UNITED ONLINE INC - 10-Q Quarterly Report

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003 or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all documents and 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. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

There were 42,056,435 shares of the registrant's common stock outstanding as of April 30, 2003.

In this document, "United Online," the "Company," "we," "us" and "our" collectively refer to United Online, Inc. and its wholly-owned subsidiaries.

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

UNITED ONLINE, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)

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

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

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

United Online, Inc. ("United Online" or the "Company") is a leading Internet Service Provider ("ISP"). The Company, under the NetZero, Juno and BlueLight Internet brand names, offers consumers value-priced Internet access and e-mail. United Online also offers consumers free Internet access under the NetZero and Juno brands. In addition to offering consumers access to the Internet, United Online offers marketers a variety of online advertising products, including online market research and measurement services. The Company is headquartered in Westlake Village, California, with additional offices in New York, New York; San Francisco, California; San Jose, California; and Hyderabad, India.

United Online was incorporated in Delaware in June 2001 and was formed in connection with the merger of NetZero, Inc. ("NetZero") and Juno Online Services, Inc. ("Juno") into two of United Online's wholly-owned subsidiaries, which was consummated on September 25, 2001 (the "Merger"). The Merger was accounted for under the purchase method of accounting and NetZero was the acquirer and predecessor for financial accounting purposes. As a result of the Merger, NetZero and Juno each became wholly-owned subsidiaries of United Online. On November 4, 2002, the Company, through its wholly-owned NetBrands subsidiary, acquired the Internet access assets of BlueLight.com LLC ("BlueLight").

From inception through the fiscal year ended June 30, 2002, the Company and NetZero, as the Company's predecessor, incurred losses from operations and reported negative annual operating cash flows. As of March 31, 2003, the Company had an accumulated deficit of $347.0 million, cash and cash equivalents of $61.8 million and short-term investments of $109.8 million. The Company has no material financial commitments other than for operating lease, telecommunications and marketing agreements. The Company believes that its existing cash, cash equivalents and short-term investments, and cash generated from operations will be sufficient to fund its working capital requirements, capital expenditures and other obligations through at least the next twelve months. However, additional capital may be needed in order to fund the Company's operations, expand marketing activities, develop new or enhance existing services or products, to respond to competitive pressures or to acquire complementary services, businesses or technologies.

The consolidated financial statements and notes for the three and nine months ended March 31, 2003 reflect the consolidated results of United Online. The consolidated financial statements and notes for the nine months ended March 31, 2002 reflect the financial results of NetZero prior to September 25, 2001, as predecessor to United Online. As a result, the operating results presented for the nine months ended March 31, 2002 exclude the results of Juno prior to the Merger. In addition, since the operating results for the nine months ended March 31, 2002 only include Juno's results subsequent to the Merger, the results do not reflect the additional amortization expense that would have been incurred if the Merger had occurred at the beginning of fiscal 2002.

The accompanying consolidated financial statements are unaudited except for the balance sheet information at June 30, 2002 and include United Online and its wholly-owned subsidiaries. The Company's interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") including those for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and note disclosures required by GAAP for complete financial statements. These financial statements are unaudited and, in the opinion of management, include all adjustments (which include only normal

recurring adjustments) considered necessary for a fair presentation. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates. The results of operations for these interim periods are not necessarily indicative of the operating results for a full year. Certain reclassifications have been made to the prior period financial statements to conform to the current year presentation. These consolidated financial statements should be read in conjunction with the audited financial statements and related notes for the year ended June 30, 2002 included in the Company's Annual Report on Form 10-K filed on September 30, 2002 with the SEC.

In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The adoption of SFAS No. 142 in the first quarter of fiscal 2003 did not have any impact on the Company's financial position, results of operations or cash flows.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, and portions of APB Opinion No. 30, Reporting the Results of Operations. SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value or carrying amount. SFAS No. 144 also requires expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required. The adoption of SFAS No. 144 in the first quarter of fiscal 2003 did not have any impact on the Company's financial position, results of operations or cash flows.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and nullifies the guidance of Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), which recognized a liability for an exit cost at the date of an entity's commitment to an exit plan. SFAS No. 146 requires that the initial measurement of a liability be at fair value. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 in the third quarter of fiscal 2003 did not have any impact on the Company's financial position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. ("FIN") 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee. This interpretation is applicable on a prospective basis to guarantees issued or modified after December 31, 2002. FIN 45 also contains disclosure provisions surrounding existing guarantees, which are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 in the third quarter of fiscal 2003 did not have any impact on the Company's financial position, results of operations and cash flows.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FAS 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. This Statement also amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. SFAS No. 148 is effective for annual and interim periods beginning after December 15, 2002. The adoption of the interim disclosure provisions of SFAS No. 148 in the third quarter of fiscal 2003 did not have any impact on the Company's financial position, results of operations or cash flows. The Company is currently evaluating whether to adopt the fair value based method of accounting for stock-based employee compensation in accordance with SFAS No. 148 and its resulting impact on the Company's financial position, results of operations and cash flows.

In January 2003, the Emerging Issues Task Force issued EITF Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. This consensus addresses certain aspects of accounting by a vendor of arrangements under which it will perform multiple revenue-generating activities, specifically, how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. EITF Issue No. 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003 or entities may elect to report the change in accounting as a cumulative-effect adjustment in accordance with APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, with early application of this consensus permitted. The adoption of EITF Issue No. 00-21 in the first quarter of fiscal 2004 will not have any impact on the Company's financial position, results of operations of cash flows.

For the three and nine months ended March 31, 2003, the Company recorded a provision for California state income taxes of $0.8 million and $1.5 million, respectively. In September 2002, the State of California enacted legislation that suspends the utilization of net operating loss carryforwards to offset current taxable income for a two-year period beginning in fiscal 2003, which required the Company to record a California state income tax provision for the period. For federal income tax purposes, pre-tax income for the period was fully offset by net operating loss carryforwards. Because the benefit of net operating loss carryforwards was not recognized in prior periods, such benefit is recognized in the current period and, as a result, no federal income tax provision has been recorded.

Consistent with prior periods, the Company's net deferred tax assets, consisting primarily of federal and state net operating loss carryforwards, have been offset by a full valuation allowance. In determining the need for a valuation allowance, management has reviewed both positive and negative evidence, including current and historical operating results, future income projections and potential tax-planning strategies. Based upon management's assessment of all available evidence, the Company has concluded that it is not more likely than not that deferred tax assets will be realized. This conclusion is based primarily on the Company's history of net operating losses and the need to generate significant amounts of taxable income in future periods in order to utilize existing deferred tax assets. Accordingly, the Company has not released all or a portion of the valuation allowance against its otherwise recognizable deferred tax assets. However, the Company will continue to monitor all available evidence and reassess the potential realization of its deferred tax assets, especially given that the Company has recently begun to generate current taxable income. If the Company continues to meet its financial projections and improve its results from operations, or if circumstances otherwise change, it is reasonably possible that the Company may release all or a portion of the valuation allowance in the near term.

Federal and state net operating loss carryforwards available to offset future taxable income have been adjusted to reflect utilization limitations under Section 382 of the Internal Revenue Code (the "Code") resulting from the Merger. In addition, utilization of the net operating loss carryforwards is subject to annual usage limitations as determined under Section 382 of the Code. Net operating loss limitations under Section 382 and the carryforward suspension under California state tax law may significantly impact the timing and amount of future income tax obligations, if any, and the Company's ability to utilize its deferred tax assets.

On September 25, 2001, NetZero and Juno merged into two wholly-owned subsidiaries of United Online. The Merger was accounted for under the purchase method of accounting in accordance with SFAS No. 141, Business Combinations, and NetZero was the acquirer for financial accounting purposes. The primary reasons for the Merger were to accelerate the Company's growth in pay users, leverage NetZero's and Juno's operating and cost infrastructures to create a lower cost structure for providing Internet access and to create a more attractive base of users for advertising customers. The historical consolidated results of operations reflect only the operating results of NetZero and its subsidiaries prior to September 25, 2001 as predecessor to United Online.

On November 4, 2002, the Company acquired the Internet access assets of BlueLight. The acquisition has been accounted for under the purchase method of accounting in accordance with SFAS No. 141. The primary reason for the acquisition was to acquire BlueLight's pay user base in order to accelerate the Company's pay user growth and leverage its operating and cost infrastructure.

The purchase price of approximately $8.4 million, including $0.1 million of acquisition-related costs, was paid in cash and allocated to the assets acquired based on their estimated fair values, including identifiable intangible assets. The following table summarizes the net assets acquired in connection with the acquisition (in thousands):

Asset Description				Estimated Fair Value			Estimated Amortizable Life
Net tangible assets acquired:
	Accounts receivable			$	1,611
	Property and equipment				585
	Accounts payable				(649	)
	Deferred service liabilities				(1,044	)

		Total net tangible assets acquired			503

Intangible assets acquired:
	Pay user base				7,500		4 years
	Proprietary rights				235		3 years
	Software and technology				150		2.5 years

		Total intangible assets acquired			7,885

			Total purchase price	$	8,388

The weighted average amortizable life of all acquired intangible assets is 3.9 years.

