and  in  almost  all  cases,   pursuant  to  contractual
arrangements,  provide  members-only  discounts  on  products  or  services.  We
generally do not receive  payments from these vendors for rendering  services to
our members and, in certain cases,  we pay the vendors a fee based on the number
of members  enrolled  in the  membership  program or based on other  agreed-upon
factors.

Our contracts with vendors are generally for one year or more,  with  subsequent
one-year  renewal  terms  at our  option.  In most  cases,  vendors  may  cancel
contracts  only for cause and are subject to notice  provisions  that provide us
time  to  locate  a  substitute  vendor.   Most  of  our  vendor  contracts  are
non-exclusive  and  require  vendors  to  maintain  the  confidentiality  of the
contract terms.

Clients.   Our  membership  programs  are  marketed,   in  many  cases,  through
arrangements  with  our  clients,   which  include  banks  and  other  financial
institutions,   e-commerce  companies,  direct  response  television  companies,
catalog  companies,  retailers,  and other  organizations  with large numbers of
individual  customers.  These  companies have outsourced the  implementation  of
membership  programs to providers,  such as us, that are able to apply  advanced
database systems to capture, process, and store consumer and market information,
use their  experience  to provide  effective  membership  programs,  and realize
economies of scale.  In addition,  businesses  that outsource  their  membership
programs  demand that the program  provider  have the  expertise  to continue to
introduce  innovative new programs and have resources,  such as extensive vendor
networks and an  experienced  management  team,  to launch  membership  programs
quickly and  successfully.  Our clients receive royalty payments in exchange for
providing us with new members or access to potential members.

                                        5
<PAGE>

Our  Marketing   Services   segment's  clients  supply   substantially  all  the
information for marketing  efforts in accordance  with strict  consumer  privacy
safeguards.  As a result,  our  ability to market a new  program to an  existing
customer base or an existing  program to a new customer base may depend on first
obtaining our client's approval.

Our  contracts  with our clients  typically  grant us the right to  indefinitely
continue  to  provide  membership  services  directly  to the  clients'  account
holders,  even  if our  client  terminates  its  contract.  Many  of our  client
contracts  may be  terminated  by the client upon 30 to 90 days  notice  without
cause and without penalty.

In 2006 and 2005, our largest client,  West  Corporation,  accounted for 12% and
14%,  respectively,  of our total revenues.  In 2004, our largest clients,  West
Corporation and Citibank,  N.A (and its affiliates),  accounted for 18% and 12%,
respectively,  of total  revenues.  The loss of our major  clients  could have a
material effect on our results of operations.  The decrease in the concentration
of revenue  with these  clients  demonstrates  our efforts over the past several
years to  diversify  our  business  model and  increase  our direct to  consumer
marketing thereby diminishing our reliance on key client partners.

Program  Enrollment and Billing.  When  consumers  agree to enroll in a program,
they generally receive a trial membership.  During this time, the member may use
the  program's  services  without  obligation,  as  outlined  in  the  marketing
solicitation.  Membership  materials,  which include a membership brochure and a
membership card with a membership  identification  number,  are either mailed or
emailed to the member during the trial period.  The brochure  outlines in detail
the  benefits  offered and contains a toll-free  number and a web site  address,
which may be used to access  membership  benefits and information.  In the event
that a member elects not to participate in the membership program, he or she can
call a  toll-free  number or log on to the web site  during the trial  period to
cancel the service without incurring any additional  charges.  Trial memberships
are generally for a period ranging from 7 to 30 days and there are no conditions
with respect to the ability of the consumer to terminate a trial membership.

If the membership is not canceled during the trial period, the member is charged
the annual or monthly membership fee, depending upon the applicable payment plan
offered.  Annual members who do not cancel their  memberships  after the initial
one year  membership term receive a renewal notice in advance of each membership
year and are charged for the succeeding year's membership fee. During the course
of an initial annual membership term or renewal term, a member may cancel his or
her membership in the program  generally for a pro rata refund of the membership
fee based on the remaining  portion of the membership  period at the time of the
cancellation.  Monthly members are billed each month after the trial period ends
and continue to be billed each month until the  membership is cancelled.  During
2006, 91% of our Marketing  Services  segments' new member enrollments were in a
monthly  payment  program.  Membership  fees vary  depending upon the particular
services offered in the membership  program.  Our Marketing Services segment had
approximately  5.8 million  members as of June 30, 2006  compared to 5.7 million
members as of June 30, 2005.

Member  Service.  Providing high quality  service to our members is an extremely
important factor in retaining our members and  strengthening the affinity of our
clients'  customers.  Currently,  our  membership  call  centers  are located in
Montreal, Canada, Houston, Texas, Omaha, Nebraska, and Chicago, Illinois, with a
total  of  over  1,400  membership  service  representatives.  All  of  our  new
membership service  representatives are required to attend on-the-job  training.
Through our training programs,  systems and software, we seek to provide members
with friendly,  rapid and effective answers to their questions.  Our members can
access  their  benefits 24 hours a day via the  program's  web site or automated
telephone response  technology.  We also work closely with our clients' customer
service  personnel to ensure that their  representatives  are  knowledgeable  in
matters relating to the membership programs.

Technology.  We have invested  substantially  in new technology,  including data
warehousing,  data mining,  and various Internet  applications  that allow us to
effectively and efficiently market our services to potential  members.  Over the
last 12 months, we have specifically invested in further upgrading our marketing
applications to state-of-the-art technology platforms,  completing deployment of
a new internet marketing  development plan and deployment platform with advanced
marketing optimization capabilities.

We continue to apply substantial  resources to plan,  develop,  and deploy a new
Member  Management  platform  based on  state-of-the-art  technology,  including
advanced  rules engine  capabilities.  As a new member  enrolls on the internet,
membership  information  is  immediately  interfaced  and maintained on a Member
Management  platform that drives information  constantly to the customer service
platforms  ("CRM") and web sites, as well as to the  fulfillment,  billing,  and
data warehousing  systems.  This approach allows for rapid fulfillment of member
information  via e-mail or mail,  immediate  access to benefits such as coupons,
credit  reports,  and  discounted  gift  cards,  while  facilitating  responsive
targeted  call  center and web site  interactions.  If a member  contacts  us by
phone,  the Member  Management  System  interacts with our advanced call routing
system  to  display  the  member's  profile  information  prior  to an  employee
answering the call. This allows our membership service representatives to access
the   best   possible   information   prior   to   serving   a   given   member.
Telecommunications   systems  also  monitor  the  performance   quality  of  the
membership  service  representatives  and other aspects of the business  through
sophisticated reporting capabilities.

                                        6
<PAGE>

To provide the highest quality  service to our members,  we have deployed a new,
more advanced technology platform that offers increased capabilities for members
to  access  their  membership  benefits  via the web  sites.  In  addition,  the
Marketing  Services  segment  has  increased  its  use of the  data  warehousing
capabilities  to review,  analyze,  and model the  membership  base, in order to
optimize  service and market  additional  products that are most appropriate for
each member.

Competition.  We  believe  that the  ability  to  identify,  develop,  and offer
innovative  programs,  the quality and breadth of programs offered,  competitive
prices, and in-house marketing  expertise are the principal  competitive factors
in the marketing services industry. Our competitors offer programs which provide
services  similar to or that compete  directly with those we offer.  Some of our
competitors have  substantially  larger customer bases and greater financial and
other  resources.  To date, we have  effectively  competed with our competitors.
However,  there can be no assurance that our competitors will not increase their
emphasis on programs similar to ours, provide programs comparable or superior to
ours at lower  membership  prices,  or adapt more  quickly to evolving  industry
trends or changing market  requirements,  or that new competitors will not enter
the market or that clients and vendors will not introduce  competing programs of
their own. Such increased  competition may result in price  reductions,  reduced
marketing  margins  or loss of  market  share,  any of  which  could  materially
adversely  affect our business,  financial  condition and results of operations.
Additionally,  because contracts between clients and program providers are often
exclusive  with  respect  to a  particular  service,  potential  clients  may be
prohibited  from  contracting  with us to promote a program if our  services are
similar to or overlap  with the  services  provided by an existing  program of a
competitor.

PERSONALS SEGMENT
The  Personals  segment  consists of our Lavalife  Inc.  ("Lavalife")  business.
Lavalife  customers  can choose to  connect  with other  singles  through  three
distinct offerings - web, phone, and mobile.  Lavalife's open-minded approach to
dating allows customers to choose how they want to "click with other singles" by
offering  different dating  communities  including  dating,  relationships,  and
intimate  encounters.  Our  interactive  services  allow  customers  who want to
enhance  their  social  lives,  to  search  for a date,  or meet new  people  to
communicate  with other  customers in a real time,  "Anywhere,"  "Anytime,"  and
"Anyhow"  environment.  Customers  can interact with each other from anywhere in
real time by phone, email, instant message, video, or text chat.

We rely on our innovative  products,  marketing  relationships  with major media
groups,  advertising campaigns in large markets, a widely recognized brand name,
and an advanced technology infrastructure to acquire new users and to retain our
existing  customers.  In 2006,  our marketing  initiative  with several  leading
mobile phone carriers generated strong results. To further develop brand loyalty
and to encourage return visits, we continue to add features and functionality to
our existing  service  offerings  and to introduce  new  innovative  interactive
products.

We employ a transactional  business model, in which customers buy non-refundable
credits up front and spend those  credits  only when they want to interact  with
other customers. Our competitors generally employ a subscription-based  business
model,  in which  customers pay a fixed periodic fee. We believe a transactional
model  is more  attractive  to new  customers,  who will  join due to the  lower
initial cost and the ability to easily  control  their  spending.  Our customers
determine  when to use  their  credits  to  communicate  with  other  customers.
Furthermore,  once a customer has an account balance,  the customer has a strong
financial incentive to return to use their remaining credits.

Technology.  We utilize an  integrated  network to support our phone,  web,  and
mobile  operations.  Our  infrastructure  is built on state of the art, industry
standard,  high capacity technology designed to support the significant level of
member interaction and a quality experience. The phone-based IVR systems are all
voice over internet protocol  platform based, and this technology  supports such
high demand features as live chat, and voice messaging.  The network  operations
center,  located in Toronto,  Canada, allows the personals business to scale its
web, phone, and mobile operations with full remote  management  capabilities for
all services.

Competition.  The personals  industry is very competitive and highly fragmented.
Our  primary   competitors  include  numerous  online  and  offline  dating  and
matchmaking  services (both free and paid), some of which operate nationwide and
some of which  operate  locally,  and the personals  sections of newspapers  and
magazines.  In addition to broad-based  personals  services,  there are numerous
niche  web  sites  and  offline  personals   services  that  cater  to  specific
demographic groups.


                                        7
<PAGE>

MANAGEMENT SERVICES SEGMENT
The Management Services segment consists of our My Choice Medical Holdings, Inc.
business,  which  provides  advertising  and practice  management  services to a
network of cosmetic physicians throughout the United States.  Consultants assist
consumers with locating board  certified  physicians  nearby,  schedule  initial
consultations, offer pre-negotiated fee schedules that are up to 60 percent less
than the usual and customary charges, and provide financing, if needed.

GOVERNMENT REGULATION
We market our  products  and  services  through  various  distribution  channels
including internet marketing,  inbound call marketing,  television and newspaper
advertising, direct mail and telemarketing. These channels are regulated at both
the state and federal  levels and we believe  that these  marketing  methods may
increasingly be subject to such regulation, particularly in the area of consumer
privacy.  Regulations  may limit our  ability to solicit new members or to offer
one or more products or services to existing members. The telemarketing industry
has become subject to an increasing amount of federal and state regulation.  For
example,  the Federal Telephone Consumer Protection Act of 1991 limits the hours
during which telemarketers may call consumers and prohibits the use of automated
telephone dialing equipment to call certain telephone numbers. Additionally, the
Federal  Telemarketing  and Consumer Fraud and Abuse  Prevention Act of 1994 and
Federal Trade Commission ("FTC") regulations,  including the Telemarketing Sales
Rule, as amended, promulgated thereunder,  prohibit deceptive, unfair or abusive
practices in telemarketing  sales. Both the FTC and state attorneys general have
authority  to  prevent  marketing  activities  deemed by them to be  "unfair  or
deceptive acts or practices." Further,  some states have enacted laws and others
are  considering  enacting  laws targeted  directly at regulating  telemarketing
and/or internet marketing practices, and there can be no assurance that any such
laws,  if  enacted,  will not  adversely  affect or limit our  current or future
operations.  Compliance with these  regulations is generally our  responsibility
and we could be subject to a variety of enforcement  and/or private  actions for
any failure to comply  with such  regulations.  Our  provision  of products  and
services requires us to comply with certain state regulations,  changes in which
could  materially  increase our operating  costs  associated with complying with
such  regulations.  Noncompliance  with any rules and regulations  enforced by a
federal or state consumer protection  authority may subject us or our management
to fines or various forms of civil or criminal  prosecution,  any of which could
have a material adverse affect on our business,  financial condition and results
of operations.  Also, the media often publicizes  perceived  noncompliance  with
consumer  protection  regulations and violations of notions of fair dealing with
consumers that make the membership  programs industry  susceptible to peremptory
charges of regulatory noncompliance and unfair dealing by the media.

We currently  maintain  rigorous security and quality controls that are intended
to ensure that all of our marketing  practices meet or exceed industry standards
and all applicable state and federal laws and  regulations.  We only collect and
maintain customer data that is necessary to administer our business  activities,
such as a customer's name,  address and encrypted  billing  information and only
public  information  is  used  for  marketing  and  modeling  purposes,  such as
demographic, neighborhood, and lifestyle data.

FINANCIAL  INFORMATION  ABOUT SEGMENTS AND  GEOGRAPHIC  AREAS See Note 17 to the
consolidated  financial  statements  in  Item 8 of  this  report  for  financial
information about our segments and geographic areas.

EMPLOYEES
As of June 30, 2006, we employed 1,603 persons on a full-time basis and 768 on a
part-time  basis. Our employees are not represented by a labor union. We believe
our employee relations are good.

AVAILABLE INFORMATION
Our Internet address is  http://www.vertrue.com.  Information on our web site is
not a part of this report.

We make  available,  free of charge  through our web site, our annual reports on
Form 10-K,  quarterly reports on Form 10-Q, current reports on Form 8-K, Section
16 filings,  Code of Conduct,  and all  amendments  to those  reports as soon as
reasonably  practicable  after such  material  is  electronically  filed with or
furnished to the Securities and Exchange  Commission  ("SEC").  You may read and
copy any document filed with the SEC on its web site, http://www.sec.gov,  or at
its Public Reference Room at 100 F Street, N.E., Washington,  D.C. 20459. Please
call the SEC at 1-800-SEC-0330  for further  information on the operation of the
Public Reference Room.

Item 1A.  Risk Factors
          ------------

The  statements  in this  section  describe  the major risks to our business and
constitute our cautionary  statements  under the Private  Securities  Litigation
Reform Act of 1995.  These risks discussed below and elsewhere in this 2006 Form
10-K should be considered  carefully when evaluating our business operations and
strategies.  Additionally,  there may be risks and uncertainties that we are not
aware of or that we currently deem immaterial, which may become material factors
affecting  our  operations  and  business  success.  Many of the factors are not
within our control.

                                        8
<PAGE>

Our disclosure and analysis in this 2006 Form 10-K contain some  forward-looking
statements.  From time to time,  we also provide  forward-looking  statements in
other  materials  we release to the  public.  These  forward-looking  statements
involve known and unknown risks,  uncertainties and other factors that may cause
our actual results, levels of activity or performance to be materially different
from any future results,  levels of activity or performance expressed or implied
by  these   forward-looking   statements.   Such  statements  give  our  current
expectations  or forecasts of future  events and they do not relate  strictly to
historical or current facts.  We have generally  identified  such  statements by
using  words such as  "anticipate,"  "estimate,"  "project,"  "intend,"  "plan,"
"believe,"  "will," "target,"  "forecast" and similar  expressions in connection
with any discussion of future operating or financial performance. All statements
that  address  activities,  events or  developments  that we  intend,  expect or
believe may occur in the future are forward-looking  statements.  In particular,
these include  statements  relating to future  actions,  future  performance  or
results of current and anticipated revenues,  expenses,  interest rates, foreign
exchange rates, the outcome of  contingencies,  such as legal  proceedings,  and
financial results.

We  cannot  guarantee  that  any  forward-looking  statement  will be  realized.
Achievement of future results is subject to risks, uncertainties and potentially
inaccurate   assumptions.   Should  known  or  unknown  risks  or  uncertainties
materialize,  or should underlying assumptions prove inaccurate,  actual results
could differ materially from past results and those anticipated,  estimated,  or
projected.  You  should  bear  this  in  mind  as you  consider  forward-looking
statements.

We  undertake  no  obligation  to publicly  update  forward-looking  statements,
whether as a result of new  information,  future  events or  otherwise.  You are
advised, however, to consult any further disclosures we make on related subjects
in our Form  10-Q and Form 8-K  reports  to the  SEC.  The  risks  that  follow,
individually or in the aggregate, are those that we think could cause our actual
results to differ  materially  from those  stated or implied in  forward-looking
statements.  It may not be  possible to predict or  identify  all such  factors.
Consequently,  you should not consider the following to be a complete discussion
of all potential risks or uncertainties.

Our long-term profitability depends on our ability to replace the members of our
membership  programs or customers of our personals  services that we lose in the
ordinary  course of  business,  and, if we fail to do so, our member or customer
base and consequently our revenue will decline.
We lose a significant number of members of our membership programs and customers
of our  personals  and  management  services  segments each year in the ordinary
course of business.  The loss of such members or customers may occur as a result
of numerous factors including:

     o changing consumer preferences;
     o competitive price pressures;
     o general economic conditions;
     o customer dissatisfaction; and
     o credit or debit card holder turnover.

Failure  to obtain  new  members  or  customers  who  produce  revenue  at least
equivalent  to the revenue from the lost members or customers  would result in a
decrease  in the number of our  members or  customers  and,  consequently,  in a
reduction of our revenue.  There can be no  assurance  that we can  successfully
replace the lost members or customers.

In addition,  even if we are  successful  in adding new members and customers to
replace lost revenue, our profitability and cash flow may still decline since we
generally  incur losses and negative  cash flow during the initial  stages of an
individual membership program and customer procurement, as compared with renewal
periods,  due  primarily  to higher  marketing  costs  associated  with  initial
membership and customer procurement.

Increased  cancellations  could  impair  our  financial  condition,  results  of
operations and cash flows.
Monthly members of our membership programs are billed each month after their
trial period until they cancel their membership. Annual members who cancel their
membership at any time during the membership period generally receive a pro rata
refund of the membership fee based on the remaining portion of the membership
period. Increased cancellations could have a material adverse effect on our
business, financial condition, results of operations, and cash flows.

                                        9
<PAGE>

The success of our business  depends on the introduction of popular new programs
or services or the  enhancement  of existing  membership  programs or  personals
services.
Our  business  is  substantially   dependent  on  our  ability  to  develop  and
successfully   introduce   popular  new   membership   programs  or  to  provide
enhancements to existing  membership  programs which generate  consumer loyalty.
Failure to introduce new membership  programs in a timely manner could result in
our competitors acquiring additional market share. In addition, the introduction
or announcement of new innovative  membership  programs or personals services by
us or by others could render existing  membership programs or personals services
obsolete  or result in a delay or  decrease  in orders for  existing  membership
programs or personals services as customers evaluate new membership  programs or
personals  services.   Therefore,   the  announcement  or  introduction  of  new
innovative  membership programs by us or others, or our failure to introduce new
membership  programs which generate broad consumer  appeal,  or our inability to
refine our service offerings or introduce new services in our personals business
could have a  material  adverse  effect on our  business,  financial  condition,
results of operations, and cash flows.

We may need to spend more money to advertise to generate  the same  revenue.
We believe that advertising spending on the Internet, as in traditional media,
fluctuates significantly with economic conditions. Because a majority of our
revenues are derived as a result of our advertising efforts, fluctuations in our
advertising spending generally, or with respect to our Internet-based spending
specifically, could have an adverse impact on our revenue and our profitability.


We depend on payment  processors to process  revenue and obtain payments for us.
We  depend  on  payment  processors  to  obtain  payments  for us.  The  payment
processors  operate  pursuant to agreements  that may be terminated with limited
prior notice.  In the event a payment  processor ceases operations or terminates
its agreement with us, there can be no assurance a replacement payment processor
could be  retained on a timely  basis,  if at all.  Any  service  interruptions,
processing cost increases,  delays or quality problems could result in delays in
collecting payments, decreased revenue and/or increased expense which could have
a material  adverse  effect on our  business,  financial  condition,  results of
operations, and cash flows.

We depend in part on the  communication  channels  through  which we market  and
service our products and services  such as telephone,  internet,  and the United
States Postal Service.  An  interruption  of, or an increase in the billing rate
for, such services could  adversely  affect our business.
We market and service our programs by various communication channels, including
telephone, internet, and direct mail. Accordingly, our business is dependent on
the quality of the postal and telephone services provided by the U.S. Post
Office and various local and long distance telephone companies. Any significant
interruption of such services or any limitations in their ability to provide us
with increased capacity could adversely impact our business, financial
condition, and results of operation. In addition, rate increases imposed by
providers would increase our and our marketing partners' operating expenses and
could have a material adverse effect on our business, financial condition,
results of operations, and cash flows.

We depend on third-party vendors to supply the products and services that we
market. The failure of these vendors to provide such products or services could
result in customer dissatisfaction and could harm our business.
We depend on third-party vendors to provide most of the products and services
included in the membership programs and services that we market. The third-party
vendors generally operate pursuant to non-exclusive agreements with us that may
be terminated by the vendor with limited prior notice. There can be no assurance
that, in the event a vendor ceases operations, terminates, breaches, or chooses
not to renew its agreement with us, a replacement vendor could be retained on a
timely basis, if at all. In addition, our third-party vendors are independent
contractors and the level and quality of services they provide is outside our
control. Any product or service interruptions, delays, or quality problems could
result in customer dissatisfaction and membership cancellations and/or
termination of marketing partners' relationships with us, which could have a
material adverse effect on our business, financial condition, results of
operations, and cash flows.

Our  business  is  highly   dependent  on  our   existing   computer,   billing,
communications, and other technological systems. Any temporary or permanent loss
of any of our systems could have a negative  effect on our  business,  financial
condition, and results of operations.
Our business depends upon ongoing  investments in advanced computer database and
telecommunications  technology  as well as  upon  our  ability  to  protect  our
telecommunications  and information  technology systems against damage or system
interruptions  from  natural  disasters,  technical  failures,  and other events
beyond our control. In order to compete effectively and to meet the needs of our
clients,  members, and customers, we must maintain our systems as well as invest
in improved  technology.  A temporary or permanent loss of any of our systems or
networks could cause significant  damage to our reputation and could result in a
loss of revenue.

                                       10
<PAGE>

In addition, we receive credit data electronically,  and this delivery method is
susceptible  to damage,  delay,  or  inaccuracy.  A  significant  portion of our
business involves telephonic customer service as well as mailings, both of which
depend upon the data generated from our computer systems. Unanticipated problems
with our  telecommunications  and information technology systems may result in a
significant  system outage or data loss,  which could  interrupt our operations.
Our infrastructure may also be vulnerable to computer viruses, hackers, or other
disruptions  entering  our  systems  from the  credit  reporting  agencies,  our
marketing  partners,  members,  customers,  or other  authorized or unauthorized
sources.  Any  damage  to  our  telecommunications  and  information  technology
systems,  failure of communication links, or other loss that causes interruption
in, or damage to, our  operations  could have a material  adverse  effect on our
business, financial condition, results of operations, and cash flows.

We rely  on our  clients  to  provide  customer  information  to us for  certain
marketing purposes and to approve our marketing  materials.  If our clients make
significant  changes to the materials that decrease our results or if they limit
the  information  that they provide to us, our ability to generate new customers
may be adversely affected.
Certain of our marketing efforts depend in part on limited customer  information
being made  available to us by our clients.  There can be no assurance  that our
clients will continue to provide us with the use of such customer information.

Our  marketing  efforts  are  largely  dependent  on  obtaining  approval of the
solicitation  materials  from our  clients.  We market our programs and services
based on  tested  marketing  materials,  and any  significant  changes  to those
materials  that are required by our clients could have a negative  impact on our
results.  The material terms of each marketing  campaign must be mutually agreed
upon by the parties.  There can be no assurance that we will obtain approvals of
our marketing materials from our clients,  and the failure to do so could have a
material  adverse  impact  on our  business,  financial  condition,  results  of
operations, and cash flows.

The loss of key clients could have a material  adverse  effect on our results of
operations.
The loss of key clients could have a material adverse effect on our results of
operations. Membership programs marketed through one of these clients, West
Corporation, accounted for approximately 12% of our total revenue for the fiscal
year ended June 30, 2006. Though the status of members that have already joined
our membership programs through existing clients would not be affected, a loss
of key clients or a decline in their respective businesses would result in the
loss of our ability to draw new customers to our membership programs marketed
through these clients and could have a material adverse effect on our financial
condition, results of operations, and cash flows. There can be no assurance that
one or more of our clients will not terminate its relationship with us or suffer
a decline in its business.