The following summarized unaudited pro forma financial information for the nine months ended March 31, 2002 assumes that the Merger had occurred at the beginning of the period presented (in

thousands, except per share amounts). The information excludes the acquisition of the Internet access assets of BlueLight since the pro forma effect of that transaction is immaterial.

	Nine Months Ended March 31, 2002
	(unaudited)
Revenues	$	140,974
Net loss	$	(46,875	)
Net loss per share	$	(1.21	)

Short-term investments consist of debt securities classified as available-for-sale and have maturities greater than 90 days from the date of purchase. The Company has invested primarily in U.S. commercial paper, all of which have a minimum long-term investment rating of A, and government agency notes. The Company had no material realized gains or losses from the sale of investments for the three and nine-month periods ended March 31, 2003.

Short-term investments as of March 31, 2003 consist of the following (in thousands):

		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Commercial paper		$	39,882	$	1,558	$	(16	)	$	41,424
Government agencies			66,617		1,716		(5	)		68,328

	Total	$	106,499	$	3,274	$	(21	)	$	109,752

Gross unrealized gains and gross unrealized losses are presented net of tax in accumulated other comprehensive income on the consolidated balance sheet.

At March 31, 2003, two customers comprised approximately 21% and 16%, respectively, of the consolidated accounts receivable balance. At June 30, 2002, one customer comprised approximately 21% of the consolidated accounts receivable balance.

The following table sets forth the computation of basic and diluted net income (loss) per share:

			Three Months Ended March 31,						Nine Months Ended March 31,
			2003			2002			2003			2002
Numerator:
	Net income (loss)		$	6,962		$	(7,254	)	$	13,198		$	(45,133	)

Denominator:
	Weighted average common shares—basic			41,734			40,031			41,188			35,330
		Adjustment for weighted average common shares subject to repurchase		(266	)		(1,080	)		(335	)		(1,188	)

	Adjusted weighted average common shares—basic			41,468			38,951			40,853			34,142

	Effect of dilutive securities:
		Stock options, restricted shares, warrants and employee stock purchase plan shares		3,624			—			3,585			—

	Weighted average common shares—diluted			45,092			38,951			44,438			34,142

Net income (loss) per share—basic			$	0.17		$	(0.19	)	$	0.32		$	(1.32	)

Net income (loss) per share—diluted			$	0.15		$	(0.19	)	$	0.30		$	(1.32	)

The diluted per share computations exclude unvested stock options, restricted shares, warrants and employee stock purchase plan shares which are antidilutive. The number of antidilutive stock options excluded from the diluted net income per share calculation for the three and nine months ended March 31, 2003 is 1.4 million and 1.6 million, respectively. The number of antidilutive stock options, restricted shares, warrants and employee stock purchase plan shares excluded from the net loss per share calculation for the three and nine months ended March 31, 2002 is 8.8 million and 9.6 million, respectively. As of March 31, 2003, there were approximately 8.7 million options outstanding with a weighted average exercise price of $11.63 per share.

The Company measures compensation expense for its stock-based employee compensation plans using the intrinsic value method in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and complies with the disclosure provisions of SFAS No. 123 and SFAS No. 148.

For each option granted up to and including September 23, 1999, the Company calculated the minimum fair value on the date of the grant using the minimum value option-pricing model as prescribed by SFAS No. 123. The fair value of the options granted subsequent to September 23, 1999 has been estimated at the date of grant using the Black-Scholes option-pricing model.

If the fair value based method had been applied in measuring stock-based compensation expense, the pro forma effect on net income (loss) and net income (loss) per share would have been as follows (in thousands, except per share amounts):

The following table summarizes the stock-based charges that have been included in the following captions for each of the periods presented (in thousands):

			Three Months Ended March 31,				Nine Months Ended March 31,
			2003		2002		2003		2002
Operating expenses:
	Cost of billable services		$	3	$	27	$	7	$	96
	Cost of free services			—		—		—		60
	Sales and marketing			5		694		17		539
	Product development			1		283		5		1,175
	General and administrative			19		1,194		64		3,892

		Total stock-based charges	$	28	$	2,198	$	93	$	5,762

In April 2001, a complaint was filed against NetZero, certain of its officers and directors and the investment firms Goldman Sachs, BancBoston Robertson Stephens and Salomon Smith Barney alleging violations of the federal securities laws. A number of other complaints brought by different plaintiffs have since been filed and/or served against NetZero containing similar allegations and were brought as purported stockholder class action lawsuits. The complaints generally allege that the prospectus through which NetZero conducted its initial public offering in September 1999 was materially false and misleading because it failed to disclose, among other things, that (i) the underwriters of NetZero's initial public offering had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of the restricted number of NetZero shares issued in connection with initial public offering; and (ii) the underwriters had entered into agreements with customers whereby they agreed to allocate NetZero shares to those customers in the initial public offering in exchange for which the customers agreed to purchase additional NetZero shares in the aftermarket at pre-determined prices. The complaints against NetZero have been consolidated with similar complaints filed against other companies and investment firms. Settlement discussions among counsel for plaintiffs, counsel for the underwriter

defendants and counsel for the insurers of the issuer defendants are continuing. No trial date has been set.

In May 2001, a complaint was filed against Juno alleging that Juno was unjustly enriched and deceived consumers by: (a) advertising "free" Internet access services and limiting the usage of heavier users of the service, and (b) advertising a free trial month for its premium service and not disclosing that the free month begins when the software is requested, rather than when it is first used, resulting in users receiving less than one month of free use. The plaintiff is seeking class certification and unspecified compensatory damages. Juno filed a motion to dismiss the complaint for failure to state a claim. On November 29, 2002, the court issued a ruling granting Juno's motion to dismiss in part and denying the motion in part. Plaintiff filed an amended complaint in accordance with the court's ruling. Juno has filed an answer denying the material allegations of the amended complaint and asserting certain affirmative defenses. Discovery is ongoing and no trial date has been set.

In August 2001, Juno commenced a proceeding against Smart World Technologies, LLC, or "Freewwweb," a provider of free Internet access that had elected to cease operations and had sought the protection of Chapter 11 of the Bankruptcy Code. In this action, Juno is seeking a declaratory judgment as well as monetary damages against Freewwweb. In June 2000, Juno entered into a subscriber referral agreement with Freewwweb under which Juno was obligated to pay certain amounts based on the number of "Qualified Referred Subscribers" generated by referral activities specified in the agreement. A new Juno subscriber referred to Juno by Freewwweb was considered a Qualified Referred Subscriber if he or she met certain qualification criteria defined in the subscriber referral agreement. Under the terms of the agreement, Juno has the right to settle a portion of the liabilities incurred in connection with acquiring the Qualified Referred Subscribers through the issuance of shares of its common stock. Freewwweb filed a claim against Juno asserting that Juno is obligated to pay Freewwweb an amount in excess of $80 million under the terms of its agreement with Juno. Juno has requested that the court rule on this issue, and is seeking unspecified monetary damages against Freewwweb. In connection with the Freewwweb bankruptcy proceeding, WorldCom provided telecommunications services to Freewwweb. Juno is required to pay WorldCom certain amounts owing for such services, although Juno and WorldCom are in disagreement as to the amounts owing, with WorldCom claiming in excess of $1 million and Juno claiming less than $300,000. At a status conference held on October 23, 2002, the court ordered the parties to participate in a court sponsored non-binding mediation of all outstanding issues. As a result of the mediation, a settlement agreement has been reached among the committee representing the unsecured creditors, WorldCom as the secured creditor and Juno pursuant to which Juno would be released from all claims in exchange for a $5.5 million cash payment. The settlement is subject to approval by the Freewwweb bankruptcy court and the WorldCom bankruptcy court. The Company expects that Freewwweb will object to the terms of the settlement. At March 31, 2003, the Company had liabilities recorded of approximately $5.5 million as an estimate of the amounts for which it believes the WorldCom and Freewwweb claims will be resolved. There can be no assurance that the settlement will be approved by the courts, that the outcome of the litigation will be positive or that the Company will not be required to pay Freewwweb and WorldCom an amount in excess of the amount currently reserved.

In November 2001, a complaint was filed against Juno, NetZero and United Online, alleging breach of contract, fraud and unjust enrichment arising out of an agreement between Juno and Activeworlds for advertising, distribution and other services. Specifically, the plaintiff alleges that Juno failed to advise of a planned change in Juno's business policy that had an adverse impact on the value of the agreement to the plaintiff. The plaintiff is seeking damages in excess of $500,000, plus punitive damages and other relief. Juno has filed its answer denying the material allegations of the complaint and asserting certain affirmative defenses. Discovery is ongoing and no trial date has been set.

In January 2002, a nationwide class action lawsuit was filed against United Online, NetZero and Juno alleging unlawful, unfair or deceptive business practices. The plaintiffs allege that the defendants

used misleading marketing and promotional materials regarding their billable Internet access services. The plaintiffs are seeking injunctive relief, restitution, disgorgement of profits, the establishment of a constructive trust and attorneys' fees. The Company filed a demurrer to the complaint, which the court granted in part and denied in part. The plaintiffs filed an amended complaint in August 2002, naming only United Online and NetZero as defendants. The Company has filed an answer denying the material allegations of the amended complaint and asserting certain affirmative defenses. The parties are currently engaged in settlement discussions. The parties are participating in a court-ordered non-binding mediation of certain issues relating to the settlement. The Company has established a reserve for such litigation although there can be no assurance that the amount reserved will be sufficient to resolve the dispute.

In December 2002, a complaint was filed against Juno alleging that Juno was unjustly enriched and deceived consumers by: (a) advertising "free" Internet access services and limiting the usage of heavier users of the service, and (b) advertising a free trial month for its premium service and not disclosing that the free month begins when the software is requested, rather than when it is first used, resulting in users receiving less than one month of free use. The plaintiff is seeking class certification and unspecified compensatory damages. Discovery in this case is ongoing and no trial date has been set.

The pending lawsuits involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to defend. Although the Company does not believe the outcome of the above outstanding legal proceedings, claims and litigation will have a material adverse effect on its business, the results of litigation are inherently uncertain and the Company can provide no assurance that the Company's financial position, results of operations or cash flows will not be materially and adversely impacted by the results of such proceedings. Other than as specified above, the Company is unable to estimate the range of possible loss from outstanding litigation, and no amounts have been provided for in our consolidated financial statements. There is no assurance the reserves that have been established are sufficient to cover the possible losses from outstanding litigation.

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

On November 15, 2001, the Board of Directors declared a dividend of one preferred share purchase right for each outstanding share of its common stock. The dividend was paid on November 26, 2001 to the stockholders of record at the close of business on that date. Each right entitles the registered holder to purchase from the Company one unit consisting of one one-thousandth of a share of its Series A junior participating preferred stock. On April 29, 2003, the Board of Directors voted to amend the purchase price per unit from $25 to $140. The rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's common stock or announces a tender or exchange offer which results in a person owning 15% or more of the Company's common stock. The Company generally will be entitled to redeem the rights at $0.001 per right at any time until 10 days after a public announcement that a 15% position in the Company's common stock has been acquired or that a tender or exchange offer which would result in a person owning 15% or more of the Company's common stock has commenced. The rights expire on November 26, 2011.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements based on our current expectations, estimates and projections about our operations, industry, financial condition and liquidity. Statements containing words such as "anticipate," "expect," "intend," "plan," "believe," "may," "will" or similar expressions constitute forward-looking statements. These forward-looking statements include, but are not limited to, statements about our user base, the advertising market, the dial-up Internet access market, operating expenses and operating efficiencies, income, revenues, capital requirements, the impact of inflation and our cash position. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The sections entitled "Risk Factors" in this Form 10-Q, our Annual Report on Form 10-K as filed with the SEC on September 30, 2002 and our other filings with the SEC set forth some of the important risk factors that may affect our business, results of operations and financial condition. We undertake no obligation to revise or update publicly any forward-looking statements, other than as required by law.

United Online commenced operations on September 25, 2001, following the merger of NetZero and Juno into two of its wholly-owned subsidiaries (the "Merger"). The Merger was accounted for under the purchase method of accounting for business combinations as an acquisition of Juno by NetZero, which is considered the predecessor company to United Online. On November 4, 2002, we acquired the Internet access assets of BlueLight.com LLC ("BlueLight"). Our financial results include Juno's results since the date of the Merger and the impact of the acquisition of the Internet access assets of BlueLight since November 4, 2002.

We are a leading Internet Service Provider ("ISP") offering consumers free and value-priced Internet access and e-mail. Our Internet services, currently offered through the NetZero, Juno and BlueLight Internet brands, are available in more than 6,000 cities across the United States and Canada. In addition, we offer marketers numerous online advertising products as well as online market research and measurement services. At March 31, 2003, we had approximately 2.4 million subscribers to our pay services and approximately 5.2 million active users, including pay users. "Active" users include all pay users and those free users who have logged onto our services during the preceding 31-day period.

Juno launched its first service, a free dial-up e-mail service, in April 1996. NetZero launched its free Internet access service in October 1998. Both Juno's and NetZero's free services were predicated on generating advertising revenues to fund their operations. Due to a variety of factors, including reductions in online advertising rates, both NetZero and Juno have taken various measures to limit the cost of providing free services.

Juno started offering fee-based Internet services in 1998, NetZero started offering fee-based Internet services in January 2001 and we acquired the fee-based Internet access assets of BlueLight in November 2002. The NetZero and Juno pay services differ from their respective free services in that hourly and other limitations set for the free services do not apply, and the services feature small toolbars without a persistent on-screen advertising banner. We do not currently offer free services under the BlueLight Internet brand. Our current fee-based Internet services are offered through various pricing plans, generally $9.95 per month. In April 2003, NetZero and Juno began marketing NetZero HiSpeed and Juno SpeedBand at $14.95 per month. These services combine a standard NetZero or Juno pay account with compression and caching technologies that reduce the average time

for certain web pages to download to users' computers when compared to standard dial-up services. We cannot assure you that these services will be commercially successful.

As a result of imposing limitations on our free services and focusing our marketing on our pay services, we have experienced increases in our pay user base and decreases in our active free user base. We may experience, in the future, periodic fluctuations in our pay user base as a result of a number of factors including, but not limited to, the imposition of additional limitations on our free services; changes in our free services user base; promotional free trial periods of our pay services; increases or decreases in our marketing expenditures; acquisitions; competitive factors, including competition in the value-priced segment of the ISP market; the effects of customer churn and seasonality; changes in the prices of our billable services plans; and new product offerings. Our active free user base may continue to decrease and may fluctuate as a result of a number of factors including, but not limited to, changes to the limitations imposed on our free services and the extent to which we market our free services.

We previously operated a broadband service, Juno Express. However, due to a variety of factors including the failure of several providers of high-speed services, this broadband service was terminated. Prior to the Merger, Juno entered into an agreement with AOL Time Warner to utilize their cable network to offer cable broadband services, but there are numerous operational and other issues that could impact whether Juno will offer these services over AOL Time Warner's cable systems in the near term, or at all. Furthermore, the agreement with AOL Time Warner is subject to termination by either party and is also subject to the approval of the Federal Trade Commission. In February 2002, we signed an agreement with Comcast Cable Communications, Inc. to offer broadband Internet service over Comcast's cable systems. We have launched this service in a small number of markets and have had limited success in offering this service. We did not incur significant costs or capital expenditures to launch this service. We cannot assure you, however, that there will not be unanticipated costs associated with offering this service. We also cannot assure you that we will be able to implement the service successfully, that the service will be offered on other than a limited basis or that we will generate a significant number of users to the service.

We provide billable dial-up Internet access services under a number of pricing plans, generally ranging from $1.95 to $29.95 per month. Currently, the most common pricing plans for our services are $9.95 per month for our Platinum services and $14.95 per month for our NetZero HiSpeed and Juno SpeedBand services. We have experimented with the use of a variety of pricing plans both in connection with offers extended to some of our existing users and through external marketing channels. We may continue testing a variety of pricing plans in the future to determine their impact on profitability, pay user acquisition, conversion rates of free users to pay and pay user retention rates. We intend to continually evaluate the desirability and effectiveness of our pricing plans and may, in the future, make changes to these plans. We may also offer additional fee-based products and services to our users. We may also offer promotions such as a free month of service or a discounted rate for an initial or prepaid period, as well as a wide range of discounted flat-rate plans. Future changes in our pricing plans and promotional discounts may adversely impact the number of pay users and the amount of billable services revenues we receive from such users.

Billable services revenues may fluctuate from period-to-period primarily as a result of changes in the average number of pay users. We may also experience periodic fluctuations in billable services revenues as a result of fluctuations from period-to-period in the average monthly revenue per user. Average monthly revenue per user is calculated by dividing billable services revenues for a period by the average number of pay users for that period, calculated based on the number of pay users at the beginning and end of such period. Average monthly revenue per user may fluctuate due to a variety of factors, including but not limited to, the use of discounted pricing plans, the use of promotions such as

a free month of service, the timing of pay users joining and leaving our services during the period and changes in the mix of pay users and their related monthly price plans.