We market certain of our  membership  programs  through  credit card issuers.  A
downturn in the credit card industry or changes in the  marketing  techniques of
credit card issuers could adversely affect us.
Our success is dependent in large part on  continued  demand for our  membership
programs within our clients' industries.  Certain of our membership programs are
marketed through our credit card issuer clients.  A significant  downturn in the
credit card  industry or a trend in that industry to reduce or eliminate its use
of membership programs could adversely affect our business.

Our failure to protect  private data could damage our reputation and cause us to
expend capital and other resources to protect  against future security  breaches
and could harm our business.
Certain  of our  services  are  based  upon the  collection,  distribution,  and
protection of sensitive private data. Unauthorized users might access that data,
and human error or technological failures might cause the wrongful dissemination
of that data.  If we experience a security  breach,  the integrity of certain of
our  services may be affected  and such a breach  could  violate  certain of our
marketing partner agreements,  which could give our marketing partners the right
to terminate such  agreements  with us. We have  incurred,  and may incur in the
future, significant costs to protect against the threat of a security breach. We
may also incur  significant costs to solve problems that may be caused by future
breaches or to prevent  such  breaches.  Any breach or  perceived  breach  could
subject us to legal  claims  from our  marketing  partners or  customers  and/or
regulatory or law enforcement  entities under laws that govern the protection of
non-public personal  information.  Moreover,  any public perception that we have
engaged in the  unauthorized  release of, or have failed to adequately  protect,
private  information  could  adversely  affect our ability to attract and retain
members and  customers.  In addition,  unauthorized  third  parties  might alter
information in our databases,  which would adversely  affect both our ability to
market our services and the credibility of our information.

We depend on key executive and marketing personnel.
We are dependent on certain key members of our management  and marketing  staff,
particularly our Chief Executive Officer,  Gary Johnson. In addition, we believe
that our future  success  will  depend in part upon our  ability to attract  and
retain highly skilled  managerial and marketing  personnel.  We face significant
competition  for  such  personnel,  and we  may be  unsuccessful  in  hiring  or
retaining  the  personnel  we  require.  The  failure  to hire and  retain  such
personnel  could  have a  material  adverse  effect on our  business,  financial
condition and results of operations.

                                       11
<PAGE>

The industries in which we operate are highly  competitive.  We may be unable to
compete  effectively  with other companies in our industries that have financial
or other  advantages  and  increased  competition  could lead to reduced  market
share,  a decrease in margins and a decrease  in  revenue.
We believe that the principal competitive factors in the industries in which we
operate include the ability to identify, develop, and offer innovative programs
and services, the quality and breadth of programs and services offered,
competitive pricing and in-house marketing expertise. Our competitors offer
programs and services which are similar to, or which compete directly with,
those provided by us. In addition, in our Marketing Services segment, we could
face competition if our current clients or other companies were to introduce
their own in-house programs or services similar to ours.

Some of the existing and potential  competitors  to our  Marketing  Services and
Personals  businesses  have  substantially  larger  customer  bases and  greater
financial and other resources than we do. There can be no assurance that:

     o    our  competitors  will not  increase  their  emphasis  on  programs or
          services similar to those we offer;
     o    our competitors  will not provide  programs or services  comparable or
          superior to those we provide at lower costs;
     o    our  competitors  will not  adapt  more  quickly  than us to  evolving
          industry trends or changing market requirements;
     o    new competitors will not enter the market; or
     o    other businesses  (including our current marketing  partners) will not
          themselves introduce in-house programs or services similar to those we
          offer.

In order to compete effectively with our competitors, we must be able to provide
superior programs and services at competitive  prices.  In addition,  we must be
able to adapt  quickly  to  evolving  industry  trends,  a  changing  market and
increased regulatory  requirements.  Our ability to grow our business may depend
on our ability to develop new  programs  and  services  that  generate  consumer
interest.  Failure to do so could result in our competitors acquiring additional
market share in areas of consumer  interest.  Any increase in competition  could
result in price reductions,  reduced gross margin, and loss of market share, any
of which  could  have a  material  adverse  impact  on our  business,  financial
condition, and results of operations.

Additionally,  because  contracts  between clients and program  providers in our
Marketing  Services  business are often  exclusive  with respect to a particular
program, potential clients may be prohibited from contracting with us to promote
a new program if the products  and services  provided by our program are similar
to, or overlap with, the products and services  provided by an existing  program
of a competitor.

Our  industry  is  increasingly  subject to U.S.  state,  federal,  and  foreign
government regulation, which could impede our ability to market our programs and
services and reduce our profitability.
We market our  membership  programs and services  through  various  distribution
channels, including internet marketing,  inbound call marketing,  television and
newspaper  advertising,  direct  mail,  and  telemarketing.  These  channels are
regulated at the state,  federal,  and foreign  levels and we believe that these
channels will be subject to increasing  regulation,  particularly in the area of
consumer  privacy.  Such regulation may limit our ability to solicit new members
or customers or to offer products or services to existing members or customers.

Our Membership Services segment is subject to extensive regulation and oversight
by the FTC, the Federal  Communications  Commission (the "FCC"), state attorneys
general  and  other  state  regulatory   agencies,   including  state  insurance
regulators and various foreign  regulatory  entities.  Our programs and services
involve the use of  nonpublic  personal  information  that is subject to federal
consumer  privacy laws,  such as the federal Gramm Leach Bliley Act, and various
federal and state telemarketing  regulations,  including the FTC's Telemarketing
Sales  Rule,  the  FCC's  Telephone  Consumer  Protection  Act and  implementing
regulations, as well as various state telemarketing laws and regulations.  While
we do not  believe  that the laws and  regulations  passed  to date  will have a
material  impact on our  business,  additional  federal,  state or foreign  laws
and/or  regulations,  including  subsequent  amendments  to  existing  laws  and
regulations,  could cause a material  adverse impact on our business,  financial
condition, results of operations, and cash flows.

                                       12
<PAGE>

Compliance with these laws and regulations is generally our responsibility,  and
we could be subject to a variety of enforcement  and/or private  actions for any
failure  to comply  such laws and  regulations.  Any  changes  to these laws and
regulations could materially  increase our compliance costs.  Noncompliance with
any laws and  regulations  enforced  by a state,  federal,  or foreign  consumer
protection  authority may subject us or our management to fines or various forms
of civil or criminal  prosecution,  any of which  could have a material  adverse
effect on our business, financial condition and results of operations. Also, the
media often publicizes perceived noncompliance with consumer protection laws and
regulations  and  violations  of notions of fair dealing with  consumers and the
membership  services industry is susceptible to peremptory  charges by the media
of regulatory noncompliance and unfair dealing.

We are  subject  to legal  actions  that  could  have a  negative  impact on our
financial  condition,  results of operations,  cash flows or reputation.
We are involved in claims, legal proceedings, and governmental inquiries related
to employment  matters,  contract disputes,  business  practices,  trademark and
copyright  infringement  claims, and other commercial  matters.  While we cannot
predict the outcome of pending suits, claims, investigations, and inquiries, the
cost of  responding  to and  defending  such  suits,  as  well  as the  ultimate
resolution of any of these matters,  could have a material adverse effect on our
business, financial condition, results of operations, cash flows, or reputation.

We  may  experience   operational   and  financial   risks  in  connection  with
acquisitions.  In  addition,  some of the  businesses  acquired  by us may incur
significant  losses from operations or experience  impairment of carrying value.
Our future  growth may  depend,  in part,  on  acquisitions.  We may  experience
operational and financial risks in connection with  acquisitions.  To the extent
that we grow through acquisitions, we will need to:

     o    retain senior management and other key personnel at acquired
          businesses; and
     o    successfully  manage  acquisition-related  strain  on our  management,
          operations, and financial resources and on the management, operations,
          and financial resources of the acquired company.

We may not be successful in addressing  these  challenges or any other  problems
encountered  in connection  with  historical and future  acquisitions,  and, the
failure to do so, could adversely affect our business,  financial condition, and
results of operations. In addition, we may not achieve the operational synergies
and cost  savings  anticipated  in  connection  with any such  acquisition.  The
failure to realize  anticipated  benefits of one or more of our acquisitions and
the  undertaking  of future  acquisitions  could result in  potentially  diluted
issuances  of  equity  securities,  additional  contingent  liabilities,  or the
impairment  of  goodwill  and/or  other  intangible  assets,  any of which could
adversely affect our business, financial condition, and results of operations.

We may need to raise  additional  capital  in the future to fund  liquidity  and
capital requirements,  which may not be available to us on favorable terms or at
all.
Our future liquidity and capital requirements will depend upon numerous factors,
including the success of our  membership  programs and other product and service
offerings,   market   developments,   potential   acquisitions   and  additional
repurchases  of our  common  stock.  We may  need to raise  additional  funds to
support  expansion,  develop new  products or services,  respond to  competitive
pressures,  acquire complementary  businesses or take advantage of unanticipated
opportunities.  The indenture  governing our senior secured credit  facility and
our Senior  Notes  contain  covenants  that may  restrict our ability to finance
operations or capital needs. We cannot be certain that we will be able to obtain
adequate financing on favorable terms or at all.

Our quarterly operating results are volatile and may adversely affect the market
price of our securities.
Our  quarterly   revenues,   expenses,   and   operating   results  have  varied
significantly in the past and may vary  significantly from quarter to quarter in
the  future.  Factors  which  could  cause our  financial  results to  fluctuate
include:

     o    increased or decreased cancellation of member enrollments;
     o    the rate of renewal by existing members;
     o    increased default on notes receivables;
     o    our ability to introduce new programs or products or to enhance
          existing programs or products on a timely basis and the introduction
          of programs or products by our competitors;
     o    the mix of our client base;
     o    seasonality of the businesses of our clients;
     o    market acceptance and demand for our and our clients' membership
          programs generally;
     o    the mix of programs we offer and the price points of such programs; o
          increased commission rates and other compensation required by our
          clients;

                                       13
<PAGE>

     o    the mix of our marketing channels;
     o    unanticipated service interruptions;
     o    movement in foreign exchange rates;
     o    adverse outcomes of litigation or regulatory matters;
     o    the availability of vendors to support programs we offer;
     o    the level of enthusiasm for health and fitness, travel, entertainment
          and leisure activities, and other lifestyle elements underlying our
          membership programs; and
     o    competitive pressures on selling prices.

Many of these  factors  are  beyond  our  control.  Operating  results  would be
adversely  affected if projected  revenues for a given quarter are not achieved.
In addition,  any future acquisitions by us could have a material adverse effect
on our results of operations,  particularly  in quarters  immediately  following
consummation of such transactions, while the operations of the acquired business
are being integrated into our operations.

Item 1B.  Unresolved Staff Comments
          -------------------------

Not Applicable.

Item 2.  Properties
         ----------

A summary  of key  information  with  respect  to our  leased  facilities  is as
follows:

                                            Calendar Year Lease
Location              Square Footage            Expires
--------------------- ------------------  ----------------------
Omaha, NE                       124,832     2009 through 2015
Goleta, CA                       82,798     2006 through 2011
Norwalk, CT                      82,215           2016
Toronto, Canada                  73,929           2009
Montreal, Canada                 48,193     2006 through 2014
Houston, TX                      41,848           2011
Chicago, IL                      18,776           2010
Atlanta, GA                      13,717           2010
Stroudsburg, PA                  11,000           2014


During 2006, we relocated our corporate  headquarters  to Norwalk,  Connecticut.
Our  Norwalk  office  also  includes  non-corporate  offices  for our  Marketing
Services segment.  The Toronto,  Canada office serves as the operational  office
for our Personals segment.  The Stroudsburg,  Pennsylvania  office serves as the
operational  office for our Management  Services  segment.  All other  locations
serve as operational offices for our Marketing Services segment. We believe that
our  properties  are generally in good  condition,  are well  maintained and are
suitable and adequate to carry on our business.

Item 3.  Legal Proceedings
         -----------------

In our opinion, there are no significant legal proceedings to which we or any of
our subsidiaries  are a party or to which any of our properties are subject.  We
are  involved in  lawsuits  and claims  generally  incidental  to our  business,
including  but not  limited to various  suits,  including  previously  disclosed
suits,  brought  against us by  individual  consumers  seeking  monetary  and/or
injunctive relief relating to the marketing of our programs.  In addition,  from
time to time in the regular  course of our business,  we receive  inquiries from
various federal and/or state regulatory authorities.

Item 4.  Submission of Matters to a Vote of Security Holders
         ---------------------------------------------------

No matters were submitted to a vote of security holders during the quarter ended
June 30, 2006.


                                       14
<PAGE>

                                     Part II

Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and
         ----------------------------------------------------------------------
         Issuer Purchases of Equity Securities
         -------------------------------------

Market Information
Our common stock is listed on the NASDAQ  National Market  ("NASDAQ")  under the
symbol VTRU. The following table sets forth the high and low closing sale prices
per share for the periods indicated as reported on the NASDAQ.

Fiscal Year Ended June 30, 2006:           High           Low
                                        ---------     ---------
First Quarter                           $  40.61      $  33.72
Second Quarter                             38.47         33.79
Third Quarter                              45.15         33.50
Fourth Quarter                             44.38         38.21

Fiscal Year Ended June 30, 2005:           High           Low
                                        ---------     ---------
First Quarter                           $  29.28      $  24.42
Second Quarter                             38.33         24.70
Third Quarter                              40.89         35.34
Fourth Quarter                             39.47         29.47


Holder and Dividend Information
As of  August  28,  2006,  there  were  40,000,000  shares of our  common  stock
authorized of which 9,688,778  shares were  outstanding,  held by  approximately
2,600 stockholders of record. We have not declared or paid any cash dividends to
date and anticipate that all of our earnings in the  foreseeable  future will be
retained for use in our business  and to  repurchase  our common stock under our
stock  repurchase  program.  Our  future  dividend  policy  will  depend  on our
earnings,  capital  requirements,   financial  condition,  requirements  of  the
financing  agreements  to which we are a party,  and  other  factors  considered
relevant by our Board of Directors.

Purchases of Equity Securities by the Issuer
The following table summarizes the shares of our equity securities  purchased by
us or on our behalf:

<TABLE>
<CAPTION>

                                                                                        Maximum
                                                                                       Number of
                                                                Total Number of     Shares that May
                                                                Shares Purchased        Yet be
                                  Total Number Average Price  as Part of Publicly   Purchased Under
                                   of Shares       Paid        Announced Plans         the Plans
Period                             Purchased    per Share      or Programs (1)        or Programs
--------------------------------- -----------  -----------    -------------------   ---------------
<S>                                    <C>     <C>                         <C>             <C>
April 1, 2006 to April 30, 2006        4,100   $    41.54                  4,100           545,630
May 1, 2006 to May 31, 2006          163,500        38.67                163,500           382,130
June 1, 2006 to June 30, 2006         55,000        39.69                 55,000           327,130
                                  -----------  -----------    -------------------   ---------------
  Total                              222,600   $    38.97                222,600           327,130
                                  ===========  ===========    ===================   ===============
</TABLE>


(1)      In October 2004, our Board of Directors authorized 1,000,000 shares, no
         expiration  date, to be purchased  under our stock  repurchase  program
         originally  authorized during fiscal 1997. In August 2006, we announced
         that our Board of Directors  authorized the purchase of up to 1,000,000
         shares, no expiration date, in addition to the authorization  described
         above,  thereby increasing the maximum number of shares that may yet be
         purchased to 1,327,130.


                                       15
<PAGE>

Item 6.  Selected Financial Data
         -----------------------

The selected consolidated  operating and common stock data for each of the years
ended  June 30,  2006  through  2002  and the  selected  consolidated  financial
position  data and  liquidity as of June 30, 2006 through 2002 below are derived
from the  Company's  audited  consolidated  financial  statements.  All selected
financial  information in this Item 6 is qualified by reference to and should be
read in conjunction with Item 8, "Financial  Statements and Supplementary Data,"
and Item 7,  "Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations," in this report.

<TABLE>
<CAPTION>

                                                                                       For the years ended June 30,
                                                                         -----------------------------------------------------
(Dollar amounts in millions except per share data)                          2006 (1)  2005 (2)   2004 (3)  2003 (4)   2002 (5)
                                                                         -----------------------------------------------------
Consolidated Operating Data:
<S>                                                                         <C>       <C>        <C>       <C>        <C>
Revenues                                                                    $ 658.9   $ 579.8    $ 488.7   $ 456.9    $ 427.6
Operating income                                                               65.3      57.1       52.9      22.3       11.9
Income before provision for income taxes                                       48.6      38.9       46.6      40.6       43.9
Provision for income taxes                                                     15.9      13.4       18.6      16.2          -
Income before cumulative effect of accounting change                           32.7      25.5       28.0      24.4       43.9
Net income                                                                     32.7      25.5       28.0      24.4       38.0

Per Share Data:
Earnings before cumulative effect of accounting change per share:
   Basic                                                                     $ 3.36    $ 2.56     $ 2.60    $ 1.93     $ 3.03
   Diluted                                                                   $ 2.83    $ 2.22     $ 2.29    $ 1.84     $ 2.95
Earnings per share:
   Basic                                                                     $ 3.36    $ 2.56     $ 2.60    $ 1.93     $ 2.63
   Diluted                                                                   $ 2.83    $ 2.22     $ 2.29    $ 1.84     $ 2.55
Diluted weighted average common shares outstanding                             12.7      13.0       13.2      13.2       14.9

                                                                                                June 30,
                                                                         -----------------------------------------------------
                                                                            2006      2005       2004      2003       2002
                                                                         -----------------------------------------------------
Consolidated Financial Position Data and Liquidity:
Cash and cash equivalents                                                    $ 36.3    $ 64.4     $ 47.2    $ 67.3     $ 45.5
Short-term investments                                                         31.8      16.2      120.0       5.0          -
Total assets                                                                  443.0     447.2      453.2     248.5      280.8
Long-term liabilities                                                         254.9     252.8      246.9       8.3        3.6
Treasury stock, at cost                                                      (273.0)   (253.6)    (212.5)   (124.6)     (87.5)
</TABLE>


(1) In 2006,  the Company  adopted the  provisions  of  Statement  of  Financial
    Accounting  Standards ("SFAS") No. 123, Accounting for Share-Based  Payments
    (revised).
(2) In 2005, the Company  acquired certain of the net assets of Bargain Network,
    Inc. and My Choice Medical Holdings, Inc.
(3) In 2004, the Company  completed the acquisition of all of the net assets and
    outstanding capital stock of Lavalife Inc.
(4) In 2003,  the Company  received a  settlement  award from a lawsuit  against
    Homestore.com, Inc.
(5) In 2002, the Company sold its investment in iPlace, Inc.  Additionally,  the
    Company  recorded  an  impairment  of  goodwill  as a  cumulative  effect of
    accounting change in connection with the adoption of SFAS No. 142, "Goodwill
    and Other Intangible Assets."

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         -----------------------------------------------------------------------
         of Operations
         -------------

OVERVIEW

Vertrue is a leading internet marketing  services company.  We operate a diverse
group of marketing  businesses with a unified mission: to provide every consumer
with access to savings and services that improve their daily lives.

We have three reportable business segments:  Marketing Services,  Personals, and
Management Services.  The Marketing Services business segment primarily provides
discounted   products  and  services  to  consumers  and  generates   recurring,
membership-based  revenue.  The Personals  business segment provides web, phone,
and mobile-based personals services and generates transaction-based revenue. The
Management   Services   business  segment  provides   advertising  and  practice
management  services to healthcare  professionals  throughout the United States.
Revenues from the Marketing Services and Personals business segments represented
93% of our consolidated total revenues in 2006.

                                       16
<PAGE>

The  Marketing  Services  segment  offers  consumers a variety of  products  and
services  from  selected  vendors and service  providers  on a monthly or annual
subscription basis or a fee for service basis.  Revenues are derived principally
from recurring fees which are billed to the member on either a monthly or annual
basis. In the case of annually billed membership fees, the Company receives full
payment at or near the beginning of the  membership  period,  but recognizes the
revenues as the member's  refund  privilege  expires.  Membership  fees that are
billed monthly are recognized when earned.  Revenues  derived from one time fees
are recognized when the service is performed.

The Personals segment employs a transactional  business model in which users buy
non-refundable  credits up front and spend those  credits only when they want to
interact  with other  customers.  Personals  revenues  are  recognized  when the
services are used.

During 2006,  the  Management  Services  segment  became  reportable  due to the
increase  in its assets and as such,  all prior  periods  have been  restated to
reflect this change. For additional financial information about these reportable
business segments,  see Note 17 to the consolidated financial statements in Item
8 of this report.

The results of MCM, Bargain, and Lavalife have been included in the consolidated
results  since their  acquisitions  on January 1, 2005,  November 30, 2004,  and
April 1,  2004,  respectively.  MCM,  Bargain,  and  Lavalife  are  included  in
Management Services, Marketing Services, and Personals segment, respectively.

Adjusted EBITDA and EBITDA are used by the Company's  management to evaluate the
performance  of its business.  A discussion  of Adjusted  EBITDA can be found in
this Item 7 under the heading  "Liquidity and Capital Resources" in this report.
A description and reconciliation of net income to EBITDA and Adjusted EBITDA are
disclosed in this Item 7 under the heading "Reconciliation of Non-GAAP Measures"
in this report.


                                       17
<PAGE>

RESULTS OF OPERATIONS

Consolidated Overview
<TABLE>
<CAPTION>

                                                 For the years ended June 30,         Percent Increase/(Decrease)
                                               ----------------------------------   ---------------------------------
(Dollars amounts in millions)                     2006        2005       2004         '06 vs. '05      '05 vs. '04
                                               ----------- ----------- ----------   ---------------  ----------------
<S>                                               <C>         <C>        <C>                   <C>               <C>
Revenues                                          $ 658.9     $ 579.8    $ 488.7               14%               19%

Marketing expenses                                  313.2       286.4      255.8                9%               12%
Operating expenses                                  151.7       114.4       91.8               33%               25%
General and administrative expenses                 120.3       108.2       85.8               11%               26%
Charge for arbitration award                            -         5.5          -             (100%)               NM
Amortization of intangible assets                     8.4         8.2        2.4                2%              242%
                                               ----------- ----------- ----------

Operating income                                     65.3        57.1       52.9               14%                8%
Interest income                                       3.6         1.9        1.1               89%               73%
Interest expense                                    (20.3)      (20.7)      (7.7)               2%             (169%)
Other income, net                                       -         0.6        0.3             (100%)             100%
                                               ----------- ----------- ----------

Income before income taxes                           48.6        38.9       46.6               25%              (17%)
Provision for income taxes                           15.9        13.4       18.6               19%              (28%)
                                               ----------- ----------- ----------

Net income                                         $ 32.7      $ 25.5     $ 28.0               28%               (9%)
                                               =========== =========== ==========


EBITDA                                             $ 89.8      $ 78.7     $ 65.4               14%               20%
                                               =========== =========== ==========
</TABLE>

NM = Not Meaningful

Revenues
The following table sets forth revenue by payment plan and by segment:
<TABLE>
<CAPTION>

                                      For the years ended June 30,          Percent Increase/(Decrease)
                                 --------------------------------------- -------------------------------
(Dollars amounts in millions)        2006         2005          2004       '06 vs. '05     '05 vs. '04
                                 ------------ ------------- ------------ --------------- ---------------
<S>                              <C>          <C>           <C>                    <C>             <C>
Monthly payment plans            $     357.2  $      250.8  $     160.6             42%             56%
Annual payment plans:
   Initial year                         33.6          56.5        113.2            (41%)           (50%)
   Renewal year                        112.7         152.6        170.1            (26%)           (10%)
Other                                   36.2          30.4         27.1             19%             12%
                                 ------------ ------------- ------------ --------------- ---------------
   Total Marketing Services            539.7         490.3        471.0             10%              4%
Personals                               74.5          72.1         17.7              3%            307%
Management Services                     44.7          17.4            -            157%              NM
                                 ------------ ------------- ------------ --------------- ---------------
   Total                         $     658.9  $      579.8  $     488.7             14%             19%
                                 ============ ============= ============ =============== ===============
</TABLE>


In 2006,  revenues  increased  $79.1 million,  or 14%.  Revenues  related to the
Company's 2005 acquisitions were $81.4 million in 2006 compared to $38.4 million
last  year.  Excluding  revenues  from  Bargain  and MCM,  revenues  would  have
increased 7% due to an increase in Marketing  Services'  revenues,  as discussed
below.  The remaining  revenue increase is due to the inclusion of the full year
of  revenues  from  Bargain and MCM.  Net active  retail  members and  customers
increased 3% to 6.5 million at June 30, 2006 from 6.3 million at June 30, 2005.

In 2006,  Marketing Services revenues increased $49.4 million, or 10%. Excluding
revenues from Bargain,  total marketing  services  revenues would have increased
7%.  Revenues from members  enrolled in monthly  payment plans increased 42% and
were  partially  offset by a 30% decrease in revenue  from  members  enrolled in
annual  payment plans.  The increase in revenues from monthly  payment plans was
due to a 30% increase in average monthly members billed and a 9% increase in the
monthly  member price point.  Revenues from members  enrolled in annual  payment
plans continue to decrease for both initial year members and renewal members due
to the continued shift to enrolling new members in monthly  payment  programs as
well as the  attrition  of the  annual  renewal  base.  Revenues  from other are
derived from one time fees that are recognized when the service is performed.