Our advertising and commerce revenues consist of fees from the placement of media, direct marketing agreements, referring our users to partners' Internet search services and Web sites and enabling customer registrations for partners. We also generate revenues from our online market research and measurement services. Our advertising and commerce revenues are generated from both our pay and free users.

Advertising on the Internet, particularly the products and services we offer, is a relatively new and changing industry. Internet advertising rates have fluctuated significantly, and it is possible that rates could decline. Historically, many purchasers of Internet advertising were companies that came under financial pressure and were not able to access the capital markets. This trend has impacted our ability to generate advertising and commerce revenues in the past and could continue to do so in the future.

Due to market forces and other factors, our advertising and commerce revenues have in the past fluctuated, and may continue to fluctuate from period-to-period. In the past, we have experienced sequential quarters of decreased advertising and commerce revenues, and we cannot assure you that we will not experience decreased advertising and commerce revenues in future periods. Factors impacting our advertising and commerce revenues include, but are not limited to, the state of the online advertising market, changes in orders from significant customers, increases or decreases in our active user base, limitations on our free services and reductions in advertising inventory available for sale. Limitations on our free services have adversely impacted our volume of advertising inventory.

In general, we do not enter into barter transactions. There is no barter revenue in our revenues for the three and nine months ended March 31, 2003 and 2002.

Cost of billable services includes costs that have been allocated to billable services based on the aggregate hourly usage of our pay users as a percentage of total hourly usage of both our free and pay users. Allocated costs consist primarily of telecommunications costs, personnel and related overhead costs associated with operating our network and data centers and depreciation of network computers and equipment. In addition, cost of billable services includes direct costs incurred in providing technical and customer support and costs associated with providing customer billing and billing support.

Historically, we have expended significant funds on our network infrastructure. While we may expend significant funds on capital expenditures in the future, such expenditures are dependent upon our expectation of user growth and usage patterns, the need to upgrade our existing network infrastructure, as well as needs associated with acquired businesses and new products. Telecommunications costs for network access are expensed as incurred. Our failure to accurately forecast users' needs could result in significant overcapacity, which would adversely impact our results of operations. Conversely, under-forecasting usage could adversely impact the ability of users to receive adequate service and adversely impact our reputation and our ability to maintain or increase our user base. We cannot assure you that we will be able to accurately forecast user requirements in the future.

Cost of free services includes costs that have been allocated to free services based on the aggregate hourly usage of our free users as a percentage of total hourly usage of both our free and pay users. Allocated costs consist primarily of telecommunications costs, personnel and related overhead costs associated with operating our network and data centers, and depreciation of network computers and

equipment. In addition, cost of free services includes certain direct costs incurred in providing technical and customer support to our free users.

Sales and marketing expenses include advertising and promotion expenses, compensation, sales commissions, employee benefits, travel and related expenses for our direct sales force and telemarketing costs incurred to acquire and retain pay users. We have expended significant amounts on sales and marketing, including national branding campaigns comprised of television, sponsorships, radio, outdoor, Internet and print advertising and a variety of other promotions, including performance-based Internet advertising. Marketing costs have in the past fluctuated, and may in the future fluctuate, significantly from quarter-to-quarter. Marketing and advertising costs to promote our products and services are expensed in the period incurred. Advertising and promotion expenses include media, agency and promotion expenses. Production costs are expensed the first time the advertisement is aired. Media and agency costs are expensed when the advertising runs.

Product development expenses include expenses for the development of new or improved technologies and products, including compensation and related expenses for the software engineering department, as well as costs for contracted services, facilities, and equipment. Costs incurred by us to develop, enhance, manage, monitor and operate our software and services are generally expensed as incurred, except for certain costs relating to the acquisition and development of internal-use software that are capitalized and depreciated over their estimated useful lives, generally three years or less.

General and administrative expenses include compensation, employee benefits and expenses for executive, finance, legal, human resources and internal customer support personnel. In addition, general and administrative expenses include fees for professional services, non-income taxes, insurance and occupancy and other overhead-related costs, as well as the expenses incurred and credits received as a result of certain legal settlements.

Restructuring charges consist of employee severance costs, contract termination fees, lease exit costs and the write-off of leasehold improvements associated with terminated leases.

Amortization of intangible assets includes amortization of acquired pay users, purchased technologies and other identifiable intangible assets. At March 31, 2003, we had approximately $42.6 million in identifiable intangible assets primarily resulting from the Merger and the acquisition of the Internet access assets of BlueLight. We expect to incur significant amortization expense in connection with our intangible assets in future periods. At March 31, 2003, we had approximately $10.9 million in goodwill resulting from the Merger. In accordance with the provisions set forth in Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, goodwill acquired in connection with the Merger is not being amortized but is tested for impairment at a reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value amount.

We recorded deferred stock-based charges in connection with the grant of stock options and restricted stock to employees and the issuance of restricted shares of stock in connection with prior acquisitions, which are amortized over the vesting period of the applicable shares.

Interest income consists of earnings on our cash and cash equivalents, short-term investments and restricted cash. Interest expense consists of interest expense on capital leases and notes payable balances.

On September 25, 2001, NetZero and Juno merged into two wholly-owned subsidiaries of United Online. The Merger was accounted for under the purchase method of accounting in accordance with SFAS No. 141, Business Combinations, and NetZero was the acquirer for financial accounting purposes. The purchase price of approximately $89.2 million, including acquisition costs, was allocated to Juno's net assets based on their estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired, including identifiable intangible assets, was recorded as goodwill. The primary reasons for the Merger were to accelerate our growth in pay users, leverage NetZero's and Juno's operating and cost infrastructures to create a lower cost structure for providing Internet access and to create a more attractive base of users for advertising customers. The historical consolidated results of operations reflect only the operating results of NetZero and its subsidiaries prior to September 25, 2001 as predecessor to United Online.

On November 4, 2002, we acquired the Internet access assets of BlueLight. The acquisition has been accounted for under the purchase method of accounting in accordance with SFAS No. 141. The primary reason for the acquisition was to acquire BlueLight's pay user base in order to accelerate the Company's pay user growth and leverage its operating and cost infrastructure.

Asset Description				Estimated Fair Value			Estimated Amortizable Life
Net tangible assets acquired:
	Accounts receivable			$	1,611
	Property and equipment				585
	Accounts payable				(649	)
	Deferred service liabilities				(1,044	)

		Total net tangible assets acquired			503

Intangible assets acquired:
	Pay user base				7,500		4 years
	Proprietary rights				235		3 years
	Software and technology				150		2.5 years

		Total intangible assets acquired			7,885

			Total purchase price	$	8,388

The weighted average amortizable life of the BlueLight acquired intangible assets is 3.9 years.

Our discussion and analysis of our financial condition and results of operations is based upon our unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, uncollectible receivables, intangible and other long-lived assets, income taxes and legal contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the current circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our unaudited consolidated financial statements.

We apply the provisions of SEC Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of

revenue in financial statements filed with the SEC. SAB No. 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, we recognize revenue related to our billable services and advertising products when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable and (iv) collectibility is reasonably assured.

Billable services revenues are recognized in the period in which fees are fixed or determinable and the related products or services are provided to the user. Our pay users generally pay in advance for their service by credit card and revenue is then recognized ratably over the period in which the related services are provided. Advance payments from users are recorded on the balance sheet as deferred revenue. We offer alternative payment methods to credit cards for certain pay service plans. These alternative payment methods currently include payment by check or money order and payment via a pay user's monthly phone bill. In circumstances where payment is not received in advance, revenue is only recognized if collectibility is reasonably assured.

Advertising and commerce revenues include banner advertisements, placements and sponsorships, referrals of users to search engines or other Web sites, performance-based agreements and advertising messages delivered to users via e-mail. We recognize banner advertising and sponsorship revenues in the periods in which the advertisement or sponsorship placement is displayed, based upon the lesser of (i) impressions delivered over the total number of guaranteed impressions or (ii) ratably over the period in which the advertisement is displayed, provided that no significant obligations remain, fees are fixed or determinable, and collection of the related receivable is reasonably assured. Our obligations typically include the guarantee of a minimum number of impressions or the satisfaction of other performance criteria. Revenue from performance-based arrangements is recognized as the related performance criteria are met. Referral revenues are recognized when the referrals are made to partners' search engines or Web sites, provided that no significant obligations remain, fees are fixed or determinable, and collection of the related receivable is reasonably assured. In determining whether an arrangement exists, we ensure that a binding contract is in place, such as a standard insertion order or a fully executed customer-specific agreement. We assess whether performance criteria have been met and whether the fees are fixed or determinable based on a reconciliation of the performance criteria and the payment terms associated with the transaction. The reconciliation of the performance criteria includes a comparison of internally tracked performance data to the contractual performance obligation and to third-party or customer performance data in circumstances where that data is available. Probability of collection is assessed based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If it is determined that collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash.