                                       18
<PAGE>

In 2006,  Personals revenues increased $2.4 million, or 3%, primarily due to the
incremental  revenue generated from Lavalife's growing mobile service.  In 2006,
Management  Services  revenues  increased $27.3 million,  or 157%. 2005 included
revenues  from  MCM for only the  second  half of the  fiscal  year  since  that
acquisition was completed on January 1, 2005.  Comparing the second half of 2005
to the second half of 2006,  Management Services increased 74%. This increase is
due to growth in volume and increased pricing of transactions managed.

In  2005,  revenues  increased  $91.1  million,  or  19%,  primarily  due to the
inclusion  of  revenues  from MCM and Bargain  and the  full-year  effect of the
acquisition of Lavalife. Net active retail members and customers increased 2% to
6.3 million at June 30, 2005 from 6.2 million at June 30, 2004.

In 2005,  Marketing Services revenues increased $19.3 million, or 4%, due to the
inclusion of revenues from Bargain.  During 2005, the Marketing Services segment
increased direct to consumer  marketing  efforts in order to provide  additional
growth  opportunities  and  a  more  diverse  business  model.  Offsetting  this
increase,  the Marketing  Services segment decreased its level of marketing with
certain client partners in the outbound telemarketing channel.

In 2005,  Personals  revenues were $72.1 million and represented the revenues of
Lavalife.  On a pro forma basis assuming the acquisition of Lavalife occurred on
July 1, 2003,  revenues would have remained flat from 2004.  Management Services
revenues were $17.4 million in 2005.

Marketing Expenses
In 2006, marketing expenses increased $26.8 million, or 9%, due to the inclusion
of a full year of costs  incurred  by Bargain  and MCM as well as an increase in
online marketing efforts which resulted in higher revenues,  as discussed above.
As a percentage of revenues,  marketing expenses decreased to 48% in 2006 versus
49% in 2005 primarily due to increased  price points,  more efficient  marketing
spending, and better retention in certain sectors of the business.

In 2005,  marketing expenses  increased $30.6 million,  or 12%, primarily due to
the inclusion of marketing expenses incurred by Lavalife, Bargain, and MCM. As a
percentage of revenues,  marketing  expenses decreased to 49% in 2005 versus 52%
in 2004  primarily due to the decrease in the level and mix of members  enrolled
through the higher  cost  outbound  telemarketing  channel and the effect of the
lower marketing expense ratios of Lavalife and MCM.

Operating Expenses
In 2006, operating expenses increased $37.3 million, or 33%, and as a percentage
of revenues, were 23% this year versus 20% in 2005 due to the full year of costs
incurred  by Bargain and MCM.  Operating  expenses  of the  Management  Services
segment  increased  173% in 2006 to support  the 157%  increase  in revenue  and
accounted for a 2% increase in the overall operating expenses as a percentage of
revenue.  The operating  expense  ratio of the  Management  Services  segment is
higher than that of other segments. The remaining increase in operating expenses
was due to increased  costs of servicing the higher member and customer base and
the higher mix of members enrolled in monthly payment plans compared with annual
payment plans.

In 2005, operating expenses increased $22.6 million, or 25%, and as a percentage
of revenues,  were 20% in 2005 versus 19% in 2004 and were  primarily due to the
effect of the higher operating expense ratio of Lavalife and MCM.

General and Administrative Expenses
In 2006,  general and administrative  expenses increased $12.1 million,  or 11%,
and  included  a $4.5  million  charge  related  to SFAS No.  123,  "Share-Based
Payment," ("SFAS 123R"),  which was adopted in July 2005,  partially offset by a
one-time  $1.0  million  benefit  realized on the  recovery of certain  expenses
related to  litigation  settled  during 2006.  Excluding the impact of these two
items in 2006 and  excluding  the $1.0 million in expenses  related to that same
litigation from 2005, general and  administrative  expenses would have increased
9% to $116.8 million,  or 18% of revenue, in 2006 from $107.2 million, or 19% of
revenue,  in 2005.  The  increase in general  and  administrative  expenses  was
primarily  due to the  inclusion of a full year of expenses  incurred by Bargain
and MCM and  increased  employee and  occupancy  related  expenses.  General and
administrative  expenses  decreased as a percentage of revenue due to leveraging
expenses with the increase in revenue.

In 2005,  general and administrative  expenses increased $22.4 million,  or 26%,
and as a percentage of revenues were 19% in 2005 compared to 18% in 2004.  These
increases  were  primarily  due to the impact of the  acquisition  of  Lavalife,
Bargain, and MCM.


                                       19
<PAGE>

Charge for Arbitration Award
In 2005,  the Company  recorded a $5.5 million  charge related to an arbitration
award against the Company. For additional  information,  see Note 8 of the Notes
to Consolidated Financial Statements included in Item 8 of this report.

Operating Income
In 2006, operating income increased $8.2 million, or 14%. Excluding the expenses
associated  with the  adoption  of SFAS 123R and the one time  benefit  realized
related to the  settlement  of  litigation  from 2006 and excluding the expenses
related to that same litigation in 2005 and the charge for the arbitration award
from 2005,  operating income would have increased 8% to $68.9 million from $63.5
million due to the 14%  increase in revenue  partially  offset by the  increased
level of operating expenses, as described above.

In 2005,  operating income  increased $4.2 million,  or 8%, due to the impact of
Lavalife,  Bargain,  and MCM and the decrease in marketing  expense ratios. As a
percentage of revenues,  marketing  expenses were 49% in 2005 compared to 52% in
2004.  Marketing expenses decreased as a percentage of revenues primarily due to
the  decrease in the level and mix of members  enrolled  through the higher cost
outbound  telemarketing  channel and the effect of the lower  marketing  expense
ratios of Lavalife  and MCM.  The  increase in  operating  income was  partially
offset by the impact of the $5.5 million charge for the arbitration award.

Interest Income
Interest income included interest earned on cash,  short-term  investments,  and
notes receivable. In 2006, interest income increased 89% primarily due to higher
outstanding  notes receivable  related to the growth of the Management  Services
segment.  Interest income  increased 73% in 2005 due primarily to higher average
yield on our cash and short-term investments.

Interest Expense
Interest  expense in 2006 and 2005 primarily  included $14.3 million  related to
the 9.25% Senior Notes issued in April 2004 and $5.0 million related to the 5.5%
Convertible  Notes issued in September  2003.  The increase in interest  expense
during 2005 was due to a full year of interest expense related to this debt. For
additional information on these debt issuances,  refer to "Liquidity and Capital
Resources" in this Item 7.

Provision for Income Taxes
In 2006,  2005,  and 2004, the Company  recorded  provisions for income taxes of
$15.9 million, $13.4 million, and $18.6 million, respectively, which resulted in
effective tax rates of 32.7%, 34.4%, and 40.0%, respectively.  The effective tax
rate in 2006  included  a $2.0  million  tax  benefit  primarily  related to the
reversal  of accrued  income  taxes due to the  completion  of a tax audit.  The
effective  tax  rates in 2006 and 2005  included  the full  year  impact  of the
acquisition of Lavalife and certain tax benefits realized as a result. Excluding
the $2.0 million benefit, the effective tax rate increased in 2006 primarily due
to decreased losses in certain foreign branch operations. The effective tax rate
in 2004 was higher than the U.S. federal statutory rate due to state tax expense
and other non-deductible items.

EBITDA
<TABLE>
<CAPTION>

                                        For the years ended June 30,    Percent Increase/(Decrease)
                                 ----------------------------------- -------------------------------
(Dollars amounts in millions)        2006        2005        2004      '06 vs. '05     '05 vs. '04
                                 ----------- ----------- ----------- --------------- ---------------
<S>                              <C>         <C>         <C>                     <C>            <C>
Marketing Services               $     99.9  $     96.5  $     86.7              4%             11%
Personals                              11.0         6.2         2.7             77%            130%
Management Services                     6.9         2.7           -            156%              NM
Corporate                             (28.0)      (26.7)      (24.0)             5%             11%
                                 ----------- ----------- ----------- --------------- ---------------
Total                            $     89.8  $     78.7  $     65.4             14%             20%
                                 =========== =========== =========== =============== ===============
</TABLE>


In 2006,  EBITDA  increased  14% to $89.8  million  from $78.7  million in 2005.
Excluding  the $4.5 million in expenses  associated  with SFAS 123R and the $1.0
million benefit  realized  related to the settlement of litigation from 2006 and
excluding the $1.0 million in expenses  related to that same  litigation in 2005
and the $5.5 million charge for the  arbitration  award from 2005,  EBITDA would
have increased 10% to $93.3 million,  or 14% of revenue,  from $85.1 million, or
15% of revenue,  in 2005.  This was due to the 14% increase in operating  income
discussed above. Marketing Services EBITDA increased 4% to $99.9 million in 2006
from $96.5 million in 2005 due to increased price points and synergies  realized
from the Bargain acquisition. Personals EBITDA increased 77% to $11.0 million in
2006 from $6.2  million  in 2005.  Excluding  the  impact of the  settlement  of
litigation  from both  periods  discussed  above,  Personals  EBITDA  would have
increased  39% to $10.0  million  from $7.2  million due to  Lavalife's  growing
mobile service business and cost containment efforts. Management Services EBITDA
increased to $6.9 million in 2006 from $2.7 million in 2005 due to the growth in
revenue.  Corporate  EBITDA  decreased  to $(28.0)  million in 2006 from $(26.7)
million in 2005  primarily  due to  increased  employee  and  occupancy  related
expenses.  Corporate  EBITDA  included  $4.5  million in expense  related to the
adoption  of SFAS 123R in 2006 and the $5.5  million  charge for an  arbitration
award in 2005.

                                       20
<PAGE>

In 2005,  EBITDA  increased  20% to $78.7  million  from  $65.4  million in 2004
primarily due to the impact of the  acquisition  of Bargain and MCM and improved
marketing  margins partially offset by the impact of the $5.5 million charge for
the arbitration award.  Marketing Services EBITDA increased 11% to $96.5 million
in 2005 from  $86.7  million  in 2004 due to a 4%  increase  in  revenues  while
marketing expenses only increased 1%. Personals EBITDA increased to $6.2 million
in 2005 due to the full year impact of Lavalife.  On a pro forma basis  assuming
the  acquisition of Lavalife  occurred on July 1, 2003,  Personals  EBITDA would
have been $9.9 million in 2004.  The  decrease  from 2004 was  primarily  due to
increased employee related expenses. Management Services EBITDA was $2.7 million
in 2005.  Corporate  EBITDA  decreased  to $(26.7)  million in 2005 from $(24.0)
million in 2004  primarily due to the impact of the $5.5 million  charge for the
arbitration award.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2006,  the Company had cash,  cash  equivalents,  and  short-term
investments  of $68.1  million in  addition  to its $50  million  unused line of
credit under its senior  secured  credit  facility.  The Company  believes  that
existing cash and short-term  investment  balances and funds available under its
senior secured credit facility together with cash generated from operations will
be sufficient to meet its funding  requirements for 2007 and for the foreseeable
future.

Management  believes it is useful to analyze the components of net cash provided
by operating  activities as follows:  Revenue before  deferral,  marketing costs
before  deferral,  Adjusted EBITDA,  and changes in assets and liabilities.  For
definitions  and  reconciliations  of revenue before  deferral,  marketing costs
before deferral and Adjusted EBITDA,  refer to the discussion in "Reconciliation
of Non-GAAP Measures" in this Item 7 of this report.

Net cash flow provided by operating  activities is an important  measure used to
understand  the  Company's  liquidity.  In 2006,  net cash provided by operating
activities  increased  to $37.7  million  from $32.3  million in 2005.  In 2006,
operating  cash flow  increased  $5.4 million  primarily  due to a $22.0 million
increase in Adjusted  EBITDA,  partially  offset by a $10.0  million use of cash
from changes in assets and liabilities. In addition, operating cash flow in 2006
reflected a $3.1 million  decrease  compared to a $2.2 million increase in 2005,
due to the change in the  classification  of excess tax benefit from stock-based
compensation from operating activities to financing  activities,  as required by
SFAS 123R.

In 2005,  net cash provided by operating  activities  decreased to $32.3 million
from $47.9 million in 2004. The $15.6 million decrease in operating cash flow in
2005  compared  with  2004 was  primarily  due to a $16.4  million  increase  in
interest paid on the Convertible Notes and Senior Notes.

The table below summarizes the components of revenues before deferral:
<TABLE>
<CAPTION>

                                              For the years ended June 30,      Increase/(Decrease)
                                          ----------------------------------- -----------------------
(Dollars amounts in millions)                 2006        2005        2004    '06 vs. '05 '05 vs. '04
                                          ----------- ----------- ----------- ----------- -----------
Revenues before deferral
<S>                                       <C>         <C>         <C>                <C>         <C>
Monthly payment plans                     $    361.4  $    255.8  $    166.3         41%         54%
Annual payment plans:
Initial year                                    26.7        40.3        78.2        (34%)       (48%)
Renewal year                                    91.4       127.7       167.7        (28%)       (24%)
Other                                           36.2        30.5        27.1         19%         13%
                                          ----------- ----------- ----------- ----------- -----------
    Total Marketing Services                   515.7       454.3       439.3         14%          3%
Personals                                       74.3        72.2        17.1          3%        322%
Management Services                             45.3        18.4           -        146%          NM
                                          ----------- ----------- ----------- ----------- -----------
    Total                                 $    635.3  $    544.9  $    456.4         17%         19%
                                          =========== =========== =========== =========== ===========
</TABLE>


In 2006,  revenues before deferral increased 17% to $635.3 million and excluding
revenues  before  deferral from Bargain and MCM,  revenues before deferral would
have increased 9% in 2006.  Revenues  before deferral from monthly payment plans
increased 41% due to a 30% increase in the average monthly members billed to 2.2
million in 2006 and a 9% increase in the monthly  weighted average program price
point. The monthly  weighted  average program price points were $13.69,  $12.61,
and $11.37 for the 2006, 2005, and 2004 fiscal years, respectively.  The average
monthly  members billed  increased due to the increase in the mix of new members
enrolled in monthly  payment  plan  programs.  New  members  enrolled in monthly
payment  plan  programs  represented  91%,  85%,  and 62% of total  new  members
enrolled in 2006,  2005, and 2004,  respectively.  Revenues before deferral from
annual  payment  plans  declined due to the  continued  shift to  enrolling  new
members in  monthly  payment  programs  as well as the  attrition  of the annual
renewal base. The new annual  weighted  average  program price points were $107,
$104, and $107 in 2006, 2005, and 2004, respectively.

                                       21
<PAGE>

In 2006,  Personals revenue before deferral increased 3% from 2005 primarily due
to Lavalife's  growing mobile  services.  Management  Services  revenues  before
deferral increased 146%. 2005 included revenue from MCM for only the second half
of the fiscal year since the acquisition was completed on January 1, 2005.

In 2005,  revenues  before  deferral  increased  from 2004  primarily due to the
inclusion of revenues before deferral from Lavalife, Bargain, and MCM. Excluding
revenues  before  deferral from  Lavalife,  Bargain,  and MCM,  revenues  before
deferral  would have  decreased  1% in 2005 due to the effect of an  increase in
marketing of monthly payment programs.  The table below presents Adjusted EBITDA
by segment.
<TABLE>
<CAPTION>

                                              For the years ended June 30,      Increase/(Decrease)
                                          ----------------------------------- -----------------------
(Dollars amounts in millions)                 2006        2005        2004    '06 vs. '05 '05 vs. '04
                                          ----------- ----------- ----------- ----------- -----------
Adjusted EBITDA
<S>                                       <C>         <C>         <C>                <C>         <C>
Marketing Services                        $     88.9  $     74.0  $     80.5         20%         (8%)
Personals                                       10.8         6.3         2.1         71%        200%
Management Services                              7.5         3.6           -        108%          NM
Corporate                                      (28.0)      (26.7)      (24.0)         5%         11%
                                          ----------- ----------- ----------- ----------- -----------
   Total                                  $     79.2  $     57.2  $     58.6         38%         (2%)
                                          =========== =========== =========== =========== ===========
</TABLE>


In 2006,  marketing costs before deferral increased 10% to $300.2 million versus
$273.0  million in 2005 due to the  inclusion of a full year of marketing  costs
before deferral from Bargain and MCM as well as increased  marketing required to
generate the  increased  revenue.  As a percentage of revenue  before  deferral,
marketing  costs before  deferral were 47% in 2006 and 50% in 2005. The improved
marketing  cost ratio in 2006 is due to increased  price points,  more efficient
marketing spending, and better retention in certain sectors of our business. The
increase in marketing  margin  before  deferral  (revenue  before  deferral less
marketing costs before deferral) in 2006 contributed to a $22.0 million increase
in Adjusted EBITDA, to $79.2 million in 2006 from $57.2 million in 2005.

In 2005,  marketing costs before deferral  increased 19% from 2004 primarily due
to the inclusion of marketing costs before deferral from Lavalife,  Bargain, and
MCM.

In 2006,  cash used from  changes in assets and  liabilities  was $10.0  million
versus cash  provided by changes in assets and  liabilities  of $2.9  million in
2005.  The use of cash  in 2006  primarily  related  to the  increase  in  notes
receivable  related to higher revenues from the Management  Services segment and
the payment of the $5.5 million arbitration award, which was partially offset by
lower use of cash from an increase in accrued  and other  liabilities.  In 2005,
cash  provided  by changes in assets and  liabilities  primarily  related to the
timing of trade payments.

In 2005,  cash  provided by changes in assets and  liabilities  was $2.9 million
versus  cash used of $4.1  million  in 2004.  In 2004 the use of cash  primarily
related to the  decrease  in the  allowance  for  membership  cancellations  and
reflected  the decrease in the level of marketing as well as the decrease in the
programs marketed with an annual payment program.

In 2006,  capital  expenditures  increased  to $17.8  million  compared to $11.0
million in 2005 due to the costs associated with the relocation of the Company's
corporate  headquarters.  As a result, free cash flow, defined as operating cash
flow less  capital  expenditures,  was $19.9  million in 2006  compared to $21.3
million in 2005. In 2004,  capital  expenditures were $7.1 million and free cash
flow was $40.8  million.  Free cash flow in 2004 did not reflect the annual cost
of debt service payments  because of the timing of Senior and Convertible  Notes
issuances,  or the full impact of tax payments as the Company still had the full
Federal benefit of its net operating loss carry forwards.

In 2006, net cash (used in) provided by investing activities was $(58.0) million
versus  $16.4  million in 2005.  Net cash used in investing  activities  in 2006
reflected $25.7 million of contingent  payments made related to acquisitions and
$14.6  million of net  purchases of short-term  investments.  In 2005,  net cash
provided by investing  activities  reflected $104.6 million of net proceeds from
sales  of  short-term  investments  offset  by  $77.2  million  of cash  used in
connection with the Company's acquisitions.

                                       22
<PAGE>

In 2005,  net cash provided by (used in) investing  activities was $16.4 million
compared with ($237.0) million in 2004. Net cash used in investing activities in
2004  reflected   $114.9  million  of  cash  payments  in  connection  with  the
acquisition  of  Lavalife  and $115.0  million of net  purchases  of  short-term
investments.

In 2006,  net cash used in financing  activities was $8.4 million in 2006 versus
$31.7 million in 2005. Net cash used in financing activities in 2006 principally
reflected  the use of $19.3 million to  repurchase  the Company's  common stock,
which was  partially  offset by proceeds  from the exercise of stock  options of
$8.6 million and the excess tax benefits from  stock-based  compensation of $3.1
million. Net cash used in financing activities in 2005 principally reflected the
use of $41.1  million  to  repurchase  the  Company's  common  stock,  which was
partially  offset  by  proceeds  from the  exercise  of stock  options  of $10.8
million.

In 2005, net cash (used in) provided by financing activities was ($31.7) million
versus  $168.8  million  in  2004.  In  2004,  net cash  provided  by  financing
activities  principally reflected the issuance of $229.8 million in debt, net of
issuance  costs,  proceeds from the exercise of employee  stock options of $24.5
million,  and proceeds  from the issuance of  restricted  stock of $9.1 million.
These  sources of cash were  partially  offset by $94.2  million of cash used to
repurchase the Company's common stock.

Debt Issuances
As of June 30,  2006,  the Company had $240.0  million of debt  outstanding.  In
September 2003, the Company issued $90.0 million aggregate principal amount 5.5%
convertible  senior  subordinated  notes due  September  2010.  Interest  on the
Convertible  Notes is  payable in cash  semi-annually  in arrears on April 1 and
October  1. Upon a change  in  control,  holders  of the  Convertible  Notes may
require the Company to repurchase all or part of the Convertible Notes for cash.

In April 2004, the Company issued $150.0 million  aggregate  principal amount of
9.25%  Senior  Notes due 2014.  These  Senior  Notes were sold at 98.418% of the
principal amount,  which resulted in an effective yield of 9.5%. Interest on the
Senior Notes is payable in cash  semi-annually in arrears on April 1 and October
1. A portion of the  proceeds  from the offering of the Senior Notes was used to
repay  amounts  borrowed  under the senior  secured  credit  facility  to fund a
portion of the Lavalife acquisition.

Credit Facility
The Company has an amended and restated  senior secured credit facility dated as
of March 17, 2006,  which allows  borrowings of up to $50.0 million.  Borrowings
under this senior secured credit facility accrue interest at the Eurodollar rate
or the Prime rate,  plus an  applicable  margin.  As of June 30, 2006,  the base
interest rate for borrowings  under this credit facility was 8.5%. There were no
borrowings  outstanding  under this  credit  facility as of June 30,  2006.  The
senior  secured credit  facility has certain  financial  covenants,  including a
maximum debt coverage ratio, potential restrictions on borrowings, and potential
restrictions on additional stock  repurchases.  As of June 30, 2006, the Company
was in  compliance  with all such debt  covenants.  The  senior  secured  credit
facility matures on March 31, 2009.

Stock Repurchase Program
The Company purchased 498,000 shares of its common stock for $19.3 million at an
average price of $38.83 per share during 2006 compared to 1.2 million  shares of
its  common  stock for $41.1  million  at an  average  price of $34.92 per share
during 2005,  and 3.0 million  shares for $94.2  million at an average  price of
$31.56  per  share in  2004.  The  Company  used  cash  from  operations,  stock
issuances,  and the  issuance  of the  Convertible  Notes  and  Senior  Notes to
repurchase shares.

As of June 30, 2006,  the Company had 327,000  shares  available for  repurchase
under its stock repurchase  program.  In August 2006, the Company announced that
its  Board  of  Directors  authorized  the  additional  repurchase  of  up to an
aggregate 1.0 million shares of the Company's common stock.

Acquisitions
In January 2005, the Company  completed the acquisition of certain of the assets
of MCM, a privately held  advertising  and practice  management  company serving
cosmetic surgeons  throughout the United States.  The purchase price,  excluding
fees and expenses, amounted to $33.0 million and was paid in cash on the closing
date. In addition, the Company paid $10.7 million of contingent payments in 2006
and additional contingent payments of up to $45.3 million may be paid if certain
performance targets,  including increasing levels of revenues and earnings,  are
achieved over the next two calendar years.

In November 2004, the Company completed the acquisition of certain of the assets
of Bargain,  a privately held provider of premier pricing services for homes and
vehicles.  The total purchase  price,  which  excluded  fees,  amounted to $53.7
million and included  $14.6 million in contingent  payments paid during 2006. No
further contingent payments are required under the purchase agreement.

                                       23
<PAGE>

In April 2004,  the Company  completed the  acquisition of all of the net assets
and outstanding  capital stock of Lavalife,  a leading provider of web-based and
phone-based  interactive personals services.  The purchase price, excluding fees
and expenses,  was Cdn$152.5 million, or $116.3 million. In connection with this
acquisition,  the Company  received $9.1 million  related to the issuance of the
Company's restricted common stock to Lavalife's senior management.

Other
The Company did not have any material commitments for capital expenditures as of
June 30, 2006. The Company expects to incur capital expenditures of $8.0 million
in 2007.  In addition,  the Company  acquired  certain  assets  during the first
quarter of fiscal 2007 for  approximately  $10.0 million in order to further its
internet strategy.

RECONCILIATION OF NON-GAAP MEASURES

Management  believes that revenues  before  deferral and marketing  costs before
deferral are  important  measures of liquidity  and are  significant  factors in
understanding the Company's operating cash flow trends. These measures are not a
substitute  for or superior to revenues and  marketing  expenses  determined  in
accordance  with  generally  accepted  accounting  principles,  or  GAAP.  These
non-GAAP  measures  are  used by  management  and  the  Company's  investors  to
understand the liquidity  trends of the Company's  marketing  margins related to
current  period  operations  which are reflected  within the operating cash flow
section of the cash flow  statement.  GAAP revenues and  marketing  expenses are
important  measures used to understand  the marketing  margins earned during the
period in the income  statement.  However,  in order to understand the Company's
operating  cash flow, it is important to understand  the primary  current period
drivers of that cash flow. Two of the primary indicators of operating  liquidity
for the period are revenues before deferral and marketing costs before deferral.
Revenues  before  deferral  are  revenues  before the  application  of the Staff
Accounting  Bulletin 104,  "Revenue  Recognition"  ("SAB 104") and represent the
revenues  billed  during the  current  reporting  period less an  allowance  for
membership  cancellations.  That is,  revenues  before  deferral for a reporting
period include  membership  fees received in the current  reporting  period that
will be  recorded  as GAAP  revenues  in future  reporting  periods  and exclude
membership  fees received in prior  reporting  periods that are recorded as GAAP
revenues in the current  reporting  period.  Marketing costs before deferral are
marketing costs before the application of SAB 104 and the American  Institute of
Certified  Public  Accountants   Statement  of  Position  93-7,   "Reporting  on
Advertising  Costs" ("SOP 93-7") and represent  marketing  costs paid or accrued
during the current  reporting  period.  That is, marketing costs before deferral
for a reporting  period  include costs paid or accrued in the current  reporting
period  that will be  recorded as GAAP  marketing  expenses in future  reporting
periods  and  exclude  marketing  expenses  paid or accrued  in prior  reporting
periods that are recorded as GAAP  marketing  expenses in the current  reporting
period.  Neither  revenues  before  deferral nor marketing costs before deferral
exclude charges or liabilities that will require future cash settlement.

Revenues before deferral are calculated as follows:

                                             For the years ended June 30,
                                        -------------------------------------
(Dollars amounts in millions)               2006         2005         2004
                                        -----------  -----------  -----------
Revenues                                $    658.9   $    579.8   $    488.7
Change in deferred revenues                  (23.6)       (34.9)       (32.3)
                                        -----------  -----------  -----------
Revenues before deferral                $    635.3   $    544.9   $    456.4
                                        ===========  ===========  ===========

Marketing costs before deferral are calculated as follows:

                                             For the years ended June 30,
                                        ------------------------------------
(Dollars amounts in millions)               2006        2005         2004
                                        -----------  -----------  ----------
Marketing expenses                      $    313.2   $    286.4   $   255.8
Change in deferred marketing costs           (13.0)       (13.4)      (25.5)
                                        -----------  -----------  ----------
Marketing costs before deferral         $    300.2   $    273.0   $   230.3
                                        ===========  ===========  ==========


EBITDA is calculated as net income excluding interest and other expense,  taxes,
depreciation,  and amortization.  Adjusted EBITDA is calculated as EBITDA before
the deferral of revenues and the deferral of marketing costs.

                                       24
<PAGE>

EBITDA and Adjusted EBITDA are used by the Company's  management to evaluate the
overall  performance  of its business and to measure that  performance  compared
with internal budgets. Additionally, Adjusted EBITDA is the primary measure used
by management to allocate capital and other resources to its operating  segments
and assess  the  operating  performance  of those  segments  (See Note 17 to the
consolidated financial statements in Item 8 of this report).  Adjusted EBITDA is
also one of the measures  used to  determine  compensation  under the  Company's
management incentive plans.

Adjusted  EBITDA is useful to  management  and  investors  because  it  provides
insight  into the current  period cash  operating  results.  Adjusted  EBITDA is
reconciled  to net cash  provided by  operating  activities  because the Company
believes  that  it is the  most  directly  comparable  GAAP  liquidity  measure.
Adjusted  EBITDA  is  also  used  by the  Company's  management  as the  primary
performance  measure of the business both on an overall company basis as well as
for its operating segments.  Adjusted EBITDA is reconciled to net income because
the  Company  believes  it is the  most  directly  comparable  GAAP  performance
measure.

EBITDA is useful to management  and investors  because it eliminates the effects
of interest and other expense,  income taxes,  non-cash depreciation of tangible
assets,  and non-cash  amortization of intangible assets and is calculated using
revenues and marketing expenses.  EBITDA is reconciled to net income because the
Company believes that it is the most directly comparable GAAP measure.

The usefulness of Adjusted  EBITDA and EBITDA is limited as compared to net cash
provided  by  operating  activities  or net income in that  Adjusted  EBITDA and
EBITDA do not reflect the periodic  amortization of certain capitalized tangible
and intangible assets used in generating  revenues in the Company's  businesses,
they do not  reflect net income  earned for GAAP  reporting  purposes,  and they
exclude the effects of interest  and taxes.  Additionally,  Adjusted  EBITDA and
EBITDA exclude the impact of working capital changes.

Adjusted EBITDA and EBITDA should not be considered a substitute for or superior
to, operating income, net income, net cash from operating  activities,  or other
measures of financial  performance  and liquidity  determined in accordance with
GAAP.

The following  table  reconciles  net cash  provided by operating  activities to
Adjusted EBITDA:

<TABLE>
<CAPTION>
                                                           For the years ended June 30,
                                                       --------------------------------------
(Dollars amounts in millions)                              2006         2005         2004
                                                       ------------ ------------ ------------
<S>                                                         <C>          <C>          <C>
Net cash provided by operating activities                   $ 37.7       $ 32.3       $ 47.9
Changes in assets and liabilities (use of cash)               10.0         (2.9)         4.1
Interest and other expense, net (to be paid in cash)          15.6         16.7          5.6
Taxes                                                         19.4         10.7          1.9
Stock compensation expense                                    (4.5)           -            -
Other                                                          1.0          0.4         (0.9)
                                                       ------------ ------------ ------------
Adjusted EBITDA                                             $ 79.2       $ 57.2       $ 58.6
                                                       ============ ============ ============
</TABLE>


                                       25
<PAGE>


The following tables reconcile EBITDA and adjusted EBITDA to net income:
<TABLE>
<CAPTION>

                                                                                    For the year ended June 30, 2006
                                                                      -----------------------------------------------------------
(Dollars amounts in millions)                                          Marketing              Management
                                                                        Services   Personals   Services    Corporate     Total
                                                                      ----------- ----------- ----------- ----------- -----------
<S>                                                                   <C>         <C>         <C>         <C>         <C>
Net income                                                                                                            $     32.7
Interest and other expense, net (1)                                                                                         16.7
Provision for income taxes (1)                                                                                              15.9
                                                                                                                      -----------
Operating income (expense)                                            $     88.0  $      1.2  $      5.3  $    (29.2) $     65.3
Depreciation and amortization                                               11.9         9.8         1.6         1.2        24.5
                                                                      ----------- ----------- ----------- ----------- -----------
EBITDA                                                                      99.9        11.0         6.9       (28.0)       89.8
Change in deferred revenues                                                (24.0)       (0.2)        0.6           -       (23.6)
Change in deferred marketing costs                                          13.0           -           -           -        13.0
                                                                      ----------- ----------- ----------- ----------- -----------
Adjusted EBITDA                                                       $     88.9  $     10.8  $      7.5  $    (28.0) $     79.2
                                                                      =========== =========== =========== =========== ===========


                                                                                    For the year ended June 30, 2005
                                                                      -----------------------------------------------------------
(Dollars amounts in millions)                                          Marketing              Management
                                                                        Services   Personals   Services    Corporate     Total
                                                                      ----------- ----------- ----------- ----------- -----------
Net income                                                                                                            $     25.5
Interest and other expense, net (1)                                                                                         18.2
Provision for income taxes (1)                                                                                              13.4
                                                                                                                      -----------
Operating income (expense)                                            $     85.5  $     (3.1) $      1.9  $    (27.2) $     57.1
Depreciation and amortization                                               11.0         9.3         0.8         0.5        21.6
                                                                      ----------- ----------- ----------- ----------- -----------
EBITDA                                                                      96.5         6.2         2.7       (26.7)       78.7
Change in deferred revenues                                                (35.9)        0.1         0.9           -       (34.9)
Change in deferred marketing costs                                          13.4           -           -           -        13.4
                                                                      ----------- ----------- ----------- ----------- -----------
Adjusted EBITDA                                                       $     74.0  $      6.3  $      3.6  $    (26.7) $     57.2
                                                                      =========== =========== =========== =========== ===========


                                                                                    For the year ended June 30, 2004
                                                                      ----------------------------------------------------------
(Dollars amounts in millions)                                          Marketing              Management
                                                                        Services   Personals   Services    Corporate     Total
                                                                      ----------- ----------- ----------- ----------- -----------
Net income                                                                                                            $     28.0
Interest and other expense, net (1)                                                                                          6.3
Provision for income taxes (1)                                                                                              18.6
                                                                                                                      -----------
Operating income (expense)                                            $     76.6  $      0.3  $        -  $    (24.0) $     52.9
Depreciation and amortization                                               10.1         2.4           -           -        12.5
                                                                      ----------- ----------- ----------- ----------- -----------
EBITDA                                                                      86.7         2.7           -       (24.0)       65.4
Change in deferred revenues                                                (31.7)       (0.6)          -           -       (32.3)
Change in deferred marketing costs                                          25.5           -           -           -        25.5
                                                                      ----------- ----------- ----------- ----------- -----------
Adjusted EBITDA                                                       $     80.5  $      2.1  $        -  $    (24.0) $     58.6
                                                                      =========== =========== =========== =========== ===========

</TABLE>

(1) Management  does not allocate  interest and other  expense,  net nor does it
allocate provision for income taxes to the individual segments.

Free cash flow represents net cash provided by operating activities less capital
expenditures. Free cash flow is important because it represents the cash that is
available  to   shareholders   from  operating   activities   less   capitalized
expenditures needed to continue funding these activities. Free cash flow is used
by the Company to pursue  opportunities that enhance  shareholder value, such as
make  acquisitions,  reduce debt, and develop new products.  The following table
reconciles operating cash flow to free cash flow:

<TABLE>
<CAPTION>
                                                          For the years ended June 30,
                                                    ----------------------------------------
(Dollars amounts in millions)                           2006          2005          2004
                                                    ------------  ------------  ------------
<S>                                                 <C>           <C>           <C>
Net cash provided by operating activities           $      37.7   $      32.3   $      47.9
Capital expenditures                                      (17.8)        (11.0)         (7.1)
                                                    ------------  ------------  ------------
Free cash flow                                      $      19.9   $      21.3   $      40.8
                                                    ============  ============  ============
</TABLE>

                                       26
<PAGE>

COMMITMENTS

The Company's  significant  contractual  obligations as of June 30, 2006 and the
anticipated payments under these obligations are as follows:

<TABLE>
<CAPTION>
                                                                   Payments Due by Period
                                 --------------------------------------------------------------------------------------------
(Dollars amounts in millions)          Total        Less than 1 year     1 - 3 years        3 - 5 years       After 5 years
                                 ----------------   ----------------   ----------------   ----------------   ----------------
<S>                              <C>                <C>                <C>                <C>                <C>
Operating leases                 $          57.7    $           9.4    $          17.9    $          13.2    $          17.2
Capital leases                               1.3                0.8                0.5                  -                  -
Long-term debt                             240.0                  -                  -               90.0              150.0
Purchase obligations                        10.7               10.7                  -                  -                  -
Other(1)                                   182.6               29.5               72.3               35.5               45.3
                                 ----------------   ----------------   ----------------   ----------------   ----------------
Total payments due               $         492.3    $          50.4    $          90.7    $         138.7    $         212.5
                                 ----------------   ----------------   ----------------   ----------------   ----------------
</TABLE>

(1) Included  interest  payments on long-term  debt,  pension  obligations,  and
    expected contingent payments related to the MCM acquisition.

The  Company  operates  in leased  facilities.  Management  expects  that leases
currently  in effect will be renewed or  replaced  by other  leases of a similar
nature  and  terms.  For  additional  information,  see  Notes  7 and  8 to  the
consolidated financial statements in Item 8 of this report.

CRITICAL ACCOUNTING POLICIES

Critical  accounting  policies  are those  policies  that are  important  to the
Company's  financial  condition and results of operations and involve subjective
or complex judgments on the part of management, often as a result of the need to
make estimates.  The following areas require the use of judgments and estimates:
revenue recognition,  deferred marketing costs, allowances for notes receivable,
valuation  of goodwill,  estimation  of  remaining  useful  lives of  intangible
assets,  valuation  of deferred  tax assets and tax  reserves,  and  stock-based
compensation.  Estimates  in  each  of  these  areas  are  based  on  historical
experience and various  assumptions  that management  believes are  appropriate.
Actual results may differ from these  estimates.  Management  believes the areas
listed  above  represent  the  critical  accounting  policies  of the Company as
contemplated by Financial Reporting Release No. 60, "Cautionary Advice Regarding
Disclosure  about  Critical  Accounting  Policies."  For a  summary  of all  the
Company's  significant  accounting  policies,  see  Note 2 to  the  consolidated
financial statements in Item 8 of this report.

Revenue Recognition
The Marketing  Services segment revenues are derived  principally from recurring
fees, which are billed to the member on either a monthly or annual basis. In the
case of annually billed membership fees, the Company receives full payment at or
near the beginning of the membership  period.  The revenues are billed primarily
through credit and debit cards and are recognized when earned.  Revenues derived
from one time fees are  recognized  when the service is  performed.  Members may
cancel their memberships at any time. Members enrolled in an annual payment plan
who cancel their  memberships  receive a pro rata refund of the remaining unused
portion of their membership fees. In accordance with SAB 104,  revenues,  net of
estimated cancellations, are deferred and recognized as revenues when membership
refund  privileges  expire.  Management  establishes  and regularly  updates the
allowance  for  membership  cancellations.   In  estimating  the  allowance  for
membership   cancellations,    management   analyzes   historical   cancellation
experience,  current  economic  trends,  and changes in customer  demand for the
Company's  products and services.  Actual membership refunds are charged against
the  allowance  for  membership  cancellations  on a  current  basis.  If actual
cancellations  differ  from the  estimate,  the results of  operations  would be
impacted.

The Personals segment employs a transactional  business model in which users buy
non-refundable  credits  up-front and spend those credits only when they want to
interact  with other  customers.  Personals  revenues  are  recognized  when the
services are used.  Management Services revenues are recognized when the medical
procedures performed by the healthcare professionals are complete.

                                       27

<PAGE>

Marketing Expenses
Marketing  expenses  are  comprised of  advertising  costs,  non-refundable  and
refundable  royalty  payments,  telemarketing  costs,  and  direct  mail  costs.
Advertising costs and  non-refundable  royalty  payments,  which include fee per
offer, fee per sale, and fee per impression marketing arrangements, are expensed
when  incurred.  Refundable  royalty  payments are charged to  operations as the
associated  revenues are  recognized in accordance  with SAB 104.  Telemarketing
costs,  including  costs for  third-party  vendors  to solicit  members  for the
Company,  and direct mail costs,  including costs of printing and mailing direct
mail pieces,  are deferred direct response  advertising costs and are charged to
marketing  expenses over the expected  future  benefit  period in accordance SOP
93-7.

Deferred  marketing  costs to  enroll a new  member  are less  than the  related
estimated  total net  revenues.  However,  if deferred  marketing  costs were to
exceed the related  estimated  total net revenues,  management  would adjust the
deferred marketing costs for that impairment.

Allowance for Notes  Receivable
The  Management  Service  segment may  finance the cost of the medical  services
received  by the  patient  through  the use of  notes  receivable.  These  notes
receivable  generally  have a life of 21 to 48 months and bear interest at rates
ranging from 6% to 18%. The Company  estimates an allowance for notes receivable
based on an aging analysis, customer credit evaluations, collection history, and
any specific, known troubled accounts. As of June 30, 2006 and 2005, the Company
recorded  $3.8  million  and $0.8  million,  respectively,  for  allowances  for
uncollectible  notes. If actual bad debt differs from the estimate,  the results
of operations would be impacted.

Valuation of Goodwill
The Company  reviews the carrying value of its goodwill in accordance  with SFAS
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Management reviews
goodwill for impairment by comparing  their carrying values to their fair values
at  least  annually  or  more  frequently  if  circumstances  indicate  possible
impairment.  When determining fair value,  management uses various  assumptions,
including  projections  of  future  cash  flows.  A  change  in  the  underlying
assumptions  could cause fair value to be less than  carrying  value and require
the Company to record a  corresponding  charge  against  operations.  Management
performs its impairment testing in the first fiscal quarter of each year.

Intangible Assets
Management reassesses the estimated remaining useful lives of its definite-lived
intangible  assets in accordance with SFAS 142.  Intangible  assets  principally
include  member  and  customer  relationships  and  trade  names  that  arose in
connection with business  acquisitions.  Acquired intangible assets are recorded
at cost  and  are  generally  amortized  on a  straight-line  basis  over  their
estimated useful lives. The weighted average amortization periods for membership
and client relationships,  trade names, other amortizable intangible assets, and
total  amortizable  intangible  assets held at June 30, 2006,  were 10 years, 15
years,  3  years,  and 13  years,  respectively.  If there  was a change  in the
estimated  useful  life of  definite  lived  intangible  assets,  the results of
operations would be impacted.

Income Taxes
The Company  accounts  for income  taxes under the  provisions  of SFAS No. 109,
"Accounting  for  Income  Taxes."   Deferred  tax  assets  and  liabilities  are
recognized for future tax consequences  attributable to differences  between the
financial  statement  carrying  amounts  of  assets  and  liabilities  and their
respective  tax bases.  Management  assesses the  realizability  of deferred tax
assets considering  various  assumptions,  including estimates of future taxable
income and ongoing tax  strategies.  In  addition,  management  establishes  and
evaluates  tax reserves for uncertain  tax  positions  based on the  information
available at the time and makes  certain  assumptions  and  determinations  with
respect  to the  application  of  existing  tax law.  A  change  in any of these
underling assumptions could impact the results of operations.

Stock-Based Compensation
The Company adopted SFAS 123R in July 2005. SFAS 123R established the accounting
for  stock-based  compensation  and requires  companies to measure and recognize
compensation  expense for all share-based  payments at fair value.  Accordingly,
stock-based  compensation cost is measured at grant date based on the fair value
of the award and is recognized as expense over the requisite service period. The
Company adopted the modified prospective application method as permitted by SFAS
123R.  This method  requires the Company to apply the provisions of SFAS 123R to
new awards and to any awards that were unvested as of the adoption date and does
not require the Company to restate prior periods. The Company estimates the fair
value of stock options at the grant date using the Black-Scholes  option pricing
model.  Similar to other option pricing models, this model requires the input of
highly  subjective  assumptions,   including  the  expected  term  and  expected
volatility. In addition, the Company is required to estimate forfeiture rates at
the time of grant. Actual results,  and future changes in estimates,  may differ
substantially  from our current  estimates.  For  information  on the  Company's
stock-based compensation plans and on the assumptions used to value its options,
refer to Note 15 of Item 8 of this report.



                                       28
<PAGE>

The Company  recorded  pre-tax charges of $4.5 million ($2.8 million net of tax)
for 2006 in the  consolidated  statements of operations for  compensation  costs
related to our stock-based plans. As of June 30, 2006, unrecognized compensation
expense  related to unvested  options was $7.2 million to be  recognized  over a
weighted average period of less than 2.5 years.

NEW ACCOUNTING PRONOUNCEMENTS
See Note 2 to the consolidated financial statements in Item 8 of this report for
a description of the effect of recently issued accounting pronouncements.

Item 7A.  Quantitative and Qualitative Disclosures about Market Risk
          ----------------------------------------------------------

Interest Rate
The Company has $90.0 million  aggregate  principal  amount of 5.5%  Convertible
Notes due 2010 and $150.0  million  aggregate  principal  amount of 9.25% Senior
Notes due 2014. The Convertible  Notes and the Senior Notes pay interest in cash
semi-annually  in arrears on April 1 and  October 1. The fair value of the fixed
interest  instruments is affected by changes in interest rates and, with respect
to  the  Convertible  Notes,  by  changes  in  the  Company's  stock  price  and
volatility.  The Company does not currently hedge interest rates with respect to
its outstanding debt. As of June 30, 2006, the carrying value of the Convertible
Notes and the Senior Notes was $90.0 million and $148.0  million,  respectively,
and the  fair  value  of the  notes  was  $108.9  million  and  $155.2  million,
respectively.  Interest payable on the Convertible Notes and the Senior Notes is
expected to be $18.8 million in each of the next four years and $16.4 million in
2011 assuming none of the Convertible Notes are converted into equity.

Holders of the  Convertible  Notes may  convert  their  notes into shares of the
Company's  common stock at any time prior to maturity,  at a conversion price of
approximately  $40.37  per  share,  subject  to  certain  adjustments,  which is
equivalent  to a  conversion  rate of  approximately  24.77  shares  per  $1,000
principal  amount of the Convertible  Notes.  Such conversion  would result in a
charge against  earnings for the  unamortized  portion of  capitalized  issuance
costs relating to these notes,  which  aggregated $2.1 million at June 30, 2006.
Such charge would have no effect on the cash flows of the Company.

Foreign Currency
The Company conducts  business in certain foreign markets,  primarily in Canada.
The Company's  primary  exposure to foreign currency risk relates to investments
in foreign  subsidiaries that transact  business in functional  currencies other
than the U.S.  dollar,  primarily the Canadian  dollar.  The economic  impact of
currency  exchange rate  movements on the Company is often linked to variability
in real growth,  inflation,  interest  rates,  governmental  actions,  and other
factors.  These  changes,  if  material,  could  cause the Company to adjust its
financing  and  operating   strategies.   As  currency  exchange  rates  change,
translation of the income statements of the Company's  international  businesses
into U.S. dollars affects year-to-year comparisons of operating results.

The Company uses purchase option and forward  contracts to minimize its exposure
to changes in future cash flows caused by movements in currency  exchange  rates
between  the U.S.  dollar  and the  Canadian  dollar.  However,  there can be no
assurance  that  the  Company's   foreign  currency   hedging   activities  will
substantially  offset the impact of fluctuations  in currency  exchange rates on
its results of  operations  and  financial  position.  The Company  does not use
derivatives for speculative purposes.

Fair Value of Investments
The Company does not have  material  exposure to market risk with respect to its
short-term investments since these investments are highly liquid in nature.

Item 8.  Financial Statements and Supplementary Data
         -------------------------------------------

The Company's  financial  statements and related notes and report of independent
registered  public  accounting firm are included  following Part IV beginning on
page F-1 and identified in the index in Item 15(a).

Item 9.  Changes in and Disagreements with Accountants on Accounting
         ------------------------------------------------------------
         and Financial Disclosure
         ------------------------
None.


                                       29
<PAGE>

Item 9A.  Controls and Procedures

Evaluation of disclosure  controls and procedures.  The Chief Executive  Officer
and Chief  Financial  Officer  evaluated  the  effectiveness  of the  design and
operation of the Company's  disclosure controls and procedures (as defined under
Rules  13a-15(e) and 15d-15(e) of the Securities and Exchange Act of 1934) as of
the end of the  period  covered  by this  report  and  have  concluded  that the
Company's  disclosure  controls and procedures  were effective at the reasonable
assurance level. The Company's  disclosure  controls and procedures are designed
to ensure that material information relating to the Company and its consolidated
subsidiaries  that is required to be disclosed in its reports under the Exchange
Act is  accumulated,  communicated  to the  Chief  Executive  Officer  and Chief
Financial  Officer and disclosed  appropriately  in its timely reports under the
Exchange Act.

Because a  cost-effective  control  system,  no matter  how well  conceived  and
operated,  can  provide  only  reasonable,  not  absolute,  assurance  that  the
objectives of the control  system are met,  misstatements  due to error or fraud
may occur and not be detected.  In addition,  projections  of any  evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate  because of changes in  conditions  or that the degree of  compliance
with the policies or procedures may deteriorate.

Management's Report on Internal Control over Financial Reporting.
The  Company's  management  is  responsible  for  establishing  and  maintaining
adequate internal control over financial  reporting,  as defined in Exchange Act
Rule 13a-15(f).  Under the supervision and with the  participation  of the Chief
Executive  Officer  and  Chief  Financial  Officer,   management  evaluated  the
effectiveness of the Company's  internal control over financial  reporting as of
June 30, 2006.

Management  used the  criteria  set  forth in  "Internal  Control  -  Integrated
Framework"  of  the  Committee  of  Sponsoring  Organizations  of  the  Treadway
Commission  in  making  its  assessment.  Based  on those  criteria,  management
concluded  that the  Company's  internal  control over  financial  reporting was
effective.

PricewaterhouseCoopers  LLP, the independent  registered  public accounting firm
that  audited  the  Company's  financial  statements  included in Item 8 of this
report,  has also audited  management's  assessment  of the  Company's  internal
control over financial  reporting as of June 30, 2006 and the  effectiveness  of
the Company's  internal  control over  financial  reporting as of June 30, 2006.
Their report is included in Item 8.

Changes in internal control over financial reporting.
During the  fourth  quarter  of 2006,  there  were no  changes in the  Company's
internal control over financial reporting that have materially affected,  or are
reasonably  likely to materially  affect,  the Company's  internal  control over
financial reporting.

Item 9B.  Other Information
          -----------------
None.

                                    Part III

Item 10.  Directors and Executive Officers of the Registrant
          --------------------------------------------------

The  information  in the  Company's  Proxy  Statement  under the section  titled
"Election of Directors" is incorporated herein by reference.

Item 11.  Executive Compensation
          ----------------------

The  information  in the  Company's  Proxy  Statement  under the section  titled
"Executive Compensation" is incorporated herein by reference.

Item 12.  Security Ownership of Certain Beneficial Owners and Management
          --------------------------------------------------------------
          and Related Stockholder Matters
          -------------------------------

The  information  in the  Company's  Proxy  Statement  under the section  titled
"Security Ownership of Certain Beneficial Owners and Management" is incorporated
herein by reference.