The companies that we have acquired have all been accounted for as purchase business combinations. Under the purchase method of accounting, the costs, including transaction costs, are allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

The judgments made in determining the estimated fair value and expected useful lives assigned to each class of assets and liabilities acquired can significantly impact net income. For example, different classes of assets will have useful lives that differ (i.e., the useful life of users may not be the same as the useful life of acquired technologies). Consequently, to the extent a longer-lived asset is ascribed greater value under the purchase method than a shorter-lived asset, there may be less amortization recorded in a given period.

Determining the fair value of certain assets and liabilities acquired is judgmental in nature and often involves the use of significant estimates and assumptions. As provided by the accounting rules, we use the one-year period following the consummation of acquisitions to finalize estimates of the fair value of assets and liabilities acquired. One of the areas that requires more judgment in determining fair values and useful lives is intangible assets. To assist in this process, we have obtained appraisals from third-party valuation firms for certain intangible assets. While there were a number of different methods used in estimating the value of the intangibles acquired, there were two approaches primarily used: the discounted cash flow and market comparison approaches. Some of the more significant estimates and assumptions inherent in the two approaches include: projected future cash flows (including timing); discount rate reflecting the risk inherent in the future cash flows; perpetual growth rate; determination of appropriate market comparables; and the determination of whether a premium or a discount should be applied to comparables. Most of the foregoing assumptions were made based on available historical information.

The value of our intangible and other long-lived assets, including goodwill, is exposed to future adverse changes if we experience declines in operating results or experience significant negative industry or economic trends or if future performance results in increasing losses from operations. We periodically review intangible assets and goodwill for impairment using the guidance in the appropriate accounting literature. We continually review the events and circumstances related to our financial performance and economic environment for factors that would provide evidence of impairment.

We adopted SFAS No. 142 on July 1, 2002. Under SFAS No. 142, goodwill is no longer amortized, but is tested for impairment at a reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value amount. Events or circumstances which could trigger an impairment review include a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, significant declines in our stock price for a sustained period or significant underperformance relative to expected historical or projected future operating results. For purposes of financial reporting and impairment testing in accordance with SFAS No. 142, we operate in one principal business segment, a provider of Internet access services.

In testing for a potential impairment of goodwill, we first compare the estimated fair value of the Company with book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the Company is less than book value, then we are required to compare the carrying amount of the goodwill with its implied fair value. The estimate of implied fair value of goodwill may require independent valuations of certain internally generated and unrecognized intangible assets such as our pay user base, software and technology and patents and trademarks. If the carrying amount of our goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess.

In accordance with SFAS No. 142, we performed a transitional goodwill impairment test as of July 1, 2002 and concluded that, as of that date, there was no impairment of our $10.9 million of goodwill.

We assess the impairment of long-lived assets, which include property and equipment and identifiable intangible assets, whenever events or changes in circumstances indicate that such assets

might be impaired and the carrying value may not be recoverable. Events and circumstances that may indicate that an asset is impaired include significant decreases in the market value of an asset, significant underperformance relative to expected historical or projected future operating results, a change in the extent or manner in which an asset is used, significant declines in our stock price for a sustained period, shifts in technology, loss of key management or personnel, changes in our operating model or strategy and competitive forces.

If events and circumstances indicate that the carrying amount of an asset may not be recoverable and the expected undiscounted future cash flows attributable to the asset are less than the carrying amount of the asset, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. Fair value is determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risk involved, quoted market prices or appraised values, depending on the nature of the assets.

Our net deferred tax assets, consisting primarily of federal and state net operating loss carryforwards, have been offset by a full valuation allowance. In determining the need for a valuation allowance, we review both positive and negative evidence, including current and historical operating results, future income projections and potential tax-planning strategies. Based upon our assessment of all available evidence, we have concluded that it is not more likely than not that deferred tax assets will be realized. This conclusion is based primarily on our history of net operating losses and the need to generate significant amounts of taxable income in future periods in order to utilize existing deferred tax assets. Accordingly, we have not released all or a portion of the valuation allowance against our otherwise recognizable deferred tax assets. However, we will continue to monitor all available evidence and reassess the potential realization of our deferred tax assets, especially given that we have recently begun to generate current taxable income. If we continue to meet our financial projections and improve our results from operations, or if circumstances otherwise change, it is reasonably possible that we may release all or a portion of the valuation allowance in the near term.

We are currently involved in certain legal proceedings, certain of which are discussed further elsewhere in this Form 10-Q. We record liabilities related to pending litigation when an unfavorable outcome is probable and we can reasonably estimate the amount of loss. We have not recorded liabilities for some of our pending litigation because of the uncertainties related to assessing both the amount and the probable outcome of those claims. As additional information becomes available, we continually assess the potential liability related to all of our pending litigation. While we currently believe that the liabilities recorded on our balance sheet are sufficient to cover pending litigation for which an unfavorable outcome is probable and the amount of loss can be reasonably estimated, the outcome of litigation is inherently uncertain, and there can be no assurance that such estimates will be accurate.

Our pay user base has increased by 807,000, or 51%, during the preceding twelve months, which includes a net increase of 229,000 pay users in the March 2003 quarter. The increase in our pay user base resulted from a number of factors including, but not limited to, a significant number of free users upgrading to pay services, increased marketing of our pay services and the acquisition of the Internet access assets of BlueLight, which added over 174,000 users to our pay user base. While we anticipate that our pay user base will continue to increase in the near term, we do not believe that it will increase at the rate of growth experienced in the March 2003 quarter and there can be no assurance that we will continue to grow our pay user base as anticipated. Any future changes in our pay user base are

dependent on a number of factors including, but not limited to, upgrades from our free user base, adding new distribution channels, maintaining existing distribution relationships, the number of users who terminate their accounts with us, competition and changes in our levels of marketing expenditures, and there can be no assurance that our pay user base will continue to increase. We believe that our ability to generate billable services revenues could improve in the future as a result of introducing additional pay services, such as our recently introduced NetZero HiSpeed and Juno SpeedBand services. However, we have limited experience in offering additional pay services and there can be no assurance that we will be successful in adding users to these services.

Cost of billable services as a percentage of billable services revenues has decreased as a result of decreased telecommunications costs, decreased customer billing and support costs per pay user and decreased depreciation expense. Our average hourly cost of telecommunications has decreased as a result of further improvements in modem port utilization, consolidation of our data centers and better pricing obtained from our managed modem vendors. We do not anticipate further significant decreases in average hourly telecommunications costs and may experience increased hourly telecommunications costs in future periods, particularly if we expand our service coverage to additional areas where telecommunications costs are higher. We have experienced increases in our average usage per pay user during comparable seasonal periods, and increases in usage may impact our cost of billable services as a percentage of billable services revenues in the future. Customer billing and support costs per pay user decreased as a result of synergies gained through the consolidation of NetZero's and Juno's customer billing and support functions and we do not anticipate significant reductions in such costs per pay user in the future. Depreciation expense has decreased due to assets placed in service in fiscal 2000 becoming fully depreciated and lower levels of capital expenditures during the past two fiscal years versus fiscal 2000. We currently anticipate cost of billable services as a percentage of billable services revenues in the June 2003 quarter to be slightly lower than the 35.7% experienced in the March 2003 quarter due to an anticipated seasonal decrease in Internet usage and further declines in depreciation expense.

Cost of free services has decreased as a result of hourly and geographical limitations that were imposed on NetZero's free service in prior periods, which has resulted in a decrease in active free users and a decrease in the average monthly usage per user of NetZero's free services. We currently do not anticipate further significant decreases in our active free user base cost of free services in future periods, and cost of free services may increase in future periods.

We have been increasing our marketing expenditures on a sequential quarterly basis since the December 2001 quarter, and we currently anticipate increasing our marketing expenditures in the near term. In the June 2003 quarter, we plan to allocate a significant portion of our marketing expenditures to promote our recently launched, higher priced NetZero HiSpeed and Juno SpeedBand services. We cannot assure you that we will be successful in acquiring a significant number of users for these services and anticipate that our average cost to acquire new pay users will increase in the June 2003 quarter. Our future marketing expenditures may vary significantly from quarter-to-quarter, as many of our marketing commitments are short term in nature. We may choose to increase or decrease quarterly marketing expenditures in future periods, depending on a number of factors, including the effectiveness of our marketing activities, changes in the number of pay users, and the impact of such activities on our operating results. Any decreases in marketing expenditures could impact our ability to increase our pay user base.

We do not currently anticipate that inflation will have a material impact on our results of operations.