                                       30
<PAGE>

Item 13.  Certain Relationships and Related Transactions
          ----------------------------------------------

The  information  in the  Company's  Proxy  Statement  under the section  titled
"Certain  Relationships  and Related  Transactions"  is  incorporated  herein by
reference.

Item 14.  Principal Accountant Fees and Services
          --------------------------------------

The  information  in the  Company's  Proxy  Statement  under the section  titled
"Ratification  of Selection of Independent  Auditors" is incorporated  herein by
reference.

                                     Part IV

Item 15.  Exhibits and Financial Statement Schedules
          ------------------------------------------

<TABLE>
<CAPTION>
(a) Index to Financial Statements and Financial Statement Schedules                                              Page
-------------------------------------------------------------------                                              ----

<S>                                                                                                              <C>
     (1) Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm                       F-1
         Consolidated Balance Sheets as of June 30, 2006 and 2005                                                  F-3
         Consolidated Statements of Operations for the years ended June 30, 2006, 2005, and 2004                   F-4
         Consolidated Statements of Shareholders' Equity (Deficit) for the years ended June 30,
           2006, 2005, and 2004                                                                                    F-5
         Consolidated Statements of Cash Flows for the years ended June 30, 2006, 2005, and 2004                   F-6
         Notes to Consolidated Financial Statements                                                                F-7

     (2) The following Financial Statement Schedule is included:
         Schedule II - Valuation and Qualifying Accounts - Years ended June 30, 2006, 2005, and 2004               F-30

     All  other  schedules  for  which  provision  is  made  in  the  applicable
     accounting  regulations of the  Securities and Exchange  Commission are not
     required under the related  instructions or are  inapplicable and therefore
     have been omitted.

     (3) Exhibits:
         Exhibits  filed as part of this report are listed in the Exhibit  Index
         immediately following the signatures in this report.
</TABLE>

                                       31
<PAGE>

                              VERTRUE INCORPORATED

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.


                                VERTRUE INCORPORATED
                                    (Registrant)


                                By:       /s/ GARY A. JOHNSON
                                           ---------------------------------
                                          Gary A. Johnson, President, Chief
                                          Executive Officer and Director


                                          Date: September 12, 2006


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                           Title                                                        Date
---------                           -----                                                        ----
<S>                                 <C>                                                          <C>
By: /s/ Gary A. Johnson             President, Chief Executive Officer and Director              September 12, 2006
   ---------------------------
Gary A. Johnson


By: /s/ James B. Duffy              Executive Vice President, Chief Financial Officer            September 12, 2006
   ---------------------------      and Chief Operating Officer
James B. Duffy


By: /s/ Alec L. Ellison             Director                                                     September 12, 2006
   ---------------------------
Alec L. Ellison


By: /s/ Joseph E. Heid              Director                                                     September 12, 2006
   ---------------------------
Joseph E. Heid


By: /s/ Robert Kamerschen           Director                                                     September 12, 2006
   ---------------------------
Robert Kamerschen


By: /s/ Michael T. McClorey         Director                                                     September 12, 2006
   ---------------------------
Michael T. McClorey


By: /s/ Edward M. Stern             Director                                                     September 12, 2006
   ---------------------------
Edward M. Stern


By: /s/ Marc S. Tesler              Director                                                     September 12, 2006
   ---------------------------
Marc S. Tesler
</TABLE>



                                       32
<PAGE>

                                    Exhibits
                                    --------

No.       Description
---       -----------

*3.1     Restated  Certificate  of  Incorporation  of the  Registrant  (filed as
         Exhibit  3.3 to the  Company's  Registration  Statement  on  Form  S-1,
         Registration No. 333-10541,  filed on September 6, 1996; Certificate of
         Amendment of Restated  Certificate of  Incorporation  of the Registrant
         (filed as Exhibit 3.1 to the Company's  Quarterly  Report on Form 10-Q,
         File No. 000-21527, filed on February 9, 2005).

*3.2     Restated  By-laws of the Registrant as amended (filed as Exhibit 3.3 to
         the  Company's  Registration  Statement on Form S-1,  Registration  No.
         333-10541, filed on August 21, 1996).

*4.1     Indenture  dated as of September  30, 2003 between the  Registrant  and
         Deutsche  Bank Trust  Company  Americas,  Trustee  relating to the 5.5%
         Convertible Senior Subordinated Notes due 2010 (filed as exhibit 4.1 to
         the Company's Quarterly report on Form 10-Q, File No. 000-21527,  filed
         on November 13, 2003).

*4.2     Registration  Rights Agreement dated as of September 30, 2003 among the
         Registrant and Lehman Brothers Inc. and CIBC World Markets Corp. (filed
         as exhibit 4.2 to the Company's Quarterly report on Form 10-Q, File No.
         000-21527, filed on November 13, 2003).

*4.3     Indenture dated as of April 13, 2004 between the Registrant and each of
         the Guarantors party thereto and LaSalle Bank National Association,  as
         Trustee relating to the 9.25% Senior Notes due 2014, including the form
         of notes (filed as exhibit 4.1 to the Company's  Registration Statement
         on Form S-4, Registration No. 333-115500, filed on May 14, 2004).

*4.4     First  Supplemental  Indenture dated as of April 28, 2006 among Bargain
         Network,  Inc.,  Lavalife  Inc.,  My  Choice  Medical  Holdings,  Inc.,
         MemberWorks  Canada  Corporation,  the current  Guarantors of the 9.25%
         Senior  Notes  due 2014,  the  Registrant  and  LaSalle  Bank  National
         Association as trustee.  (filed as exhibit 4.1 to the Company's Current
         report on Form 8-K, Registration No. 000-21527, filed on May 3, 2006).

*10.1^   Amended Employee  Incentive Stock Option Plan of the Registrant  (filed
         as Exhibit 10.1 to the  Company's  Registration  Statement on Form S-1,
         Registration No. 333-10541, filed on September 6, 1996).

*10.2^   1995 Non-Employee Directors' Stock Option Plan of the Registrant (filed
         as Exhibit 10.3 to the  Company's  Registration  Statement on Form S-1,
         Registration No. 333-10541, filed on August 21, 1996).

*10.3^   1996 Stock Option Plan of the Registrant  (filed as Exhibit 10.4 to the
         Company's   Registration   Statement  on  Form  S-1,  Registration  No.
         333-10541, filed on September 27, 1996).

*10.4^   1996 Employee Stock  Purchase Plan of the Registrant  (filed as Exhibit
         10.5 to the Company's  Registration Statement on Form S-1, Registration
         No. 333-10541, filed on September 27, 1996).

*10.5^   Amended and Restated 401(k) Profit Sharing Plan of the Registrant dated
         July 1, 2000 (filed as Exhibit 10.6 to the  Company's  Annual Report on
         Form 10-K, File No. 000-21527, filed on September 6, 2001).

*10.6    Second Amended and Restated Credit Agreement dated March 17, 2006 among
         the Registrant,  the Lenders Parties Hereto,  and LaSalle Bank National
         Association, as Agent (filed as exhibit 10.1 to the Company's Quarterly
         report on Form 10-Q, File No. 000-21527, filed on May 10, 2006).

*10.7    Master Transaction  Agreement dated March 3, 2004 among the Registrant,
         Lavalife Inc.,  Lavalife's  Investors and Lavalife's  Senior Management
         (filed as exhibit  99.2 to the  Company's  Current  report on Form 8-K,
         File No. 000-21527, filed on April 5, 2004).

*10.8^   Long-term  Incentive  Plan of the  Registrant  (filed as Annex C to the
         Company's   Definitive  Proxy  Statement  on  Schedule  14A,  File  No.
         000-21527, filed on October 28, 2004).

*10.9^   First Amendment to the Vertrue  Incorporated  Long-term  Incentive Plan
         (filed as Annex A to the  Company's  Proxy  Statement on Schedule  14A,
         File No. 000-21527, filed on October 17, 2005).

*10.10^   Vertrue Incorporated 2005 Equity Incentive Plan (filed as Annex B to
          the Company's Proxy Statement on Schedule 14A, File No. 000-21527,
          filed on October 17, 2005).

*10.11   Arena  Tower  II  Lease   Agreement  by  and  between  Arena  Tower  II
         Corporation  and the  Registrant  dated  February 12, 1996,  as amended
         (filed as Exhibit 10.24 to the Company's Registration Statement on Form
         S-1, Registration No. 333-10541, filed on September 6, 1996).

                                       33
<PAGE>

*10.12   Second Amendment to Lease Agreement  between Arena Tower II Corporation
         and the  Registrant  dated  January 24, 1997 (filed as Exhibit 10.24 to
         the Company's Annual Report on Form 10-K, File No. 000-21527,  filed on
         September 29, 1997).

  *10.13  Third Amendment to Lease Agreement  between Arena Tower II Corporation
          and the Registrant  dated July 23, 1997 (filed as Exhibit 10.25 to the
          Company's  Annual Report on Form 10-K,  File No.  000-21527,  filed on
          September 29, 1997).

*14.1    Code of Conduct of the Registrant (filed as Exhibit 14 to the Company's
         Quarterly  report on Form 10-Q,  File No.  000-21527,  filed on May 14,
         2004).

21.1     Subsidiaries of the Registrant.

23.1     Consent of Independent Registered Public Accounting Firm.

31.1     Rule 13a-14(a)/15d-14(a) CEO Certification.

31.2     Rule 13a-14(a)/15d-14(a) CFO Certification.

32.1     CEO Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of
         2002.

32.2     CFO Certification  pursuant to Section 906 of the Sarbanes-Oxley Act of
         2002.

---------------------------------------------------

* Previously filed and incorporated  herein by reference.
^ Management contract or compensatory plan.


                                       34
<PAGE>

             Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Vertrue Incorporated:

We have completed integrated audits of Vertrue Incorporated's 2006 and 2005
consolidated financial statements and of its internal control over financial
reporting as of June 30, 2006, and an audit of its 2004 consolidated financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are
presented below.

Consolidated financial statements and financial statement schedule
------------------------------------------------------------------

In our opinion, the consolidated financial statements in the index appearing
under Item 15(a)(1) present fairly, in all material respects, the financial
position of Vertrue Incorporated and its subsidiaries at June 30, 2006 and 2005,
and the results of their operations and their cash flows for each of the three
years in the period ended June 30, 2006 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item
15(a)(2) presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

As discussed in Notes 2 and 15 to the consolidated financial statements, the
Company changed the manner in which it accounts for share-based compensation in
fiscal 2006.

Internal control over financial reporting
-----------------------------------------

Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of
June 30, 2006 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of June 30,
2006, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.

                                       F-1
<PAGE>

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.


PricewaterhouseCoopers LLP
New York, New York
September 12, 2006



                                      F-2

<PAGE>

<TABLE>
<CAPTION>
                                     VERTRUE INCORPORATED
                                  CONSOLIDATED BALANCE SHEETS
                           (in thousands, except per share amounts)
                                                                                                June 30,
                                                                                      ---------------------------
                                                                                          2006           2005
                                                                                      ------------   ------------
                                               Assets
Current assets:
<S>                                                                                   <C>            <C>
     Cash and cash equivalents                                                        $    36,290    $    64,356
     Restricted cash                                                                        2,699          3,411
     Short-term investments                                                                31,798         16,223
     Accounts and notes receivable, net                                                    21,014         13,683
     Prepaid expenses                                                                       9,053          5,758
     Deferred marketing costs                                                              26,463         39,226
     Other current assets                                                                   4,706          4,370
                                                                                      ------------   ------------
          Total current assets                                                            132,023        147,027
     Fixed assets, net                                                                     40,568         39,062
     Goodwill                                                                             212,187        201,499
     Intangible assets, net                                                                37,798         46,476
     Other long-term assets                                                                20,452         13,098
                                                                                      ------------   ------------
          Total assets                                                                $   443,028    $   447,162
                                                                                      ============   ============
                               Liabilities and Shareholders' Deficit
Current liabilities:
     Current maturities of long-term debt                                             $       762    $       686
     Accounts payable                                                                      42,281         42,077
     Accrued liabilities                                                                   64,602         82,157
     Deferred revenues                                                                     84,972        108,117
     Deferred income taxes                                                                 11,687          9,780
                                                                                      ------------   ------------
          Total current liabilities                                                       204,304        242,817
     Deferred income taxes                                                                  6,920          9,702
     Long-term debt                                                                       237,984        237,814
     Other long-term liabilities                                                            9,989          5,257
                                                                                      ------------   ------------
          Total liabilities                                                               459,197        495,590
                                                                                      ------------   ------------
Commitments and contingencies

Shareholders' deficit:
     Preferred stock, $0.01 par value -- 1,000 shares authorized; no shares issued              -              -
     Common stock, $0.01 par value -- 40,000 shares authorized;
          20,168 shares issued (19,703 shares at June 30, 2005)                               202            197
     Capital in excess of par value                                                       187,991        169,463
     Retained earnings                                                                     68,382         35,680
     Accumulated other comprehensive income (loss)                                            214           (148)
     Treasury stock, 10,518 shares at cost (10,020 shares at June 30, 2005)              (272,958)      (253,620)
                                                                                      ------------   ------------
          Total shareholders' deficit                                                     (16,169)       (48,428)
                                                                                      ------------   ------------
          Total liabilities and shareholders' deficit                                 $   443,028    $   447,162
                                                                                      ============   ============
</TABLE>


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

                                      F-3


<PAGE>

<TABLE>
<CAPTION>
                              VERTRUE INCORPORATED
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (in thousands, except per share amounts)

                                                                        For the years ended June 30,
                                                                 ----------------------------------------
                                                                     2006          2005          2004
                                                                 ------------  ------------  ------------
<S>                                                              <C>           <C>           <C>
Revenues                                                         $   658,855   $   579,839   $   488,739

Expenses:
     Marketing                                                       313,219       286,437       255,818
     Operating                                                       151,620       114,418        91,832
     General and administrative                                      120,315       108,231        85,826
     Charge for arbitration award                                          -         5,458             -
     Amortization of intangible assets                                 8,360         8,201         2,393
                                                                 ------------  ------------  ------------

Operating income                                                      65,341        57,094        52,870
Interest income                                                        3,579         1,936         1,094
Interest expense                                                     (20,359)      (20,741)       (7,715)
Other income (expense), net                                               (2)          652           349
                                                                 ------------  ------------  ------------
Income before income taxes                                            48,559        38,941        46,598
Provision for income taxes                                            15,857        13,392        18,638
                                                                 ------------  ------------  ------------
Net income                                                       $    32,702   $    25,549   $    27,960
                                                                 ============  ============  ============
Earnings per share:
     Basic                                                       $      3.36   $      2.56   $      2.60
                                                                 ============  ============  ============
     Diluted                                                     $      2.83   $      2.22   $      2.29
                                                                 ============  ============  ============
Weighted average common shares used in earnings per share
calculations:
     Basic                                                             9,722         9,995        10,755
                                                                 ============  ============  ============
     Diluted                                                          12,743        12,973        13,208
                                                                 ============  ============  ============
</TABLE>

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

                                      F-4
<PAGE>

                              VERTRUE INCORPORATED
            CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                 Capital in   Accumulated    Accumulated     Other
                                                Common Stock      Excess of     Earnings    Comprehensive  Treasury
                                             Shares     Amount   Par Value    (Deficit)    (Loss) Gain      Stock        Total
                                             -------    ------   ---------    ----------    -----------  -----------  -----------
<S>                                          <C>        <C>      <C>          <C>           <C>          <C>          <C>
Balance - June 30, 2003                       17,847    $ 178    $ 122,425    $ (17,829)    $     (469)  $  (124,588)    (20,283)
Issuance of common stock                       1,242       13       24,551            -              -             -      24,564
Issuance of restricted stock                       -        -        2,774            -              -         6,306       9,080
Tax benefit from employee stock options            -        -        6,520            -              -             -       6,520
Expense associated with
    issuing stock options to a non-employee        -        -          187            -              -             -         187
Acquisition of treasury stock                      -        -            -            -              -       (94,207)    (94,207)
Comprehensive income:
   Net income                                      -        -            -       27,960              -             -      27,960
   Currency translation adjustment                 -        -            -            -            105             -         105
   Minimum pension
    liability adjustment (net of tax)              -        -            -            -             (9)            -          (9)
                                                                                                                      -----------
   Total comprehensive income                                                                                             28,056
                                             ------------------------------------------------------------------------------------
Balance - June 30, 2004                       19,089      191      156,457       10,131           (373)     (212,489)    (46,083)
Issuance of common stock                         614        6       10,786            -              -             -      10,792
Tax benefit from employee stock options            -        -        2,220            -              -             -       2,220
Acquisition of treasury stock                      -        -            -            -              -       (41,131)    (41,131)
Comprehensive income:
   Net income                                      -        -            -       25,549              -             -      25,549
   Currency translation adjustment                 -        -            -            -             79             -          79
   Unrealized hedging gain                         -        -            -            -            239             -         239
   Minimum pension liability
    adjustment (net of tax)                        -        -            -            -            (93)            -         (93)
                                                                                                                      -----------
   Total comprehensive income                                                                                             25,774
                                            -------------------------------------------------------------------------------------
Balance - June 30, 2005                       19,703      197      169,463       35,680           (148)     (253,620)    (48,428)
Issuance of common stock                         465        5        8,631            -              -             -       8,636
Stock-based compensation                           -        -        4,531            -              -             -       4,531
Tax benefit from employee stock options            -        -        5,366            -              -             -       5,366
Acquisition of treasury stock                      -        -            -            -              -       (19,338)    (19,338)
Comprehensive income:
   Net income                                      -        -            -       32,702              -             -      32,702
   Currency translation adjustment                 -        -            -            -            644             -         644
   Unrealized hedging loss                         -        -            -            -           (384)            -        (384)
   Minimum pension liability
    adjustment (net of tax)                        -        -            -            -            102             -         102
                                                                                                                      -----------
   Total comprehensive income                                                                                             33,064
                                             ------------------------------------------------------------------------------------
Balance - June 30, 2006                       20,168    $ 202    $ 187,991    $  68,382     $      214    $ (272,958) $  (16,169)
                                             ====================================================================================
</TABLE>


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

                                      F-5

<PAGE>

                          VERTRUE INCORPORATED
                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (in thousands)
<TABLE>
<CAPTION>

                                                                                  For the years ended June 30,
                                                                            ----------------------------------------
                                                                                2006          2005          2004
                                                                            ------------  ------------  ------------
 Operating activities
<S>                                                                         <C>           <C>           <C>
     Net income                                                             $    32,702   $    25,549   $    27,960
     Adjustments to reconcile net income to net cash provided
     by operating activities:
       Change in deferred revenues                                              (23,549)      (34,911)      (32,272)
       Change in deferred marketing costs                                        12,984        13,443        25,455
       Depreciation and amortization                                             25,589        23,105        13,252
       Stock-based compensation                                                   4,531             -             -
       Deferred and other income taxes                                             (467)          453        10,254
       Excess tax benefit from stock-based compensation                          (3,086)            -             -
       Tax benefit from stock-based compensation                                      -         2,220         6,520
       Other                                                                     (1,009)         (423)          890

     Changes in assets and liabilities:
       Restricted cash                                                              712          (291)         (388)
       Accounts and notes receivable                                            (15,911)       (4,292)         (112)
       Prepaid expenses                                                          (3,249)       (2,114)        5,172
       Other assets                                                                 132           595        (2,050)
       Accounts payable                                                             434         8,758       (10,323)
       Accrued and other liabilities                                              7,876           219         3,590
                                                                            ------------  ------------  ------------
 Net cash provided by operating activities                                       37,689        32,311        47,948
                                                                            ------------  ------------  ------------

 Investing activities
     Acquisition of fixed assets                                                (17,781)      (11,006)       (7,057)
     Purchases of short-term investments                                       (157,520)     (402,630)     (650,750)
     Sales of short-term investments                                            142,937       507,260       535,770
     Acquisitions of businesses, net of cash acquired                           (25,667)      (77,237)     (114,916)
                                                                            ------------  ------------  ------------
 Net cash (used in) provided by investing activities                            (58,031)       16,387      (236,953)
                                                                            ------------  ------------  ------------

 Financing activities
     Net proceeds from issuance of stock                                          8,636        10,792        33,644
     Excess tax benefit from stock-based compensation                             3,086             -             -
     Treasury stock purchases                                                   (19,338)      (41,131)      (94,207)
     (Debt issuance costs)/net proceeds from issuance of debt                      (154)         (844)      229,825
     Payments of long-term obligations                                             (627)         (549)         (453)
                                                                            ------------  ------------  ------------
 Net cash (used in) provided by financing activities                             (8,397)      (31,732)      168,809
                                                                            ------------  ------------  ------------
 Effect of exchange rate changes on cash and cash equivalents                       673           224           102
                                                                            ------------  ------------  ------------
 Net (decrease) increase in cash and cash equivalents                           (28,066)       17,190       (20,094)
 Cash and cash equivalents at beginning of year                                  64,356        47,166        67,260
                                                                            ------------  ------------  ------------
 Cash and cash equivalents at end of year                                   $    36,290   $    64,356   $    47,166
                                                                            ============  ============  ============
</TABLE>


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

                                      F-6
<PAGE>

NOTE 1 - NATURE OF BUSINESS

Vertrue  Incorporated  ("Vertrue"  or  the  "Company")  is  a  leading  internet
marketing  services  company.  Vertrue gives  consumers  access to services that
offer  substantial  discounts and convenience  for important  decisions in their
everyday  lives.  The Company's  services span  healthcare,  personal  property,
security/insurance,  discounts, and personals and are all offered online through
an array of marketing  channels.  The Company is a premier  marketing partner to
corporate  clients and the Company's  services enable partners to enhance market
presence,  strengthen  customer affinity,  and generate additional value. We are
comprised of three reportable business segments: Marketing Services,  Personals,
and Management Services.

Vertrue  was  incorporated  in  1989  in  Delaware  under  the  name  Cardmember
Publishing  Corporation.  On October 17, 1996, the Company  completed an initial
public  offering of its stock and changed its name to MemberWorks  Incorporated.
On October 13, 2004,  the Company began doing  business as Vertrue  Incorporated
and on November 18, 2004,  shareholders  approved an amendment to the  Company's
charter formally changing its name to Vertrue Incorporated.  The name change was
intended to reflect the ever-broadening  base of services that Vertrue offers to
its customers.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - Consolidation
The  consolidated  financial  statements  have been prepared in accordance  with
accounting  principles  generally  accepted  in the  United  States  of  America
("GAAP") and include the accounts of the Company, its wholly owned subsidiaries,
and variable  interest  entities as required by Financial  Accounting  Standards
Board  ("FASB")  Interpretation  No.  ("FIN")  46R,  "Consolidation  of Variable
Interest   Entities  -  an  Interpretation  of  ARB  No.  51."  All  significant
intercompany accounts and transactions have been eliminated.

The  Company  acquired  Lavalife  Inc.  ("Lavalife")  on April 1, 2004,  Bargain
Network,  Inc.  ("Bargain")  on November 30, 2004, and My Choice  Medical,  Inc.
("MCM") on January 1, 2005. The results of operations of these acquisitions have
been included in the consolidated  results of operations since their acquisition
dates.  The  results of  Bargain,  Lavalife,  and MCM have been  included in the
Marketing Services, Personals, and Management Services segments, respectively.

Variable Interest Entities
The Management  Services  segment provides  advertising and practice  management
services to a network of cosmetic  physicians  throughout the United States. The
cosmetic  physicians  form  their  own  wholly-owned  professional  corporations
("PCs")  and  provide  medical  services  to  patients  generated  only  by  the
Management  Services  segment.  Since the  Management  Services  segment  is the
primary  beneficiary  of these  PCs,  the  financial  statements  of the PCs are
included in the Company's  consolidated  financial statements in accordance with
FIN 46R. The PCs maintain  minimal  assets,  and generally have no operations or
obligations other than operations and obligations  directly generated from doing
business with the Management Services segment.

Use of Estimates
The  preparation of  consolidated  financial  statements in conformity with GAAP
requires  management to make estimates,  judgments,  and assumptions that affect
the reported amounts of assets and liabilities,  disclosure of contingent assets
and  liabilities  at the  date of the  financial  statements,  and  the  amounts
reported in the financial  statements  and  accompanying  notes.  Actual results
could differ from those estimates.  The most significant judgments and estimates
include:  membership cancellation rates, deferred marketing costs, allowance for
notes  receivable,  valuation of goodwill,  intangible  assets' remaining useful
lives,  deferred  tax  asset  valuations  and  tax  reserves,   and  stock-based
compensation.

Reclassifications
Certain  prior year  amounts  have been  reclassified  to conform to the current
year's presentation.

Foreign Currency Translation
Assets and liabilities of foreign subsidiaries, whose assets and liabilities are
denominated in their local  currencies,  are translated at the exchange rates in
effect  as of the  balance  sheet  dates.  Equity  accounts  are  translated  at
historical exchange rates and revenues,  expenses, and cash flows are translated
at average  exchange  rates for the  periods  presented.  Translation  gains and
losses are included as a component of  comprehensive  income in the consolidated
statements of shareholders'  deficit.  Transaction gains and losses are included
in the consolidated statements of operations.



                                       F-7
<PAGE>

Fair Value of Financial Instruments and Concentration of Credit Risk
All current assets and liabilities are carried at cost, which approximates fair
value due to their short-term maturities. Long-term notes receivable also
approximate fair value since they are recorded at the lesser of cost or net
realizable value. The recorded amounts of the Company's long-term liabilities
also approximate fair value except for differences with respect to the
Convertible Notes and the Senior Notes (see Note 7) which had carrying values of
$90,000,000 and $147,984,000, respectively, and fair values of $108,900,000 and
$155,250,000, respectively, as of June 30, 2006 The Convertible Notes and the
Senior Notes had carrying values of $90,000,000 and $147,814,000, respectively,
and fair values of $103,050,000 and $151,500,000, respectively, as of June 30,
2005. The fair value information is based on publicly available information.
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of notes receivable from the Management Services
segment and accounts receivable from third-party payment processors who
facilitate payments from membership and personals.

Revenue Recognition
Revenues are billed  primarily  through  credit and debit cards.  Revenues  from
membership  programs  are  recognized  when  earned.  Members  may cancel  their
memberships at any time.  Members  enrolled in an annual payment plan who cancel
their  memberships  receive a pro rata refund of the remaining unused portion of
their membership fees. In accordance with Staff Accounting Bulletin ("SAB") 104,
"Revenue Recognition" ("SAB 104"), revenues, net of estimated cancellations, are
deferred and recognized as revenues when membership  refund  privileges  expire.
Management  establishes  and  regularly  updates the  allowance  for  membership
cancellations.   In  estimating  the  allowance  for  membership  cancellations,
management analyzes historical cancellation experience, current economic trends,
and changes in customer demand for the Company's  products and services.  Actual
membership   refunds  are  charged   against  the   allowance   for   membership
cancellations  on  a  current  basis.  Accrued  liabilities  set  forth  in  the
accompanying consolidated balance sheets as of June 30, 2006 and 2005 include an
allowance  for  membership   cancellations   of  $9,290,000   and   $11,232,000,
respectively.

Revenues generated by the Personals segment are recognized when the services are
used.  Revenues generated by the Management Services segment are recognized when
the medical procedures performed by the healthcare professionals are complete.

In 2006 and 2005,  the  Company's  largest  client  accounted for 12% and 14% of
revenues, respectively. In 2004, the Company's two largest clients accounted for
18% and 12% of revenues.  The revenues  from these  clients were included in the
Marketing Services segment.

Marketing Expenses
The  Company's   marketing   expenses  are  comprised  of   advertising   costs,
non-refundable and refundable royalty payments,  telemarketing costs, and direct
mail costs. Advertising costs and non-refundable royalty payments, which include
fee per offer, fee per sale, and fee per impression marketing arrangements,  are
expensed when incurred. Refundable royalty payments are charged to operations as
the associated revenues are recognized in accordance with SAB 104. Telemarketing
costs,  including  costs for  third-party  vendors  to solicit  members  for the
Company,  and direct mail costs,  including costs of printing and mailing direct
mail pieces,  are deferred direct response  advertising costs and are charged to
marketing  expenses over the expected  future benefit period in accordance  with
American Institute of Certified Public  Accountants  Statement of Position 93-7,
"Reporting on Advertising Costs" ("SOP 93-7").

Deferred  marketing  costs to  enroll a new  member  are less  than the  related
estimated  total net  revenues.  However,  if deferred  marketing  costs were to
exceed the related  estimated  total net revenues,  management  would adjust the
deferred marketing costs for that impairment.

Earnings per Share
Basic and diluted  earnings  per share are  determined  in  accordance  with the
provisions  of  Statement of Financial  Accounting  Standards  ("SFAS") No. 128,
"Earnings Per Share" ("SFAS 128").  Basic  earnings per share is computed  using
the weighted  average number of common shares  outstanding  during the reporting
period. Diluted earnings per share is computed using the weighted average number
of common shares outstanding and the dilutive effect of potentially  outstanding
common shares determined using the treasury stock method.

Cash and Cash Equivalents
The  Company  considers  highly  liquid  investment  instruments  with  original
maturities of three months or less to be cash  equivalents.  The Company's  cash
and cash equivalents are carried at cost, which  approximates fair market value,
and primarily consist of money market funds.




                                       F-8
<PAGE>

Restricted Cash
The Company excludes from cash and cash equivalents restricted cash that is held
in an escrow account for payment of commissions to a client.

Short-Term Investments
Short-term  investments  consist of commercial paper with original maturities of
more  than  three  months  but less than or equal to one year and  auction  rate
securities  with interest rates that reset every 49 days or less but have stated
contractual  maturities  greater  than  one  year.  As of June 30,  2006,  these
investments  were classified as  available-for-sale  and recorded at cost, which
approximates fair value due to their short-term reset dates.  Historically,  the
Company has been able to liquidate  auction rate securities at any reset date to
provide funds for  investing or financing  activities or to invest in securities
that would generate higher yields.

Accounts and Notes Receivable
Accounts  receivable are generally from third-party  payment  processors.  As of
June 30, 2006 and 2005, the Company recorded accounts  receivable of $14,015,000
and  $12,559,000,   respectively,   in  accounts  and  notes  receivables,  net.
Additionally,  the Management  Service segment  finances the cost of the medical
services received by patients through the use of notes  receivable.  These notes
receivable  generally  have a life of 21 to 48 months and bear interest at rates
ranging from 6% to 18%.  Interest on these notes is included in interest  income
in the  statement  of  operations.  As of June 30,  2006 and 2005,  the  Company
recorded  notes  receivable  of  $6,999,000  and  $1,124,000,  respectively,  in
accounts and notes receivable, net, and $9,870,000 and $1,311,000, respectively,
in other long-term assets.

The Company estimates an allowance for accounts and notes receivable based on an
aging  analysis,  customer  credit  evaluations,  collection  history,  and  any
specific,  known  troubled  accounts.  As of June 30, 2006 and 2005, the Company
recorded  $60,000 and $63,000,  respectively,  of allowances  for  uncollectible
accounts,  and  $3,847,000  and  $825,000,   respectively,   of  allowances  for
uncollectible notes.

Fixed Assets
Fixed assets,  computer  software costs, and capital leases are carried at cost,
less   accumulated   depreciation.   Depreciation   is   calculated   using  the
straight-line  method over the  estimated  useful  lives of the related  assets.
Useful lives are generally  between three and seven years for computer  software
and  equipment,  the  shorter  of the  estimated  remaining  useful  life or the
remaining life of the lease, for leasehold improvements,  and seven to ten years
for furniture and fixtures.  Maintenance and repair  expenditures are charged to
operations as incurred.

Valuation of Goodwill
The Company  reviews the carrying value of its goodwill in accordance  with SFAS
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Management reviews
goodwill for impairment by comparing  their carrying values to their fair values
at  least  annually  or  more  frequently  if  circumstances  indicate  possible
impairment.  When determining fair value,  management uses various  assumptions,
including  projections  of  future  cash  flows.  A  change  in  the  underlying
assumptions  could cause fair value to be less than  carrying  value and require
the Company to record a  corresponding  charge  against  operations.  Management
performs its impairment testing in the first fiscal quarter of each year.

Intangible Assets
Management   reassesses  the  estimated  useful  lives  of  its  definite  lived
intangible assets and determined that they were  appropriate.  Intangible assets
principally include member and customer relationships and trade names that arose
in  connection  with  business  acquisitions.  Acquired  intangible  assets  are
recorded at cost and are generally amortized on a straight-line basis over their
estimated useful lives. The weighted average amortization periods for membership
and client relationships,  trade names, other amortizable intangible assets, and
total  amortizable  intangible  assets held at June 30, 2006,  were 10 years, 15
years, 3 years, and 13 years, respectively.

Impairment of Long-Lived Assets
The Company  accounts for  impairment and  disposition  of long-lived  assets in
accordance  with  SFAS  144,  "Accounting  for the  Impairment  or  Disposal  of
Long-Lived  Assets." The Company  reviews its  long-lived  assets for impairment
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable,  as determined based on their projected  undiscounted future
cash  flows.  If this  review  indicates  that the  carrying  value  will not be
recoverable,  the carrying value is reduced to its estimated fair value.  During
fiscal 2006, there were no impairment charges recorded.


                                      F-9
<PAGE>

Contingent Liabilities
In  accordance  with  SFAS  5,  "Accounting  for  Contingencies,"  and  FIN  14,
"Reasonable  Estimation  of the  Amount  of a Loss,"  the  Company  accrues  for
contingent  liabilities  when it is probable  that future costs will be incurred
and those costs can be reasonably estimated and measured.

Income Taxes
The Company  accounts  for income  taxes under the  provisions  of SFAS No. 109,
"Accounting  for  Income  Taxes".   Deferred  tax  assets  and  liabilities  are
recognized for future tax consequences  attributable to differences  between the
financial  statement  carrying  amounts of existing  assets and  liabilities and
their respective tax bases.

Stock-Based Compensation
The Company adopted SFAS No. 123(R), "Share-Based Payment" ("SFAS 123R") on July
1, 2005. SFAS 123R  established the accounting for share-based  compensation and
requires  companies  to  measure  and  recognize  compensation  expense  for all
share-based payments at fair value.  Accordingly,  share-based compensation cost
is measured at grant date based on the fair value of the award and is recognized
as expense over the requisite  service period.  The Company adopted the modified
prospective  application method as permitted by SFAS 123R. Prior to the adoption
of SFAS 123R, the Company  accounted for its share-based  employee  compensation
plans under the recognition and measurement  provisions of Accounting Principles
Board ("APB")  Opinion No. 25,  "Accounting  for Stock Issued to Employees," and
the related interpretations.

New Accounting Pronouncements
In July 2006,  the FASB issued FIN 48,  "Accounting  for  Uncertainty  in Income
Taxes  -  an  interpretation  of  FASB  Statement  No.  109"  ("FIN  48").  This
interpretation  clarifies the  accounting  for  uncertainty in tax positions and
requires an entity to recognize in its financial  statements the impact of a tax
position,  if that position is more likely than not of being sustained on audit,
based on the  technical  merits of the  position.  The  provisions of FIN 48 are
effective  beginning in the Company's  first quarter of fiscal 2008. The Company
is currently evaluating the impact of FIN 48 on its financial statements.

In February  2006 the FASB issued  Statement  No. 155,  "Accounting  for Certain
Hybrid Financial Instruments - An Amendment of FASB Statements No. 133 and 140."
The Statement allows financial  instruments that have embedded derivatives to be
accounted for as a whole under  certain  circumstances.  Additionally,  in March
2006, the FASB issued Statement No. 156,  "Accounting for Servicing of Financial
Assets - An Amendment of FASB Statement No. 140." Among other requirements,  the
Statement  requires  as entity  to  recognize  a  servicing  asset or  servicing
liability each time it undertakes an obligation to service a financial  asset by
entering  into a  servicing  contract  in  certain  situations.  Both  of  these
Statements  are  effective  beginning in the  Company's  first quarter of fiscal
2008.  The Company  does not expect the  adoption of either  Statement to have a
material effect on its consolidated  financial position,  results of operations,
or cash flows.

NOTE 3 - FIXED ASSETS

                                                 June 30,
                                     ---------------------------------
(Dollar amounts in thousands)              2006              2005
                                     ---------------   ---------------
Computer software and equipment      $       67,323    $       68,273
Furniture and fixtures                        9,672             8,269
Leasehold improvements                       13,075             7,906
                                     ---------------   ---------------
                                             90,070            84,448
Accumulated depreciation                    (49,502)          (45,386)
                                     ---------------   ---------------
   Fixed assets, net                 $       40,568    $       39,062
                                     ===============   ===============


Depreciation expense was $16,087,000, $13,485,000, and $10,189,000 for the years
ended June 30, 2006, 2005, and 2004, respectively.

Fixed assets,  net recorded under capital leases were  $1,387,000 and $1,749,000
as of June 30, 2006 and 2005,  respectively.  Accumulated  depreciation on these
fixed  assets  was  $1,172,000  and  $581,000  as of June  30,  2006  and  2005,
respectively.







                                      F-10
<PAGE>

NOTE 4 - GOODWILL AND OTHER INTANGIBLE ASSETS

The gross carrying value and accumulated  amortization of amortizable intangible
assets was as follows:

<TABLE>
<CAPTION>

                                                                June 30, 2006                     June 30, 2005
                                                        -------------------------------   -------------------------------
                                                           Gross                             Gross
                                                          Carrying        Accumulated       Carrying       Accumulated
(Dollar amounts in thousands)                              Amount        Amortization        Amount        Amortization
                                                        ------------   ----------------   ------------   ----------------
<S>                                                     <C>            <C>                <C>            <C>
Membership and client relationships                     $    40,215    $        21,881    $    40,215    $        15,184
Trade names                                                  21,859              3,114         21,859              1,662
Other                                                         1,504              1,448          1,518              1,237
                                                        ------------   ----------------   ------------   ----------------
  Total amortizable intangible assets                   $    63,578    $        26,443    $    63,592    $        18,083
                                                        ------------   ----------------   ------------   ----------------
  Amortizable intangible assets, net                    $    37,135                       $    45,509
                                                        ============                      ============
</TABLE>

The carrying amounts of our indefinite-lived intangible assets were as follows:

<TABLE>
<CAPTION>
                                                                 June 30,
                                                        ---------------------------
(Dollar amounts in thousands)                               2006           2005
                                                        ------------   ------------
<S>                                                     <C>            <C>
Goodwill                                                $    212,187   $    201,499
Intangible asset related to minimum pension liability   $        663   $        967
</TABLE>


Future intangible  amortization  expense for the next five years is estimated to
be as follows:



<TABLE>
<CAPTION>

(Dollar amounts in thousands)
        Fiscal Year
<C>                                                                    <C>
   2007                                                                $      6,652
   2008                                                                       4,681
   2009                                                                       4,260
   2010                                                                       3,130
   2011                                                                       3,096
</TABLE>


Changes in the carrying amount of goodwill by segment were as follows:


<TABLE>
<CAPTION>
                                                Marketing               Management
(Dollar amounts in thousands)                    Services   Personals    Services     Total
                                               -----------  ----------  ----------  ----------
<S>                                            <C>          <C>         <C>         <C>
Balance at June 30, 2004                       $   42,039   $  83,636   $       -   $ 125,675
Acquisitions                                       53,664           -      23,367      77,031
Purchase adjustments and other                        214      (1,421)          -      (1,207)
                                               ----------- ----------- ----------- -----------
Balance at June 30, 2005                           95,917      82,215      23,367     201,499
Contingent purchase price payments, MCM
     acquisition (See Note 9)                           -           -      10,880      10,880
Purchase adjustments and other                        515        (707)          -        (192)
                                               ----------- ----------- ----------- -----------
Balance at June 30, 2006                       $   96,432  $   81,508  $   34,247  $  212,187
                                               =========== =========== =========== ===========
</TABLE>


As part of the  acquisitions  of  certain  of the  assets of MCM and  Bargain in
fiscal 2005, the Company  acquired  intangible  assets of $92,491,000.  Of those
amounts,  $12,220,000 was assigned to membership and client  relationships,  and
$3,240,000 was assigned to trade names.  These identified  intangible assets are
subject to periodic  amortization  over the estimated  useful lives ranging from
one to 15 years. Goodwill of $88,426,000,  which is not subject to amortization,
also arose in connection with these acquisitions.

As part of the  purchase  of  Lavalife  in fiscal  2004,  the  Company  acquired
intangible assets of $115,632,000. Of that amount, $14,799,000 has been assigned
to membership and client  relationships,  and  $18,619,000  has been assigned to
trade  names,  both of which  are  subject  to  periodic  amortization  over the
estimated useful lives ranging from three to 15 years.  Goodwill of $81,508,000,
which is not  subject  to  amortization,  also  arose in  connection  with  this
acquisition.


                                      F-11
<PAGE>

NOTE 5 - FOREIGN CURRENCY INSTRUMENTS

The Company uses purchase option and forward  contracts to minimize its exposure
to changes in future cash flows caused by movements in currency  exchange  rates
between the U.S. dollar and the Canadian dollar. Derivative instruments are held
only for the  purpose  of hedging  such  risks and are not used for  speculative
purposes.  Derivative instruments used to hedge forecasted cash flows associated
with Canadian dollar denominated forecasted  transactions that meet the criteria
for hedge accounting are designated as cash flow hedges.  The effective  portion
of  derivative  gains and losses for cash flow hedges is deferred as a component
of accumulated other comprehensive  income and is recognized when the underlying
hedged item is recognized in earnings.

The fair value of these  contracts is included in other  current  assets.  As of
June 30, 2006 and 2005, the fair value of these instruments was $156,000 (asset)
and $559,000 (asset), respectively. Derivative gains recognized in earnings were
recorded in operating  expenses  and general and  administrative  expenses,  and
amounted to  $1,045,000  and  $1,382,000  for 2006 and 2005,  respectively.  All
forecasted  transactions  currently  being hedged are expected to occur over the
next year.

During 2004, the Company used purchase  option and forward  contracts to protect
against the foreign  currency  exchange risk inherent in the purchase  price for
its acquisition of Lavalife, which was denominated in Canadian dollars (see Note
9). The risk of loss associated  with purchase  option  contracts was limited to
premium  amounts  paid  for  them.  The  risk of loss  associated  with  forward
contracts was equal to the exchange rate differential from the time the contract
was entered into until it was settled.  These contracts expired on April 1, 2004
concurrently  with the closing of the  Lavalife  acquisition.  Derivative  gains
recognized in earnings  were  recorded as a component of other  income,  net and
amounted to $353,000 in 2004.

NOTE 6 - RESTRUCTURING CHARGES

The  restructuring  reserve balance,  which consists of lease obligations and is
recorded in accrued liabilities and other long-term liabilities,  was $1,391,000
and $1,499,000 as of June 30, 2006 and 2005, respectively. Cash payments related
to lease  obligations  for the years ended June 30, 2006 and 2005 were  $108,000
and $145,000, respectively.

NOTE 7 - LONG-TERM LIABILITIES

Long-term liabilities were as follows at June 30:

(Dollar amounts in thousands)                    2006           2005
                                              ----------    ----------
Senior Notes                                  $  147,984    $  147,814
Convertible Notes                                 90,000        90,000
Other long-term liabilities                        9,989         5,943
                                              ----------    ----------
                                                 247,973       243,757
Less current maturities                              762           686
                                              ----------    ----------
Long-term liabilities                         $  247,211    $  243,071
                                              ==========    ==========

The  Company  has  outstanding   $150,000,000   aggregate  principal  amount  of
registered,  unsecured  9.25% senior notes due 2014 (the  "Senior  Notes").  The
Senior  Notes have an effective  yield of 9.5%,  and interest is payable in cash
semi-annually in arrears on April 1 and October 1. A portion of the proceeds was
used to repay amounts  borrowed to partially fund the Lavalife  acquisition (see
Note 9). At any time prior to April 1, 2007, the Company may redeem up to 35% of
the Senior Notes with net cash proceeds of certain equity offerings,  as long as
at least 65% of the  aggregate  principal  amount  of the  Senior  Notes  issued
remains outstanding after the redemption.  The Company may redeem all or part of
the Senior Notes prior to April 1, 2009 by paying a make-whole  premium.  At any
time on or after April 1, 2009, the Company may redeem some or all of the Senior
Notes at  certain  redemption  prices  plus  accrued  and  unpaid  interest  and
liquidation damages, if any, to the date of redemption.  Debt issuance costs and
debt  discount  associated  with this issuance  were  capitalized  and are being
amortized  as  interest  expense  over the term of the  Senior  Notes  using the
effective interest method.

Additionally, the Company has outstanding $90,000,000 aggregate principal amount
of registered 5.5% convertible senior  subordinated notes due 2010 ("Convertible
Notes"). The Convertible Notes bear interest at the rate of 5.5% per year, which
is payable in cash semi-annually in arrears on April 1 and October 1. Holders of
the  Convertible  Notes may convert  their  notes into  shares of the  Company's
common  stock at any time prior to  maturity at an initial  conversion  price of
approximately  $40.37 per share,  which is equivalent  to an initial  conversion
rate  of  approximately   24.77  shares  per  $1,000  principal  amount  of  the
Convertible Notes. There are no beneficial  conversion features related to these
Convertible  Notes.  In  accordance  with APB  Opinion No. 14,  "Accounting  for
Convertible  Notes  and  Debt  Issued  with  Stock  Purchase   Warrants,"  these
Convertible  Notes have been  classified  as a liability.  Debt  issuance  costs
associated  with this  issuance  were  capitalized  and are being  amortized  as
interest  expense  over the term of the  Convertible  Notes using the  effective
interest method.


                                      F-12
<PAGE>

Other  long-term  obligations  are  comprised  of the  long-term  portion of the
restructuring reserve (see Note 6), minimum pension liability (see Note 14), and
lease incentives  related to certain operating leases.  The lease incentives are
amortized as a reduction to rent expense over the terms of the leases.

The Company has an amended and restated  senior secured credit facility dated as
of March 17, 2006,  which allows  borrowings  of up to  $50,000,000.  Borrowings
under this senior secured credit facility accrue interest at the Eurodollar rate
or the Prime rate,  plus an  applicable  margin.  As of June 30, 2006,  the base
interest rate for borrowings  under this credit facility was 8.5%. There were no
borrowings  outstanding under this credit facility as of June 30, 2006 and 2005.
As of June 30, 2005, the  availability  under the senior secured credit facility
was  reduced  by  an  outstanding   letter  of  credit  of  $5,458,000  and  was
$39,542,000. The senior secured credit facility has certain financial covenants,
including a maximum debt coverage ratio,  potential  restrictions on borrowings,
and potential  restrictions on additional stock repurchases.  The senior secured
credit  facility  matures  on  March  31,  2009.  All of the  Company's  assets,
including  the stock of its  subsidiaries,  are  pledged as  collateral  for the
senior  secured  credit  facility.  Debt  issuance  costs  associated  with  the
amendment and restatement of the senior secured credit facility were capitalized
and are being  amortized over the term of the secured credit  facility using the
effective interest method.

Interest expense in 2006, 2005, and 2004,  included  $972,000,  $1,373,000,  and
$742,000  amortization  of debt  issuance  costs,  respectively,  and  $170,000,
$155,000,  and  $32,000  amortization  of  debt  discount,   respectively.   The
unamortized portion of debt issuance costs aggregated  $7,312,000 and $8,130,000
at June 30, 2006 and 2005, respectively.

NOTE 8 - COMMITMENTS AND CONTINGENCIES

The Company operates in leased  facilities.  Rent expense under operating leases
was  $9,463,000,  $8,643,000,  and $6,779,000 for the years ended June 30, 2006,
2005, and 2004, respectively.

The Company has certain  capital  leases for  equipment.  At June 30, 2006,  the
weighted  average  interest rate on the Company's  capital  leases was 8.1% with
individual lease rates generally ranging from 5% to 20%.

Future minimum lease payments under  operating and capital leases as of June 30,
2006 are as follows:
<TABLE>
<CAPTION>

(Dollar amounts in thousands)                            Operating     Capital
Fiscal Year                                               Leases       Leases
                                                        ----------   ----------
<S>                                                     <C>          <C>
  2007                                                  $   9,376    $     839
  2008                                                      8,998          474
  2009                                                      8,929           91
  2010                                                      7,225            -
  2011                                                      5,939            -
Thereafter                                                 17,197            -
                                                        ----------   ----------
Total minimum lease payments                            $  57,664        1,404
                                                        ==========   ==========
  Less amount representing interest                                       (101)
                                                                     ----------
Present value of net minimum capital lease obligations                   1,303
  Less current portion                                                    (762)
                                                                     ----------
Long-term capital lease obligations                                  $     541
                                                                     ==========
</TABLE>

As of June 30,  2006,  the  Company  had  outstanding  purchase  obligations  of
$10,715,000  primarily  related to marketing  agreements  and  contracts for the
Company's  software,  equipment,  and  services.  In  addition,  the Company has
$45,274,000 of potential contingent payments related to the MCM acquisition (see
Note 9).

                                      F-13

<PAGE>

Legal proceedings
In management's opinion, there are no significant legal proceedings to which the
Company  or any  of  its  subsidiaries  is a  party  or to  which  any of  their
properties is subject.  The Company is involved in lawsuits and claims generally
incidental  to its  business,  including  but  not  limited  to  various  suits,
including  previously disclosed suits, brought against the Company by individual
consumers seeking monetary and/or injunctive relief relating to the marketing of
the Company's programs. In addition,  from time to time in the regular course of
its business,  the Company receives  inquiries from various federal and/or state
regulatory authorities.

MedValUSA Health  Programs,  Inc.  ("MedVal")  filed an arbitration  against the
Company in September 2000 involving claims of breach of contract,  breach of the
duty of good faith and fair  dealing,  and violation of the  Connecticut  Unfair
Trade Practices Act ("CUTPA").  In October 2005, the U.S. Supreme Court declined
to  review  the  Connecticut  Supreme  Court's  May 2005  decision  to uphold an
arbitration panel's award of $5,458,000 in punitive damages and costs to MedVal.
The Company  recorded a one-time  charge in the year ended June 30, 2005 related
to this award.