The consolidated results of operations reflect only the operating results of NetZero and its subsidiaries prior to September 25, 2001, as predecessor to United Online. These results reflect the financial impact of the Merger subsequent to September 25, 2001 and the impact of the acquisition of the Internet access assets of BlueLight since November 4, 2002. The following table sets forth, for the periods presented, selected unaudited historical results of operations data:

Three and Nine Months Ended March 31, 2003 Compared to
the Three and Nine Months Ended March 31, 2002

Billable services revenues increased by $21.6 million, or 49%, to $66.0 million for the three months ended March 31, 2003, compared to $44.4 million for the three months ended March 31, 2002. The increase was due to an increase in our average number of pay users. Our average number of pay users was approximately 2,290,000 during the quarter ended March 31, 2003, compared to 1,529,000 during the quarter ended March 31, 2002. The increase in our average number of pay users resulted from a number of factors including, but no limited to, a significant number of free users upgrading to pay services, increased marketing of our pay services and the acquisition of the Internet access assets of BlueLight in November 2002, which added approximately 174,000 users to our pay user base.

Billable services revenues increased by $82.3 million, or 88%, to $175.4 million for the nine months ended March 31, 2003, compared to $93.1 million for the nine months ended March 31, 2002. The increase was due to an increase in our average number of pay users. Our average number of pay users

was approximately 2,056,000 during the nine months ended March 31, 2003, compared to approximately 904,000 during the nine months ended March 31, 2002. The increase in our average number of pay users is a result of the Merger in September 2001, which added over 875,000 users to our pay user base, free users upgrading to pay services, increased marketing of our pay services and the acquisition of the Internet access assets of BlueLight in November 2002, which added approximately 174,000 users to our pay user base. The increase in billable services revenues was partially offset by a 17% decrease in average monthly revenue per user, which decreased primarily as a result of the timing of pay users joining and leaving our pay services during the periods and a lower average monthly revenue per user from the BlueLight Internet user base prior to a monthly price increase in January 2003.

Advertising and commerce revenues increased by $1.3 million, or 20%, to $7.8 million for the three months ended March 31, 2003, compared to $6.5 million for the three months ended March 31, 2002. The increase was due to higher advertising revenues generated from our agreement with General Motors ("GM") and a significant increase in revenues from fees derived from referring our users to our Internet search partners. We derived approximately 36% of our advertising and commerce revenues for the three months ended March 31, 2003 from GM, compared to approximately 38% for the three months ended March 31, 2002. Additionally, we derived approximately 21% of our advertising and commerce revenues for the three months ended March 31, 2003 from Internet search referral fees, compared to approximately 8% for the three months ended March 31, 2002.

Advertising and commerce revenues increased by $2.4 million, or 12%, to $22.3 million for the nine months ended March 31, 2003, compared to $19.9 million for the nine months ended March 31, 2002. The increase was due to higher advertising revenues generated from our agreement with GM and increased revenues from Internet search referral fees. We derived approximately 36% of our advertising and commerce revenues for the nine months ended March 31, 2003 from GM, compared to approximately 34% for the nine months ended March 31, 2002. Additionally, we derived approximately 20% of our advertising and commerce revenues for the nine months ended March 31, 2003 from Internet search referral fees, compared to approximately 7% for the nine months ended March 31, 2002. The increases were partially offset by a decrease in revenue from Cisco. Our agreement with Cisco was terminated in August 2001, and during the nine months ended March 31, 2002, we generated approximately $0.9 million in revenues from Cisco.

Cost of billable services increased by $1.5 million, or 7%, to $23.6 million for the three months ended March 31, 2003, compared to $22.1 million for the three months ended March 31, 2002. The increase was due to a $1.4 million increase in telecommunications costs, a $0.7 million increase in customer support and billing-related costs and a $0.3 million increase in network personnel and overhead-related costs allocated to billable services, partially offset by a $0.9 million decrease in network depreciation allocated to billable services. Telecommunications costs increased as a result of higher telecommunications hours utilized by pay users, which increased as a result of an increase in the average number of pay users and an increase in the average usage per pay user. The increase in telecommunications hours utilized was partially offset by a 31% decrease in average hourly telecommunications cost, which decreased due to improvements in modem port utilization, consolidation of our data centers and better pricing obtained from our managed modem vendors. Telecommunication hours related to our pay user base increased to 87% as a percentage of total telecommunications hours purchased during the three months ended March 31, 2003, compared to 72% during the three months ended March 31, 2002. Customer support and billing-related costs increased as a result of an increase in the average number of pay users. Depreciation expense allocated to billable

services decreased due to assets placed in service in prior years becoming fully depreciated and significantly lower levels of capital expenditures versus prior years.

Cost of billable services increased by $12.7 million, or 24%, to $66.3 million for the nine months ended March 31, 2003, compared to $53.6 million for the nine months ended March 31, 2002. The increase is due to a $10.5 million increase in telecommunications costs, a $2.2 million increase in network personnel and overhead-related costs allocated to billable services, a $0.9 million increase in customer support and billing-related costs, which were partially offset by a $1.0 million decrease in network depreciation allocated to billable services. Telecommunications costs increased as a result of an increase in telecommunications hours utilized by pay users, which increased as a result of an increase in the average number of pay users and an increase in the average usage per pay user. The increase in telecommunications hours utilized was partially offset by a 26% decrease in average hourly telecommunications cost, which decreased due to improvements in modem port utilization, consolidation of our data centers and better pricing obtained from our managed modem vendors. Telecommunication hours related to our pay user base increased to 85%, as a percentage of total telecommunications hours purchased during the nine months ended March 31, 2003, compared to 59% during the nine months ended March 31, 2002. Network personnel and related overhead costs allocated to billable services increased due to an increase in telecommunications hours utilized by pay users as a percentage of total telecommunications hours purchased. Customer support and billing-related costs increased as a result of an increase in the average number of pay users. Depreciation expense allocated to billable services has decreased due to assets placed in service in prior years becoming fully depreciated and significantly lower levels of capital expenditures versus prior years.

Cost of free services decreased by $3.7 million, or 54%, to $3.1 million for the three months ended March 31, 2003, compared to $6.8 million for the three months ended March 31, 2002. The decrease was due to a $3.0 million decrease in telecommunications costs and a $0.6 million decrease in network depreciation allocated to free services. The decrease in telecommunications costs is a result of a decrease in average hourly telecommunications costs and decreases in the number of active free users and the average usage per free user, which resulted from usage limitations imposed on NetZero's free users, free users signing up for our pay services and fewer users signing up for our free services due to a reduced emphasis on marketing our free services. Our active free user base decreased 23% to approximately 2.8 million users as of March 31, 2003, compared to approximately 3.6 million users at March 31, 2002. Depreciation expense allocated to free services has decreased due to assets placed in service in prior years becoming fully depreciated, significantly lower levels of capital expenditures versus prior years and a decrease in free users as a percentage of total free and pay users. Telecommunication hours related to our free user base decreased to 13% as a percentage of total telecommunications hours purchased during the three months ended March 31, 2003, compared to 28% during the three months ended March 31, 2002.

Cost of free services decreased by $18.7 million, or 65%, to $10.0 million for the nine months ended March 31, 2003, compared to $28.8 million for the nine months ended March 31, 2002. The decrease was due to a $15.3 million decrease in telecommunications costs, a $2.7 million decrease in network depreciation allocated to free services and a $0.7 million net decrease in network personnel and overhead-related costs allocated to free services. The decrease in telecommunications costs is a result of a decrease in average hourly telecommunications cost and a decrease in the number of active free users, which resulted from usage limitations imposed on free users, free users signing up for our pay services and fewer users signing up for our free services due to a reduced emphasis on marketing free services. Depreciation expense allocated to free services has decreased due to assets placed in service in prior years becoming fully depreciated, significantly lower levels of capital expenditures versus prior years and a decrease in free users as a percentage of total free and pay users. Telecommunication

hours related to our free user base decreased to 15% as a percentage of total telecommunications hours purchased during the nine months ended March 31, 2003, compared to 41% during the nine months ended March 31, 2002.

Sales and marketing expenses increased by $12.0 million, or 104%, to $23.6 million for the three months ended March 31, 2003, compared to $11.6 million for the three months ended March 31, 2002. The increase is attributable to a $12.1 million increase in advertising and promotion costs. The increase in advertising and promotion costs is a result of the utilization of expanded marketing initiatives that focus on increasing our pay user base. Additionally, sales and marketing expenses increased as a result of a $0.8 million increase in telemarketing expenses related to customer acquisition and retention activities, partially offset by a $0.7 million decrease in stock-based charges.

Sales and marketing expenses increased by $34.6 million, or 135%, to $60.2 million for the nine months ended March 31, 2003, compared to $25.6 million for the nine months ended March 31, 2002. The increase is attributable to a $32.3 million increase in advertising and promotion costs. The increase in advertising and promotion costs is a result of the utilization of expanded marketing initiatives that focus on increasing our pay user base. Additionally, sales and marketing expenses increased as a result of a $3.0 million increase in telemarketing expenses related to customer acquisition and retention activities and a $0.6 million increase in personnel-related expenses due to increased headcount as a result of the Merger. These increases were partially offset by a $0.5 million decrease in costs directly associated with NetZero's former RocketCash subsidiary, which was sold in August 2001 and a $0.5 million decrease in stock-based charges.