NOTE 9 - BUSINESS COMBINATIONS

On January 1, 2005,  the Company  completed  the  acquisition  of certain of the
assets of MCM, a privately  held  advertising  and practice  management  company
serving  cosmetic  surgeons  throughout the United States.  The Company acquired
these  assets  of MCM in order to  expand  its  consumer  offerings  to  include
cosmetic surgery. The purchase price,  excluding fees and expenses,  amounted to
$33,000,000  and was paid in cash on the closing date. In addition,  the Company
paid  $10,726,000  of  contingent  payments  in 2006 and  additional  contingent
payments  of up to  $45,274,000  may be paid  if  certain  performance  targets,
including increasing levels of revenues and earnings, are achieved over the next
two calendar years.  Additional  payments under the contingency  arrangement are
considered  additional  purchase price and allocated to the net assets acquired.
The Company  identified  $12,060,000  of intangible  assets other than goodwill,
including  membership  and client  relationships  and trade name, in conjunction
with this acquisition. The $34,247,000 of excess purchase consideration over the
net assets  acquired was  allocated to goodwill,  substantially  all of which is
deductible for tax purposes.

On November 30, 2004,  the Company  completed the  acquisition of certain of the
assets of Bargain,  a privately  held provider of premier  pricing  services for
homes and  vehicles.  The Company  acquired  these assets of Bargain in order to
expand its direct to consumer  marketing  presence and to expand its  discounted
consumer  offerings to include  personal  property.  The purchase  price,  which
excluded fees and  expenses,  was paid in cash and amounted to  $39,118,000.  In
addition,  the Company paid  $14,624,000  of  contingent  payments in 2006.  The
Company also assumed certain  liabilities  amounting to $4,729,000.  The Company
identified  $3,400,000  of  intangible  assets  other than  goodwill,  including
membership and client  relationships  and trade name, in  conjunction  with this
acquisition.  The  $54,179,000  of excess  purchase  consideration  over the net
assets  acquired  was  allocated  to  goodwill,  substantially  all of  which is
deductible for tax purposes.

On April 1, 2004, the Company completed the acquisition of all of the net assets
and outstanding  capital stock of Lavalife,  a leading provider of web-based and
phone-based  interactive  personals  services.  The Company acquired Lavalife in
order to broaden the scope of services  offered to include  personals  services.
The acquisition of Lavalife  benefited the Company by providing access to one of
the  largest and fastest  growing  consumer  categories  on the  internet  while
expanding its target market.  The purchase  price,  excluding fees and expenses,
was Cdn$152,500,000,  or $116,300,000.  In connection with this acquisition, the
Company received $9,080,000 related to the issuance of the Company's  restricted
common stock to Lavalife's  senior  management.  The acquisition was funded with
cash on hand and borrowings  under the Company's senior secured credit facility.
The Company identified $33,418,000 of intangible assets other than goodwill. The
$81,508,000 of unallocated  excess  purchase  consideration  over the net assets
acquired was allocated to goodwill.  The amount of tax  deductible  goodwill was
$77,436,000.

See Note 4 for  detailed  descriptions  of the  intangible  assets and  goodwill
identified in connection with these business combinations.

                                      F-14

<PAGE>

The  fair  values  of  the  assets  acquired  and  liabilities  assumed  at  the
acquisition dates were as follows:
<TABLE>
<CAPTION>


(Dollar amounts in thousands)                     MCM         Bargain      Lavalife
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Current assets                               $       258   $     2,163   $     6,160
Fixed assets                                         600         4,017        14,730
Other assets                                           -           871             -
Goodwill arising in the acquisition               34,247        54,179        81,508
Intangible assets                                 12,060         3,400        33,418
Current liabilities                               (3,060)       (4,066)      (19,284)
Other long-term liabilities                            -          (769)       (2,498)
                                             ------------  ------------  ------------
Net assets acquired                          $    44,105   $    59,795   $   114,034
                                             ============  ============  ============
</TABLE>

Pro Forma Results
The following  unaudited pro forma results of operations for the year ended June
30, 2004 was  prepared  assuming the  Lavalife  acquisition  occurred on July 1,
2003.  These pro forma results are not necessarily  indicative of the results of
future  operations or results that would have occurred had the acquisition  been
consummated as of that date (in thousands, except per share data).

                    Revenues                          $    542,766
                    Net income                              28,979

                    Basic earnings per share          $       2.58
                    Diluted earnings per share                2.28

The  results of  operations  and  balance  sheets of Bargain and MCM for periods
prior to the acquisitions were not material to the Company and accordingly,  pro
forma results of operations have not been presented.

NOTE 10- INCOME TAXES

The provision for income taxes is as follows:

<TABLE>
<CAPTION>
                                                    For the years ended June 30,
                                             ----------------------------------------
(Dollar amounts in thousands)                    2006          2005          2004
                                             ------------  ------------  ------------
Current Payable
<S>                                          <C>           <C>           <C>
  Federal                                    $    13,325   $     9,922   $     7,219
  State                                            2,278         2,249         2,245
  Foreign                                            778           802         1,028
                                             ------------  ------------  ------------
Total current payable                             16,381        12,973        10,492
                                             ------------  ------------  ------------
Deferred
  Federal                                          1,916         3,047         8,673
  State                                             (678)         (595)          140
  Foreign                                         (1,762)       (2,033)         (667)
                                             ------------  ------------  ------------
Total deferred                                      (524)          419         8,146
                                             ------------  ------------  ------------
Total provision for income taxes             $    15,857   $    13,392   $    18,638
                                             ============  ============  ============
</TABLE>



The following is a reconciliation of the Company's effective tax rate to the
U.S. statutory rate:

<TABLE>
<CAPTION>
                                                        For the years ended June 30,
                                               ----------------------------------------------
                                                    2006            2005            2004
                                               --------------  --------------  --------------
<S>                                            <C>             <C>             <C>
Statutory rate                                         35.0%           35.0%           35.0%
State and local                                         1.9%            2.8%            3.3%
Foreign                                                (1.5%)          (3.7%)          (0.5%)
Other                                                  (2.7%)           0.3%            2.2%
                                               --------------  --------------  --------------
Effective rate                                         32.7%           34.4%           40.0%
                                               ==============  ==============  ==============
</TABLE>

                                      F-15
<PAGE>

The Foreign  reconciling  item  included the U.S. tax benefit of the losses from
certain foreign branch  operations that can be used in the foreign  jurisdiction
without a U.S. tax cost. The Other  reconciling  item included the reversal of a
$1,416,000 tax reserve related to an Internal  Revenue Service ("IRS") audit for
the year ended June 30, 2004.

The Company  has open tax years in the U.S.,  Canada,  and other  jurisdictions.
There are tax years that are not currently  under  examination by the applicable
tax authorities but may be subject to examination in the future.  The results of
audits are inherently uncertain. The Company periodically evaluates the adequacy
of its tax reserves,  taking into account its open tax return  positions and tax
law  changes.  The  Company  believes  that its tax  reserves  are  appropriate.
However,  the final  determination of tax audits could have a material effect on
the results of operations, financial position, and cash flow.

Consolidated   U.S.  income  before  taxes  was  $49,238,000,   $43,459,000  and
$44,861,000 in 2006, 2005, and 2004, respectively. The corresponding amounts for
non-U.S.-based  operations  were (loss) income of ($679,000),  ($4,518,000)  and
$1,737,000, respectively.

Undistributed  earnings  of  the  Company's  foreign  subsidiaries  amounted  to
$1,020,000  and $500,000 at June 30, 2006 and 2005,  respectively.  U.S.  income
taxes were not provided on certain unremitted earnings from foreign subsidiaries
since the Company  intends to  permanently  reinvest  substantially  all of such
earnings  outside  the  U.S.  However,  if some  portion  of these  earnings  is
remitted,  the Company  expects the effect of any remittance  after  considering
available tax credits and amounts  previously  accrued not to be  significant to
the  consolidated  results  of  operations.  A  calculation  of  the  amount  of
unrecognized  deferred U.S.  income tax liability is not  practicable due to the
complexities associated with the calculation.

The following is a summary of the Company's  deferred tax assets and liabilities
as of June 30:

<TABLE>
<CAPTION>
(Dollar amounts in thousands)                        2006            2005
                                                --------------  --------------
Deferred Tax Assets
<S>                                             <C>             <C>
  Benefit of federal, state, and
    foreign  net operating loss carry forwards  $       2,456   $       1,672
  Allowance for membership cancellations                3,765           4,459
  Charge for arbitration award                              -           2,088
  Stock option expense - FAS 123R                       1,178               -
  Other deferred tax assets                             4,142           5,194
                                                --------------  --------------
  Deferred tax assets                                  11,541          13,413
  Valuation allowance                                    (657)           (222)
                                                --------------  --------------
Deferred tax assets                                    10,884          13,191
                                                --------------  --------------
Deferred Tax Liabilities
  Deferred marketing costs                             (9,657)        (14,854)
  Deferred revenues                                    (7,961)         (5,497)
  Goodwill and other intangible assets                 (7,449)         (6,221)
  Depreciation                                         (3,410)         (5,678)
  Other deferred tax liabilities                       (1,014)           (423)
                                                --------------  --------------
  Gross deferred tax liabilities                      (29,491)        (32,673)
                                                --------------  --------------
  Net deferred tax liability                    $     (18,607)  $     (19,482)
                                                ==============  ==============
</TABLE>

As of June 30, 2006,  the Company has fully  utilized all federal net  operating
loss carry  forwards.  The Company has state net operating  loss carry  forwards
available to reduce future state taxable  income which expire  beginning  fiscal
2007 through  fiscal 2019.  In addition,  the Company has foreign net  operating
losses of $10,233,000 expiring beginning June 30, 2014 through June 30, 2016.

Tax benefits  resulting from the exercise of nonqualified  stock options and the
disqualifying  dispositions  of shares  issued under the  Company's  stock-based
compensation  plans reduced taxes payable by $5,852,000  and  $2,220,000 in 2006
and 2005,  respectively.  These  benefits were  credited to  additional  paid-in
capital and deferred tax assets.

                                      F-16
<PAGE>

NOTE 11 - EARNINGS PER SHARE

The  following  table   reconciles  the  numerators  and   denominators  in  the
computations of basic and diluted earnings per share:

                                                    For the years ended June 30,
                                                    ----------------------------
(Dollar amount in thousands, except per share data)   2006      2005      2004
                                                    --------  --------  --------
Numerator:
Income available to common shareholders used in
 basic earnings per share                           $32,702   $25,549   $27,960
Add back interest expense on convertible securities,
 net of tax                                           3,334     3,247     2,236
                                                    --------  --------  --------
Income available to common shareholders after
 assumed conversion of dilutive securities          $36,036   $28,796   $30,196
                                                    ========  ========  ========

Denominator:
Weighted average number of common shares outstanding
 - basic                                              9,722     9,995    10,755
Effect of dilutive securities:
Convertible securities                                2,230     2,230     1,678
Stock options                                           791       748       775
                                                    --------  --------  --------
Weighted average number of common shares outstanding
 - diluted                                           12,743    12,973    13,208
                                                    ========  ========  ========

Basic earnings per share                            $  3.36   $  2.56   $  2.60
                                                    ========  ========  ========
Diluted earnings per share                          $  2.83   $  2.22   $  2.29
                                                    ========  ========  ========

The  diluted  earnings  per  common  share  calculation  excludes  the effect of
potentially dilutive shares when their effect is antidilutive. Excluded from the
diluted share  calculation  above for the years ended June 30, 2006,  2005,  and
2004 are incremental  weighted  average stock options of  approximately  51,000,
67,000, and 26,000, respectively.

NOTE 12 - SHAREHOLDERS' EQUITY

The Company has a stock repurchase  program.  During 2005 and 2004, the Board of
Directors  authorized  the Company to repurchase  up to an aggregate  additional
4,000,000   shares  of  the  Company's  common  stock.  As  of  June  30,  2006,
approximately  327,000 shares  remained  authorized  for  repurchase  under this
program.  The Company  repurchased  498,000 shares for  $19,338,000,  an average
price of $38.83 per share, in 2006, 1,168,000 shares for $41,131,000, an average
price of $34.92 per share,  in 2005 and  2,985,000  shares for  $94,207,000,  an
average  price of $31.56  per  share,  in 2004.  In  August  2006,  the  Company
announced that its Board of Directors authorized the Company to repurchase up to
an aggregate additional 1,000,000 shares of the Company's common stock.

In fiscal 2005,  the Board of  Directors  authorized  a modified  Dutch  Auction
self-tender offer for up to 500,000 shares of its common stock.  Under the terms
of the self-tender offer as approved by the Board of Directors, and as set forth
in the Offer to Purchase filed as an exhibit to the Company's  Schedule TO filed
on November  15,  2004,  as amended  (the "Offer to  Purchase"),  the  Company's
stockholders were given the opportunity to tender part or all of their shares to
the  Company  at a price of not less  than  $33.50  per  share and not more than
$38.50 per share.  The self-tender  offer closed on January 7, 2005 with a total
of 605,000 shares tendered by shareholders.  The Company exercised its right, as
set forth in the Offer to Purchase,  to purchase the  additional  105,000 shares
and  repurchased a total of 605,000 shares for $38.50 per share,  paying a total
of $23,293,000.

NOTE 13 - ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The components of accumulated other comprehensive income (loss) are as follows:

                                                   June 30,
                                           -----------------------
(Dollar amounts in thousands)                 2006         2005
                                           ----------   ----------
Unrealized hedging (loss) gain             $    (145)   $     239
Currency translation adjustment                  359         (285)
Minimum pension liability adjustment, net
 of tax                                            -         (102)
                                           ----------   ----------
Total                                      $     214    $    (148)
                                           ==========   ==========

                                      F-17
<PAGE>

NOTE 14 - EMPLOYEE BENEFIT PLANS

The Company has a defined contribution 401(k) profit sharing plan. Employees may
contribute up to 20% of their compensation subject to certain  limitations.  The
Company  makes  matching  contributions  in cash.  Matching  contributions  were
$646,000, $376,000, and $168,000 for 2006, 2005, and 2004, respectively.

Effective  January 1, 2004,  the Company has an unfunded,  nonqualified  defined
benefit  pension  plan  that  benefits  certain   executives   selected  by  the
Compensation  Committee of the Board of Directors.  This plan provides for fixed
annual payments for ten years upon retirement  after attaining the age of 55 and
ten years of service.  Pension expense was $390,000,  $306,000,  and $212,000 in
2006, 2005, and 2004, respectively.

The Company used weighted-average discount rate assumptions of 6%, 5%, and 6% in
its 2006, 2005, and 2004, respectively. The following tables present information
about this pension plan:

                                               For the years ended June 30,
                                           ------------------------------------
(Dollar amounts in thousands)                 2006         2005          2004
                                           -----------  -----------  -----------
Pension expense by component
Interest cost                              $       85   $       77   $       35
Service cost                                      174          146           71
Prior service cost                                131           83          106
                                           -----------  -----------  -----------
Pension expense                            $      390   $      306   $      212
                                           ===========  ===========  ===========

                                                   June 30,
                                           ------------------------
(Dollar amounts in thousands)                 2006          2005
                                           -----------  -----------
Pension benefit obligation
Balance at beginning of year               $    1,645   $    1,276
Interest cost                                      85           77
Service cost                                      174          146
Actuarial (gain) loss                            (333)         146
                                           -----------  -----------
Balance at end of year                     $    1,571   $    1,645
                                           ===========  ===========

Funded status of the plan
Cumulative pension expense recognized      $      908   $      518
Unrecognized net actuarial (gain) loss           (220)         160
Unrecognized prior service cost                   883          967
                                           -----------  -----------
Excess of the benefit obligation over the
 value of plan assets                      $    1,571   $    1,645
                                           ===========  ===========

Net recognized amounts as classified in
 the balance sheet
Intangible asset                           $     (663)  $     (967)
Other long-term liabilities                     1,571        1,645
Accumulated other comprehensive loss                -         (160)
                                           -----------  -----------
Cumulative pension expense recognized      $      908   $      518
                                           ===========  ===========

No benefits are  expected to be paid by the plan during the next two years.  The
Company  expects it could pay  benefits of $60,000,  $175,000,  and  $175,000 in
2009, 2010, and 2011, respectively, and $3,639,000 thereafter.

                                      F-18
<PAGE>

NOTE 15 - STOCK-BASED COMPENSATION

The Company adopted SFAS 123R in July 2005.  Prior to the adoption of SFAS 123R,
the Company accounted for its share-based employee  compensation plans under the
recognition  and  measurement  provisions  of APB Opinion No. 25 and its related
interpretations. If compensation cost for the Company's stock-based compensation
plans had been determined  based on the fair value method  (estimated  using the
Black-Scholes  option pricing model) at the grant dates in accordance  with SFAS
No. 123, "Accounting for Stock-Based  Compensation," ("SFAS 123"), the Company's
pro forma net income and  earnings  per share would have been as follows for the
years ended June 30:

(Dollar amount in thousands, except per share data)      2005           2004
                                                     ------------   ------------
Net income, as reported                              $    25,549    $    27,960
Deduct: Stock-based employee compensation expense
 under the fair value method, net of related tax
 effects (1)                                              (4,013)        (4,762)
                                                     ------------   ------------
Pro forma net income                                 $    21,536    $    23,198
                                                     ============   ============

Earnings per share:
 As reported
Basic                                                $      2.56    $      2.60
Diluted                                              $      2.22    $      2.29
 Pro forma
Basic                                                $      2.15    $      2.16
Diluted                                              $      1.89    $      1.90

(1) Compensation expense was reduced for forfeitures as they occurred.

The Company  evaluated its valuation  method and  assumptions in connection with
the  implementation  of SFAS 123R.  The Company  determined  that the use of the
Black-Scholes  option-pricing  model was  appropriate and is consistent with the
Company's pro forma disclosures  under the fair value recognition  provisions of
SFAS 123. The following  weighted average  assumptions were used to estimate the
fair value of options granted for the years ended June 30:

                                           2006          2005          2004
                                       ------------  ------------  ------------
Dividend yield                                   0%            0%            0%
Expected volatility (1)                         63%           64%           74%
Risk free interest rate (2)                   3.90%         3.70%         2.90%
Expected lives (3)                          5 years       5 years       5 years

(1) Estimated based on the historical volatility of the Company's stock.
(2) Based on the U.S. Treasury yield curve in effect at the time of grant with a
    term consistent with the expected life of the options granted.
(3) Estimated based on historical exercise experience and expected future
    results of similar grants.

The weighted  average fair values of options granted during the years ended June
30, 2006,  2005,  and 2004  estimated on the grant date using the  Black-Scholes
option-pricing model with the assumptions listed above were $21.86,  $18.23, and
$14.98,  respectively.  The estimated  fair value of the  Company's  stock-based
awards to employees is amortized over the options' vesting periods of four years
and the estimated  fair value of the Company's  awards issued under the Employee
Stock Purchase Plan is recognized in the period the stock is issued.

For the year ended June 30, 2006, the Company recognized $4,531,000  ($2,838,000
net of tax,  $0.29 per basic share,  or $0.22 per diluted  share) in general and
administrative  expenses  related to stock option  compensation.  As of June 30,
2006,  unrecognized stock  compensation  expense related to unvested options was
$7,226,000, which is expected to be recognized over a weighted average period of
2.5 years.

The total intrinsic value of options  exercised  during the years ended June 30,
2006,   2005,  and  2004  was   $10,074,000,   $11,138,000,   and   $17,053,000,
respectively.  The total cash  received  as a result of  employee  stock  option
exercises  for the years ended June 30,  2006,  2005,  and 2004 was  $8,636,000,
$10,792,000,  and  $24,564,000,  respectively.  The  tax  benefits  realized  in
connection  with these  exercises were  $5,366,000,  $2,220,000,  and $6,520,000
during the years ended June 30, 2006, 2005, and 2004, respectively.

As of June 30,  2006,  the Company had the  following  stock-based  compensation
plans which are described below.

                                      F-19
<PAGE>

Under the 1996 Stock Option Plan,  the Board of Directors can determine the date
on which options vest and become  exercisable as well as the term of the options
granted.  The 1996 Stock Option Plan is  authorized  to grant options to acquire
5,524,000 shares of common stock.

Under the 1995 Executive  Officers' Stock Option Plan and the 1995  Non-Employee
Directors'  Stock  Option Plan,  the Board is  authorized  to grant  360,000 and
180,000 options,  respectively, to acquire shares of common stock at a price per
share equal to or greater  than fair market  value at the grant date.  Under the
Executive Officers' Stock Option Plan, the Board can determine the date on which
options vest and become exercisable.

Under  the  stock  option  plans  described  above,   options  generally  become
exercisable  over a four year period and expire at the earlier of termination of
employment or ten years from the grant date.

In addition,  the 2005 Equity  Incentive Plan has 1,000,000  shares  authorized,
reserved and available for issuance.  Awards granted may be in the form of stock
options,  restricted stock,  restricted stock units, stock appreciation  rights,
performance  stock, and performance  stock units. As of June 30, 2006, no awards
have been made under this plan.  The Board of  Directors  has the  authority  to
determine  the  form,  terms  and  conditions  of  awards  at the time of grant,
including  vesting,  exercisability,  payment,  and the effect,  if any,  that a
participant's termination of service will have on an award.

As of June 30, 2006, 4,028,000 shares of common stock were reserved for issuance
under these stock incentive  plans, of which 1,498,000 shares were available for
future grant.

Information  with respect to options to purchase  shares  issued under the above
plans as of June 30 is as follows:

<TABLE>
<CAPTION>
                                      2006                      2005                       2004
                            -------------------------  ------------------------  -------------------------
                                           Weighted                  Weighted                   Weighted
                                           Average                    Average                   Average
                                           Exercise                  Exercise                   Exercise
(Share amounts in thousands)  Shares        Price        Shares        Price       Shares        Price
                            -----------  ------------  -----------  -----------  -----------  ------------
<S>                              <C>     <C>                <C>     <C>               <C>     <C>
Outstanding at beginning of
 year                            2,872   $     22.16        3,305   $    20.10        4,532   $     19.88
Granted                            235         38.43          366        32.35          240         24.92
Exercised                         (449)        18.27         (607)       17.49       (1,227)        19.78
Forfeited or expired              (127)        32.43         (192)       20.87         (240)        22.48
                            -----------                -----------               -----------
Outstanding at end of year       2,531         23.85        2,872        22.16        3,305         20.10
                            ===========                ===========               ===========
</TABLE>

The following  table  summarizes  the Company's  stock options  outstanding  and
exercisable as of June 30, 2006:

<TABLE>
<CAPTION>
                                         Options Outstanding                        Options Exercisable
                           ------------------------------------------------  ---------------------------------
                                        Weighted
                                         Average     Weighted                             Weighted
                                        Remaining     Average   Aggregate                 Average   Aggregate
                                       Contractual   Exercise   Intrinsic                 Exercise  Intrinsic
(Share amounts in thousands) Shares     Term (Yrs)    Price       Value       Shares       Price      Value
                           ----------- ----------- ----------- -----------  ----------- ---------- -----------
<S>                             <C>          <C>   <C>         <C>                 <C>  <C>        <C>
$7.98 to $13.05                   419        5.96  $    12.40  $   12,842          294  $   12.12  $    9,098
$13.05 to $19.375                 377        3.60       16.43      10,012          354      16.42       9,416
$19.375 to $25.563                546        5.44       20.65      12,221          486      20.62      10,891
$25.563 to $29.875                829        4.59       29.47      11,241          683      29.44       9,279
$29.875 to $43.00                 360        8.82       36.86       2,221           51      34.14         454
                           -----------                         -----------  -----------            -----------
                                2,531        5.46       23.85  $   48,537        1,868      22.08  $   39,138
                           ===========                         ===========  ===========            ===========
</TABLE>

The weighted average remaining  contractual term of stock options exercisable as
of June 30, 2006 was 4.58 years. Of the options outstanding, the Company expects
2,464,000  options to vest.  Options  expected  to vest have a weighted  average
exercise price of $23.57, a weighted average  remaining  contractual term of 5.2
years and an intrinsic value of $47,940,000.

                                      F-20
<PAGE>

Employee Stock Purchase Plan
During 1997,  the Company  adopted the 1996 Employee  Stock  Purchase Plan which
provides  for the  issuance of up to 360,000  shares of common  stock.  The plan
permits eligible employees to purchase Common Stock through payroll  deductions,
which may not exceed 10% of an employee's compensation,  at a price equal to 85%
of the  closing  price  of the  Common  Stock  on the  day the  purchase  period
commences or  terminates,  whichever  is lower.  During  2006,  2005,  and 2004,
14,000, 11,000, and 14,000 shares were purchased under the plan, respectively.

NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information was:

                                                 For the years ended June 30,
                                        ----------------------------------------
(Dollar amounts in thousands)               2006          2005          2004
                                        ------------  ------------  ------------
Cash paid for interest                  $    19,224   $    18,754   $     2,640
Cash paid for income taxes                   12,729         8,036         5,568


NOTE 17 - BUSINESS SEGMENTS

The operating  business  segments  reported  below are the  reportable  business
segments of the Company for which  separate  financial  information is available
and for which operating results are evaluated regularly by executive  management
in  assessing  performance  and  deciding  how to  allocate  capital  and  other
resources.  The  Company  has  three  reportable  business  segments:  Marketing
Services,  Personals,  and Management Services.  The Marketing Services business
segment primarily provides  discounted  products and services to consumers.  The
Personals  business  segment  provides web, phone,  and  mobile-based  personals
services to its customers. During 2006, the Management Services business segment
became  reportable  due to the increase in its assets and all prior periods have
been restated to reflect this change.  The Management  Services business segment
provides   advertising   and   practice   management   services  to   healthcare
professionals throughout the United States. The Corporate business unit includes
unallocated general corporate expenses.