Product development expenses decreased by $0.4 million, or 6%, to $6.0 million for the three months ended March 31, 2003, compared to $6.4 million for the three months ended March 31, 2002. The decrease was due to a $0.4 million net decrease in depreciation and overhead-related expenses, a $0.3 million decrease in stock-based charges as a result of the sale of our Simpli subsidiary in the June 2002 quarter, which resulted in the accelerated vesting of previously granted restricted stock awards and a $0.2 million decrease in costs directly associated with NetZero's former RocketCash and Simpli subsidiaries. These decreases were partially offset by a $0.4 million increase in personnel-related expenses as a result of increased headcount and compensation costs.

Product development expenses decreased by $0.8 million, or 5%, to $17.6 million for the nine months ended March 31, 2003, compared to $18.5 million for the nine months ended March 31, 2002. The decrease was due to a $1.1 million decrease in costs directly associated with NetZero's former RocketCash and Simpli subsidiaries, a $1.2 million decrease in stock-based charges as a result of the sale of our Simpli subsidiary in the June 2002 quarter and the accelerated vesting of certain previously issued stock options and restricted stock awards and a $1.0 million decrease in depreciation and overhead-related expenses. These decreases were partially offset by a $2.4 million increase in personnel-related expenses as a result of increased headcount and compensation costs resulting from the Merger.

General and administrative expenses were $7.1 million for the three months ended March 31, 2003 and 2002. General and administrative expenses were impacted by a $1.2 million decrease in stock-based charges in the March 2003 quarter as a result of the accelerated vesting of certain previously issued stock options and restricted awards in the March 2002 quarter, a $0.2 million decrease in occupancy and overhead-related charges as a result of office consolidations made in connection with our prior

period restructuring activities and a $0.2 million decrease in costs directly associated with NetZero's former Simpli subsidiary. These decreases were fully offset by a $1.1 million increase in personnel-related expenses as a result of higher compensation costs and a $0.5 million increase in legal settlement related costs.

General and administrative expenses decreased by $4.4 million, or 18%, to $19.9 million for the nine months ended March 31, 2003, compared to $24.3 million for the nine months ended March 31, 2002. The decrease in general and administrative expenses is due to a $3.8 million decrease in stock-based charges as a result of the accelerated vesting of certain previously issued stock options and restricted stock awards in the October 2001 and March 2002 quarters, a $1.0 million decrease in costs directly associated with NetZero's former RocketCash and Simpli subsidiaries, a $0.7 million credit as a result of a favorable settlement of a contractual dispute in the September 2002 quarter and a net $0.4 million decrease in occupancy and overhead-related expenses as a result of office consolidations. These decreases were partially offset by a $1.0 million increase in legal settlement related costs and a $0.5 million increase in personnel-related expenses as a result of higher compensation costs.

Amortization of intangible assets decreased by $0.7 million, or 15%, to $4.0 million for the three months ended March 31, 2003, compared to $4.7 million for the three months ended March 31, 2002 as a result of certain acquired intangible assets from the Merger being fully amortized as of September 30, 2002, partially offset by a $0.5 million increase in amortization expense resulting from the $7.9 million of identifiable intangible assets acquired from BlueLight in November 2002.

Amortization of intangible assets increased by $3.0 million, or 31%, to $12.4 million for the nine months ended March 31, 2003, compared to $9.5 million for the nine months ended March 31, 2002 primarily as a result of the amortization of acquired intangible assets associated with the Merger in September 2001. Amortization of intangible assets related to these assets was not included in the results of operations prior to September 25, 2001. Additionally, amortization of intangibles increased by $0.8 million as a result of the intangible assets acquired from BlueLight in November 2002.

During the three and nine months ended March 31, 2003, we recorded a $0.2 million benefit to restructuring charges as a result of contract termination fees expensed in earlier periods in excess of final negotiated settlements. During the three months ended March 31, 2002, we recorded $0.7 million of restructuring charges, which consisted of $0.2 million in employee termination benefits and $0.5 million in lease exit costs. In an effort to streamline our operations in response to changing market conditions, we reduced our workforce by approximately 8 employees in sales and marketing during the three months ended March 31, 2002.

During the nine months ended March 31, 2002, we recorded $3.1 million of restructuring charges, which consisted of $0.8 million in employee termination benefits and $2.3 million in lease exit costs, which includes a charge of approximately $0.8 million to write-off leasehold improvements associated with our former offices in New York. In an effort to streamline our operations in response to changing market conditions, we reduced our workforce by approximately 101 employees during the nine months ended March 31, 2002. Of the 101 employees terminated, 43 were in sales and marketing, 26 were in general and administrative, 23 were in product development, 6 were at RocketCash and 3 were in network operations.

Interest income, net was $1.1 million for the three months ended March 31, 2003 and March 31, 2002. Interest income remained constant for these periods as lower interest rates were offset by higher cash balances and reduced interest expense as a result of a decrease in capital lease balances.

Interest income, net decreased by $0.9 million, or 21%, to $3.2 million for the nine months ended March 31, 2003, compared to $4.0 million for the nine months ended March 31, 2002. The decrease in interest income is due to lower interest rates, partially offset by reduced interest expense as a result of a decrease in capital lease and notes payable balances.

Other income, net for the nine months ended March 31, 2002 was $1.1 million. In August 2001, we sold substantially all of the assets of RocketCash and recognized a gain of approximately $1.0 million.

For the three and nine months ended March 31, 2003, we generated pre-tax income of $7.7 million and $14.7 million, respectively, and recorded a provision for income taxes of $0.8 million and $1.5 million, respectively for California state income tax purposes. In September 2002, the State of California enacted legislation that suspends our utilization of net operating loss carryforwards to offset current taxable income for a two-year period beginning in fiscal 2003. For federal income tax purposes, pre-tax income for the period was fully offset by net operating loss carryforwards. Because the benefit of net operating loss carryforwards was not recognized in prior periods, such benefit is recognized in the current period and no federal or state (other than California) income tax provision has been recorded. For the three and nine months ended March 31, 2002, we generated pre-tax losses of $7.3 million and $45.1 million, respectively, and recorded no provision or benefit for income taxes.

We currently have potential future tax benefits, or deferred tax assets, associated with historical net operating losses that, because they are fully reserved by a valuation allowance, are not currently reflected on the Company's balance sheet. We continue to evaluate our ability to utilize these deferred tax assets in future periods. If we continue to meet our financial goals, it is reasonably possible that we will recognize a portion of our deferred tax assets in the near future by releasing the related valuation allowance. This would result in the (i) recording a tax benefit that would increase net income in the period the allowance was released and (ii) reporting an effective tax rate as high as 41% in subsequent periods. While the potential increase in the effective tax rate would affect our reported provision for income taxes in future periods, it would not result in an increase in cash payments for income taxes.

Our net operating loss carryforwards for Federal income tax purposes at June 30, 2003 are estimated to be approximately $260 million. There are limitations on the usage of these net operating losses. As such, approximately $44 million will be available for use in fiscal 2004, with $12.5 million available per year thereafter.

From inception to March 31, 2003, our operations have been financed primarily through the sale of equity securities and, to a lesser extent, cash generated from operations, net cash acquired from acquisitions, and equipment lease financing. At March 31, 2003, we had approximately $171.5 million in cash, cash equivalents and short-term investments and approximately $0.8 million in restricted cash.

Cash provided by (used for) operating activities primarily consists of net income (loss) adjusted for certain non-cash items including depreciation and amortization, stock-based charges, tax benefit from stock options and changes in operating assets and liabilities. For the nine months ended March 31, 2003, net cash provided by operating activities was $45.5 million consisting of net income of

$13.2 million adjusted for non-cash items of $22.9 million and a $9.4 million decrease in operating assets and liabilities. For the nine months ended March 31, 2002, cash used for operating activities was $17.0 million consisting of net loss of $45.1 million, adjusted for non-cash items of $29.2 million, partially offset by a $1.0 million increase in operating assets and liabilities.

For the nine months ended March 31, 2003, net cash used for investing activities was $23.3 million, consisting of $8.4 million of cash paid for the acquisition of the Internet access assets of BlueLight, purchases of property and equipment of $4.7 million and net purchases of short-term investments of $10.2 million. For the nine months ended March 31, 2002, net cash provided by investing activities was $34.9 million, consisting of $32.3 million of cash acquired from the Merger, $1.4 million proceeds from sales of assets and $2.2 million net proceeds from the maturities of short-term investments, partially offset by purchases of property and equipment of $0.9 million.