                                      F-21
<PAGE>

Management  evaluates the operating results of each reportable  business segment
based on revenue and Adjusted  EBITDA.  The  following is a summary of revenues,
Adjusted EBITDA, capital expenditures, depreciation and amortization, and assets
by business segment:

(Dollar amounts in thousands)                 For the years ended June 30,
                                      ------------------------------------------
Revenues                                  2006           2005           2004
                                      ------------   ------------   ------------
 Marketing Services                   $   539,723    $   490,289    $   471,049
 Personals                                 74,646         72,336         17,690
 Management Services                       44,699         17,513              -
 Intersegment                                (213)          (299)             -
                                      ------------   ------------   ------------
  Total                               $    658,855   $   579,839    $   488,739
                                      ============   ============   ============


                                              For the years ended June 30,
                                      ------------------------------------------
Adjusted EBITDA (1)                       2006           2005           2004
                                      ------------   ------------   ------------
 Marketing Services                   $    88,867    $    74,060    $    80,434
 Personals                                 10,873          6,267          2,073
 Management Services                        7,528          3,639              -
 Corporate                                (28,045)       (26,763)       (23,947)
                                      ------------   ------------   ------------
  Total Reportable Segment            $    79,223    $    57,203    $    58,560
                                      ============   ============   ============


                                              For the years ended June 30,
                                      ------------------------------------------
Capital Expenditures (2)                  2006           2005           2004
                                      ------------   ------------   ------------
 Marketing Services                   $    16,327    $     8,512    $     6,486
 Personals                                  1,188          2,447            571
 Management Services                          266             47              -
 Corporate                                      -              -              -
                                      ------------   ------------   ------------
  Total                               $    17,781    $    11,006    $     7,057
                                      ============   ============   ============


                                              For the years ended June 30,
                                      ------------------------------------------
Depreciation and Amortization             2006           2005           2004
                                      ------------   ------------   ------------
 Marketing Services                   $    11,860    $    10,978    $    10,085
 Personals                                  9,839          9,323          2,327
 Management Services                        1,629            802              -
 Corporate                                  1,119            474             66
                                      ------------   ------------   ------------
  Total                               $    24,447    $    21,577    $    12,478
                                      ============   ============   ============


                                                       June 30,
                                      ------------------------------------------
Assets                                    2006           2005           2004
                                      ------------   ------------   ------------
 Marketing Services                   $   214,083    $   245,635    $   178,723
 Personals                                124,571        132,992        136,874
 Management Services                       62,730         41,052              -
 Corporate (3)                             41,644         27,483        137,565
                                      ------------   ------------   ------------
  Total                               $   443,028    $   447,162    $   453,162
                                      ============   ============   ============

(1)  Defined  as net income  plus  interest  and other  (expense)  income,  net,
     provision for income taxes, depreciation and amortization,  and the changes
     in deferred revenue and deferred marketing costs. See reconciliation below.
(2)  Management does not allocate certain capital  expenditures to the Corporate
     business  unit.  However,  the  associated  depreciation  expense  has been
     allocated for purposes of evaluating performance.
(3)  Includes unallocated non-operating assets including short-term investments,
     debt issuance costs, and other.

                                      F-22
<PAGE>

The following tables reconcile Adjusted EBITDA to income before income taxes:

<TABLE>
<CAPTION>
                                                        For the year ended June 30, 2006
                                     -------------------------------------------------------------------------
(Dollar amounts in thousands)                         Marketing                    Management
                                         Total         Services      Personals      Services       Corporate
                                     -------------  -------------  -------------  -------------  -------------
<S>                                  <C>            <C>            <C>            <C>            <C>
Income before income taxes           $     48,559
Interest and other expense, net (1)        16,782
                                     -------------
Operating income (expense)           $     65,341   $     88,010   $      1,203   $      5,292   $    (29,164)
Depreciation and amortization              24,447         11,860          9,839          1,629          1,119
Change in deferred revenues               (23,549)       (23,987)          (169)           607              -
Change in deferred marketing costs         12,984         12,984              -              -              -
                                     -------------  -------------  -------------  -------------  -------------
Adjusted EBITDA                      $     79,223   $     88,867   $     10,873   $      7,528   $    (28,045)
                                     =============  =============  =============  =============  =============

                                                        For the year ended June 30, 2005
                                     -------------------------------------------------------------------------
                                                      Marketing                    Management
                                         Total         Services      Personals      Services       Corporate
                                     -------------  -------------  -------------  -------------  -------------
Income before income taxes           $     38,941
Interest and other expense, net (1)        18,153
                                     -------------
Operating income (expense)           $     57,094   $     85,498   $     (3,129)  $      1,962   $    (27,237)
Depreciation and amortization              21,577         10,978          9,323            802            474
Change in deferred revenues               (34,911)       (35,859)            73            875              -
Change in deferred marketing costs         13,443         13,443              -              -              -
                                     -------------  -------------  -------------  -------------  -------------
Adjusted EBITDA                      $     57,203   $     74,060   $      6,267   $      3,639   $    (26,763)
                                     =============  =============  =============  =============  =============

                                                        For the year ended June 30, 2004
                                     -------------------------------------------------------------------------
                                                      Marketing                    Management
                                         Total         Services      Personals      Services       Corporate
                                     -------------  -------------  -------------  -------------  -------------
Income before income taxes           $     46,598
Interest and other income, net (1)          6,272
                                     -------------
Operating income (expense)           $     52,870   $     76,576   $        336   $          -   $    (24,042)
Depreciation and amortization              12,507         10,085          2,327              -             95
Change in deferred revenues               (32,272)       (31,682)          (590)             -              -
Change in deferred marketing costs         25,455         25,455              -              -              -
                                     -------------  -------------  -------------  -------------  -------------
Adjusted EBITDA                      $     58,560   $     80,434   $      2,073   $          -   $    (23,947)
                                     =============  =============  =============  =============  =============
</TABLE>

(1)  Management  does  not  allocate  interest  and  other  expense,  net to the
individual segments.

During 2006, the Company's  assets and  operations  were primarily in the United
States and Canada.  Revenues are  attributable to geographic  areas based on the
country where the sales were made. Geographic information is presented below:
<TABLE>
<CAPTION>

(Dollar amounts in thousands)                                     For the years ended June 30,
                                                             -------------------------------------
Revenues                                                         2006         2005         2004
                                                             -----------  -----------  -----------
<S>                                                          <C>          <C>          <C>
 United States                                               $  592,380   $  520,167   $  460,606
 Canada                                                          64,053       57,076       27,450
 Other countries                                                  2,422        2,596          683
                                                             -----------  -----------  -----------
  Total                                                      $  658,855   $  579,839   $  488,739
                                                             ===========  ===========  ===========

                                                                     June 30,
                                                             ------------------------
Long-lived assets                                                2006         2005
                                                             -----------  -----------
 United States                                               $   43,552   $   35,188
 Canada                                                          11,146        7,366
 Other countries                                                     14        2,434
                                                             -----------  -----------
   Total                                                     $   54,712   $   44,988
                                                             ===========  ===========
</TABLE>

                                      F-23
<PAGE>

NOTE 18 - QUARTERLY FINANCIAL DATA (unaudited)
<TABLE>
<CAPTION>

                                                                  For the year ended June 30, 2006
                                                          --------------------------------------------------
                                                             First        Second       Third       Fourth
(Dollar amount in thousands, except per share data)         Quarter      Quarter      Quarter      Quarter
                                                          -----------  -----------  -----------  -----------
<S>                                                       <C>          <C>          <C>          <C>
Revenues                                                  $  157,528   $  160,130   $  163,841   $  177,356
Operating income                                              17,656       16,878       10,962       19,845
Net income                                                     8,641        7,664        4,141       12,256
Basic earnings per share                                        0.89         0.79         0.43         1.26
Diluted earnings per share                                      0.74         0.66         0.38         1.03

                                                                    For the year ended June 30, 2005
                                                          --------------------------------------------------
                                                             First        Second       Third       Fourth
                                                            Quarter      Quarter      Quarter      Quarter
                                                          -----------  -----------  -----------  -----------
Revenues                                                  $  135,623   $  136,479   $  148,995   $  158,742
Operating income                                              16,732       13,783       11,539       15,040
Net income                                                     7,596        5,883        4,353        7,717
Basic earnings per share                                        0.75         0.58         0.44         0.79
Diluted earnings per share                                      0.65         0.51         0.40         0.67
</TABLE>

Net income for the fourth  quarter  of fiscal  2005  included a one-time  pretax
charge of $5,458,000  resulting  from the  settlement of the MedVal  arbitration
(see Note 8).

NOTE 19 - GUARANTOR FINANCIAL INFORMATION

In April 2004, the Company issued  $150,000,000  aggregate  principal  amount of
9.25% Senior Notes due 2014. The Senior Notes are unsecured obligations and rank
pari  passu in right of  payment  to all of the  Company's  existing  and future
senior  unsecured  indebtedness  and  senior in right of  payment  to all of the
Company's existing and future subordinated  indebtedness that expressly provides
for its subordination to the Senior Notes.  Effective April 28, 2006, the Senior
Notes are fully  and  unconditionally  guaranteed  by  substantially  all of the
Company's  subsidiaries that guarantee the Company's Credit Facility (as defined
in the First  Indenture  dated April 28, 2006 governing the Senior  Notes).  All
prior periods have been restated to conform to this presentation.

The  following   consolidating  condensed  financial  information  presents  the
consolidating  balance  sheets  as of  June  30,  2006  and  2005,  the  related
statements of operations and cash flows for the years ended June 30, 2006, 2005,
and  2004.  The  information  includes  the  elimination  entries  necessary  to
consolidate the Company ("Parent") with the guarantor entities.

Investments  in  subsidiaries  are  accounted for by the Parent using the equity
method of  accounting.  The guarantor  subsidiaries  are presented on a combined
basis. The principal  elimination entries eliminate  investments in subsidiaries
and intercompany balances and transactions.

                                      F-24
<PAGE>

               CONSOLIDATING CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                            June 30, 2006
                                       ------------------------------------------------------

                                                       Guarantor                 Consolidated
(Dollar amounts in thousands)             Parent     Subsidiaries  Eliminations      Total
                                       ------------  ------------  ------------  ------------


        Assets
<S>                                    <C>           <C>           <C>           <C>
Current assets                         $    37,724   $   115,844   $   (21,545)  $   132,023
Fixed assets, net                           22,532        18,036             -        40,568
Goodwill                                         -       212,187             -       212,187
Intangible assets, net                         675        37,123             -        37,798
Other long-term assets                      10,205        10,247             -        20,452
Investment in subsidiaries                 308,919             -      (308,919)            -
                                       ------------  ------------  ------------  ------------
  Total assets                         $   380,055   $   393,437   $  (330,464)  $   443,028
                                       ============  ============  ============  ============

 Liabilities and Shareholders'
   (Deficit) Equity
Current liabilities                    $   149,958   $    75,891   $   (21,545)  $   204,304
Deferred income taxes                         (318)        7,238             -         6,920
Long-term debt                             237,984             -             -       237,984
Other long-term liabilities                  8,600         1,389             -         9,989
                                       ------------  ------------  ------------  ------------
  Total liabilities                        396,224        84,518       (21,545)      459,197
                                       ------------  ------------  ------------  ------------

Shareholders' (deficit) equity:
 Common stock                                  202             9            (9)          202
 Capital in excess of par value            187,991       278,751      (278,751)      187,991
 Retained earnings                          68,382        29,890       (29,890)       68,382
 Accumulated other comprehensive
  income                                       214           269          (269)          214
 Treasury stock                           (272,958)            -             -      (272,958)
                                       ------------  ------------  ------------  ------------
  Total shareholders' (deficit)
   equity                                  (16,169)      308,919      (308,919)      (16,169)
                                       ------------  ------------  ------------  ------------
  Total liabilities and
   shareholders' (deficit)
   equity                              $   380,055   $   393,437   $  (330,464)  $   443,028
                                       ============  ============  ============  ============
</TABLE>

                                      F-25
<PAGE>

<TABLE>
<CAPTION>
                         CONSOLIDATING CONDENSED BALANCE SHEETS

                                                           June 30, 2005
                                       ------------------------------------------------------
                                                      Guarantor                  Consolidated
(Dollar amounts in thousands)             Parent     Subsidiaries  Eliminations      Total
                                       ------------  ------------  ------------  ------------
<S>                                    <C>           <C>           <C>           <C>
              Assets
Current assets                         $    80,036   $    84,193   $   (17,202)  $   147,027
Fixed assets, net                           18,797        20,265             -        39,062
Goodwill                                         -       201,499             -       201,499
Intangible assets, net                       1,097        45,379             -        46,476
Other long-term assets                      10,991         2,107             -        13,098
Investment in subsidiaries                 275,213             -      (275,213)            -
                                       ------------  ------------  ------------  ------------
  Total assets                         $   386,134   $   353,443   $  (292,415)  $   447,162
                                       ============  ============  ===========   ============

 Liabilities and Shareholders'
         (Deficit) Equity
Current liabilities                    $   190,595   $    69,424   $   (17,202)  $   242,817
Deferred income taxes                        2,588         7,114             -         9,702
Long-term debt                             237,814             -             -       237,814
Other long-term liabilities                  3,565         1,692             -         5,257
                                       ------------  ------------  ------------  ------------
  Total liabilities                        434,562        78,230       (17,202)      495,590
                                       ------------  ------------  ------------  ------------

Shareholders' (deficit) equity:
 Common stock                                  197             9            (9)          197
 Capital in excess of par value            169,463       267,769      (267,769)      169,463
 Retained earnings                          35,680         7,551        (7,551)       35,680
 Accumulated other comprehensive
  loss                                        (148)         (116)          116          (148)
 Treasury stock                           (253,620)            -             -      (253,620)
                                       ------------  ------------  ------------  ------------
  Total shareholders' (deficit)
   equity                                  (48,428)      275,213      (275,213)      (48,428)
                                       ------------  ------------  ------------  ------------
  Total liabilities and
   shareholders' (deficit) equity      $   386,134   $   353,443   $  (292,415)  $   447,162
                                       ============  ============  ===========   ============
</TABLE>

                                      F-26
<PAGE>

              CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>

                                                   For the year ended June 30, 2006
                                       ------------------------------------------------------
                                                      Guarantor                  Consolidated
(Dollar amounts in thousands)             Parent     Subsidiaries  Eliminations      Total
                                       ------------  ------------  ------------  ------------

<S>                                    <C>           <C>           <C>           <C>
Revenues                               $   389,867   $   290,013   $   (21,025)  $   658,855
Expenses:
 Marketing                                 214,566       118,913       (20,260)      313,219
 Operating                                  69,020        83,365          (765)      151,620
 General and administrative                 73,336        46,979             -       120,315
 Amortization of intangible assets             103         8,257             -         8,360
                                       ------------  ------------  ------------  ------------
Operating income                            32,842        32,499             -        65,341
Equity in income of subsidiaries            22,353             -       (22,353)            -
Interest (expense) income, net             (19,183)        2,403             -       (16,780)
Other income (expense), net                     13           (15)            -            (2)
                                       ------------  ------------  ------------  ------------
Income before income taxes                  36,025        34,887       (22,353)       48,559
Provision for income taxes                   3,323        12,534             -        15,857
                                       ------------  ------------  ------------  ------------

Net income                             $    32,702   $    22,353   $   (22,353)  $    32,702
                                       ============  ============  ============  ============



                CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS


                                                   For the year ended June 30, 2005
                                       ------------------------------------------------------
                                                      Guarantor                  Consolidated
(Dollar amounts in thousands)             Parent     Subsidiaries  Eliminations      Total
                                       ------------  ------------  ------------  ------------

Revenues                               $   376,112   $   216,822   $   (13,095)  $   579,839
Expenses:
  Marketing                                202,429        94,441       (10,433)      286,437
  Operating                                 62,911        54,169        (2,662)      114,418
  General and administrative                62,839        45,392             -       108,231
  Charge for arbitration award               5,458             -             -         5,458
  Amortization of intangible assets            228         7,973             -         8,201
                                       ------------  ------------  ------------  ------------
Operating income                            42,247        14,847             -        57,094
Equity in income of subsidiaries            11,167             -       (11,167)            -
Interest (expense) income, net             (19,068)          263             -       (18,805)
Other income (expense), net                    (55)          707             -           652
                                       ------------  ------------  ------------  ------------
Income before income taxes                  34,291        15,817       (11,167)       38,941
Provision for income taxes                   8,742         4,650             -        13,392
                                       ------------  ------------  ------------  ------------

Net income                             $    25,549   $    11,167   $   (11,167)  $    25,549
                                       ============  ============  ============  ============
</TABLE>

                                      F-27
<PAGE>

                CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>


                                                   For the year ended June 30, 2004
                                       ------------------------------------------------------
                                                      Guarantor                  Consolidated
(Dollar amounts in thousands)             Parent     Subsidiaries  Eliminations      Total
                                       ------------  ------------  ------------  ------------

<S>                                    <C>           <C>           <C>           <C>
Revenues                               $   395,074   $    95,205   $    (1,540)  $   488,739
Expenses:
  Marketing                                213,884        41,934             -       255,818
  Operating                                 69,222        24,150        (1,540)       91,832
  General and administrative                65,640        20,186             -        85,826
  Amortization of intangible assets              -         2,393             -         2,393
                                       ------------  ------------  ------------  ------------
Operating income                            46,328         6,542             -        52,870
Equity in income of subsidiaries             2,661             -        (2,661)            -
Interest expense, net                       (4,613)       (2,008)            -        (6,621)
Other income (expense), net                    447           (98)            -           349
                                       ------------  ------------  ------------  ------------
Income before income taxes                  44,823         4,436        (2,661)       46,598
Provision for income taxes                  16,863         1,775             -        18,638
                                       ------------  ------------  ------------  ------------

Net income                             $    27,960   $     2,661   $    (2,661)  $    27,960
                                       ============  ============  ============  ============


                CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS

                                                   For the year ended June 30, 2006
                                       ------------------------------------------------------
                                                      Guarantor                  Consolidated
(Dollar amounts in thousands)             Parent     Subsidiaries  Eliminations      Total
                                       ------------  ------------  ------------  ------------

 Net cash provided by operating
  activities                           $    55,103   $     4,939   $   (22,353)  $    37,689

 Investing activities
  Acquisition of fixed assets              (11,629)       (6,152)            -       (17,781)
  Purchases of short-term
   investments                            (138,047)      (19,473)            -      (157,520)
  Sales of short-term investments          133,088         9,849             -       142,937
  Acquisitions of businesses,
   net of cash acquired                    (25,442)         (225)            -       (25,667)
  Other investments                        (22,353)            -        22,353             -
                                       ------------  ------------  ------------  ------------
 Net cash used in investing
  activities                               (64,383)      (16,001)       22,353       (58,031)
                                       ------------  ------------  ------------  ------------

 Financing activities
  Net proceeds from issuance of
   stock                                     8,636             -             -         8,636
  Excess tax benefit from
   stock-based compensation                  3,086             -             -         3,086
  Treasury stock purchases                 (19,338)            -             -       (19,338)
  Debt issuance costs                         (154)            -             -          (154)
  Payments of long-term obligations           (408)         (219)            -          (627)
                                       ------------  ------------  ------------  ------------
 Net cash used in financing
  activities                                (8,178)         (219)            -        (8,397)
                                       ------------  ------------  ------------  ------------
 Effect of exchange rate
  changes on cash and
  cash equivalents                               -           673             -           673
                                       ------------  ------------  ------------  ------------
 Net decrease in cash and
  cash equivalents                         (17,458)      (10,608)            -       (28,066)
 Cash and cash equivalents at
  beginning of year                         24,366        39,990             -        64,356
                                       ------------  ------------  ------------  ------------
 Cash and cash equivalents
  at end of year                       $     6,908   $    29,382   $         -   $    36,290
                                       ============  ============  ============  ============
</TABLE>

                                      F-28
<PAGE>

              CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                   For the year ended June 30, 2005
                                       ------------------------------------------------------
                                                      Guarantor                  Consolidated
(Dollar amounts in thousands)             Parent     Subsidiaries  Eliminations      Total
                                       ------------  ------------  ------------  ------------
<S>                                    <C>           <C>           <C>           <C>
 Net cash provided by
  (used in) operating
  activities                           $   124,196   $   (80,718)  $   (11,167)  $    32,311

 Investing activities
  Acquisition of fixed assets               (6,418)       (4,588)            -       (11,006)
  Purchases of short-term
   investments                            (402,970)          340             -      (402,630)
  Sales of short-term investments          506,960           300             -       507,260
  Acquisitions of businesses,
   net of cash acquired                   (172,977)       95,740             -       (77,237)
  Other investments                        (11,167)            -        11,167             -
                                       ------------  ------------  ------------  ------------
 Net cash (used in) provided by
  investing activities                     (86,572)       91,792        11,167        16,387
                                       ------------  ------------  ------------  ------------

 Financing activities
  Net proceeds from issuance of
   stock                                    10,792             -             -        10,792
  Treasury stock purchases                 (41,131)            -             -       (41,131)
  Debt issuance costs                         (844)            -             -          (844)
  Payments of long-term obligations           (326)         (223)            -          (549)
                                       ------------  ------------  ------------  ------------
 Net cash used in financing
  activities                               (31,509)         (223)            -       (31,732)
                                       ------------  ------------  ------------  ------------
 Effect of exchange rate changes
  on cash and cash equivalents                   -           224             -           224
                                       ------------  ------------  ------------  ------------
 Net increase in cash and cash
  equivalents                                6,115        11,075             -        17,190
 Cash and cash equivalents at
  beginning of year                         18,251        28,915             -        47,166
                                       ------------  ------------  ------------  ------------
 Cash and cash equivalents at
  end of year                          $    24,366   $    39,990   $         -   $    64,356
                                       ============  ============  ============  ============



                CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS

                                             For the year ended June 30, 2004
                                       ------------------------------------------------------
                                                      Guarantor                  Consolidated
(Dollar amounts in thousands)             Parent     Subsidiaries  Eliminations      Total
                                       ------------  ------------  ------------  ------------
 Net cash (used in)
  provided by operating
  activities                           $   (55,030)  $   105,639   $    (2,661)  $    47,948

 Investing activities
  Acquisition of fixed assets               (5,599)       (1,458)            -        (7,057)
  Purchases of short-term
   investments                            (650,750)            -             -      (650,750)
  Sales of short-term investments          535,770             -             -       535,770
  Acquisitions of businesses,
   net of cash acquired                          -      (114,916)            -      (114,916)
  Investment in subsidiaries               (22,109)       19,448         2,661             -
                                       ------------  ------------  ------------  ------------
 Net cash used in investing
  activities                              (142,688)      (96,926)        2,661      (236,953)
                                       ------------  ------------  ------------  ------------

 Financing activities
  Net proceeds from issuance of
   stock                                    33,644             -             -        33,644
  Treasury stock purchases                 (94,207)            -             -       (94,207)
  Net proceeds from issuance of
   debt                                    229,825             -             -       229,825
  Payments of long-term obligations           (188)         (265)            -          (453)
                                       ------------  ------------  ------------  ------------
 Net cash provided by (used in)
  financing activities                     169,074          (265)            -       168,809
                                       ------------  ------------  ------------  ------------
 Effect of exchange rate
  changes on cash and
  cash equivalents                               -           102             -           102
                                       ------------  ------------  ------------  ------------
 Net (decrease) increase
  in cash and cash
  equivalents                              (28,644)        8,550             -       (20,094)
 Cash and cash equivalents at
  beginning of year                         46,895        20,365             -        67,260
                                       ------------  ------------  ------------  ------------
 Cash and cash equivalents at
  end of year                          $    18,251   $    28,915   $         -   $    47,166
                                       ============  ============  ============  ============
</TABLE>

                                      F-29
<PAGE>

<TABLE>
<CAPTION>
                                               Vertrue Incorporated
                                 Schedule II - Valuation and Qualifying Accounts
                                                  (in thousands)


(Dollar amounts in thousands)             Balance at    Charged to       Charged to                       Balance at
                                         beginning of    Costs and     Other Accounts     Deductions        End of
Description                                 Period       Expenses         Describe         Describe         Period
-----------                              ------------   -----------    --------------     -----------     -----------
<S>                                      <C>            <C>            <C>           <C>  <C>        <C>       <C>
 For the year ended June 30, 2006
 Allowance for membership cancellations  $    11,232    $        -     $      94,210 (A)  $   96,152 (B)       9,290
 Allowance for notes receivable                  825         3,022                 -               -           3,847


 For the year ended June 30, 2005
 Allowance for membership cancellations       14,156             -           122,886 (A)     125,810 (B)      11,232
 Allowance for notes receivable                    -           825                 -               -             825


 For the year ended June 30, 2004
 Allowance for membership cancellations       20,934             -           183,086 (A)     189,864 (B)      14,156

</TABLE>


(A)  Charged to deferred revenues account. Includes $240,000 added in connection
     with acquisitions in fiscal 2005.
(B)  Charges for refunds upon membership cancellations.


                                      F-30