For the nine months ended March 31, 2003, net cash used for financing activities was $2.0 million, consisting primarily of repurchases of common stock of $4.0 million and payments on capital leases of $2.9 million, partially offset by proceeds from exercises of stock options and employee stock purchase plan shares of $4.8 million. For the nine months ended March 31, 2002, net cash used for financing activities was $8.3 million, consisting of $6.1 million of payments on capital leases and notes payable and $3.5 million of repurchases of common stock and option shares exercised, partially offset by proceeds from exercises of stock options and employee stock purchase plan shares of $1.3 million.

In prior years, we invested significantly in our network infrastructure, software licenses, furniture, fixtures and equipment and may need to make further investments in the future. We anticipate that our annual capital expenditures will increase from $1.5 million in fiscal 2002 to approximately $6.0 million for fiscal 2003, of which approximately $4.7 million was expended during the nine months ended March 31, 2003. The actual amount of capital expenditures may increase due to a number of factors, including new business initiatives such as our recently launched NetZero HiSpeed and Juno SpeedBand services, which are difficult to predict and could change dramatically over time. Technological advances may also require us to make capital expenditures to develop or acquire new equipment or technology in order to replace aging or technologically obsolete equipment. We intend to use our existing cash balances to fund any potential future operating losses, to repurchase outstanding common stock, to acquire complimentary services, businesses or technologies and to fund necessary future capital expenditures.

We currently anticipate that our existing cash, cash equivalents and short-term investments will be sufficient to fund our operating activities, capital expenditures and other obligations for at least the next twelve months. In the short-term, we do not anticipate the need for additional financing to fund our operating activities. However, we may raise additional capital for a variety of reasons including, without limitation, expanding our marketing activities, developing new or enhancing existing services or products to respond to competitive pressures, acquiring complementary services, businesses or technologies or funding unanticipated capital expenditures. If we need to raise additional capital through public or private financings, strategic relationships or other arrangements it might not be available to us on acceptable terms, or at all. Our failure to raise sufficient capital when needed could have a material adverse effect on the business, financial condition, results of operations and cash flows. If additional funds were raised through the issuance of equity securities, the percentage of stock owned by the then-current stockholders would be reduced. Furthermore, such equity securities might have rights, preferences or privileges senior to holders of our common stock.

The Company leases its facilities and certain network equipment under operating leases expiring at various periods through 2010. The leases generally contain annual escalation provisions as well as

renewal options. Future minimum lease payments under operating leases as of March 31, 2003 for the remainder of the fiscal year ending June 30, 2003 are $0.6 million.

Under the terms of several multi-year telecommunications services agreements with various service providers, we are currently contractually committed to purchase approximately $3.7 million in telecommunications services for the remainder of the fiscal year ending June 30, 2003. We are currently contractually committed to purchase approximately $13.8 million, $7.3 million and $0.3 million in telecommunications services for the fiscal years ending June 30, 2004, 2005 and 2006, respectively. Under the terms of a marketing agreement, we are currently contractually committed to purchase $1.5 million and $3.5 million in advertising in the fourth quarter of fiscal 2003 and the year ending June 30, 2004, respectively.

In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142. Under SFAS No. 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The adoption of SFAS No. 142 in the first quarter of 2003 did not have an impact on our financial position, results of operations or cash flows.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, and portions of APB Opinion No. 30, Reporting the Results of Operations. SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value or carrying amount. SFAS No. 144 also requires expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required. The adoption of SFAS No. 144 in the first quarter of fiscal 2003 did not have any impact on our financial position, results of operations or cash flows.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and nullifies the guidance of Emerging Issues Task Force ("EITF") Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs

to Exit an Activity (including Certain Costs Incurred in a Restructuring), which recognized a liability for an exit cost at the date of an entity's commitment to an exit plan. SFAS No. 146 requires that the initial measurement of a liability be at fair value. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 in the third quarter of fiscal 2003 did not have any impact on our financial position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. ("FIN") 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee. This interpretation is applicable on a prospective basis to guarantees issued or modified after December 31, 2002. FIN 45 also contains disclosure provisions surrounding existing guarantees, which are effective for financial statements of interim or annual periods ending after December 15, 2002. The adoption of FIN 45 in the third quarter of fiscal 2003 did not have any impact on our financial position, results of operations and cash flows.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of FAS 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. This Statement also amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. SFAS No. 148 is effective for annual and interim periods beginning after December 15, 2002. The adoption of the interim disclosure provisions of SFAS No. 148 in the third quarter of fiscal 2003 did not have any impact on our financial position, results of operations or cash flows. We are currently evaluating whether to adopt the fair value based method of accounting for stock-based employee compensation in accordance with SFAS No. 148 and its resulting impact on our financial position, results of operations and cash flows.

In January 2003, the Emerging Issues Task Force issued EITF Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. This consensus addresses certain aspects of accounting by a vendor of arrangements under which it will perform multiple revenue-generating activities, specifically, how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. EITF Issue No. 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003 or entities may elect to report the change in accounting as a cumulative-effect adjustment in accordance with APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, with early application of this consensus permitted. The adoption of EITF Issue No. 00-21 in the first quarter of fiscal 2004 will not have any impact on our financial position, results of operations of cash flows.

Our operating results may fluctuate substantially in the future as a result of a variety of factors, many of which are outside of our control, including those discussed elsewhere in this Form 10-Q. While we do not currently intend to significantly increase our operating expenses other than to increase our marketing expenses and to increase telecommunications expenses as necessary to service new and existing users, we may increase other expenses and capital expenditures for a variety of reasons including, without limitation, unanticipated growth in our user base, enhancement of the features and functionality of our services, the development of new services and products, costs associated with integrating acquired companies, upgrading our internal network infrastructure, pursuing new distribution channels and hiring new personnel across all levels of the organization. Expenditures in each of these categories may vary significantly from period-to-period. While some expenses are fixed in

the short-term, significant amounts of our operating expenses are determined on the basis of anticipated revenues. There are risks associated with the timing and achievement of revenue targets due to a variety of factors, and we cannot assure you that revenues will increase commensurately with expenses. As a result of these and other factors, operating results may vary substantially from quarter-to-quarter.

Seasonal trends could affect revenues, operating expenses and the rate at which users sign up for our services. However, because our business model has changed and our operating history is limited, it is difficult to accurately predict these trends and plan accordingly. We currently anticipate that Internet usage and the rate at which users sign up for our services will be lower during the spring and summer months. It is possible that seasonal fluctuations could cause our active user base and cost of billable and free services to vary substantially from quarter-to-quarter.

There are several other factors that may cause our quarter-to-quarter revenues to fluctuate significantly, including demand for online advertising, changes in advertising rates, increases or decreases in the pricing of our pay services, promotional discounts, fluctuations in our user count, and changes in orders from significant customers. These and other factors may cause significant fluctuations in our quarter-to-quarter revenues.

We are currently party to various legal actions and the nature of our business may subject us to additional claims in the future. The timing of the settlement of any actions, the costs incurred in defending any actions or the entry of judgments against us in any actions could cause our results of operations to fluctuate from period-to-period.

We purchase the vast majority of our telecommunications resources from third parties. From time to time we have disputes with vendors regarding such services and the accuracy of the invoices for such services. The resolution of such disputes has resulted, and may in the future result, in adjustments in the current period to expenses that were recorded in prior periods, or an increase in expenses in the period of resolution. Our results of operations may be impacted by disputes with vendors and the timing of the resolution of such disputes.

The timing of implementation of any further limitations on our free services may impact pay user registrations as well as the number of active users on our free services. In October 2001, we implemented additional limitations on NetZero's free service. This resulted in a substantial increase in sign-ups for our pay services in October 2001 and a decrease in the number of active free users. Historical quarterly fluctuations in our user base, both free and pay, may not be indicative of an ongoing trend.

Our billable services revenues are dependent on the number of pay users on our services. Each month, an average of four to five percent of our existing pay users cancel their accounts or have their accounts terminated. These percentages do not include those users who sign-up directly for our pay services without previously using our free services and whose accounts are terminated within 30 days of registration. Since the inception of our pay services, the number of new pay users signing up for our services has exceeded the number of users canceling their service, in part as a result of users upgrading from our free services. Increasing our pay user base involves two components: gaining new pay users who have not previously used our free services and converting our free services users to our pay services. We have experienced, and may in the future experience, decreases in our free user base, which we believe will cause us to rely more heavily on acquiring new pay users that have not previously used our free services. In addition, as our pay user base grows, we are required to obtain an increasing number of pay users to replace the users who cancel their service. The dial-up ISP industry is maturing and the aggregate number of dial-up accounts in the United States is decreasing. There is significant competition for new pay users and we cannot assure you that we will achieve success in acquiring new pay users. The average cost to acquire a new pay user in our industry is significantly higher than we anticipate spending, and we cannot assure you that we will be able to acquire new pay users at a

reasonable acquisition cost. If we experience decreases in the number of new pay users signing up for our pay services, our pay user base is likely to decrease, and our business, results of operations and financial position will be adversely impacted.

We have previously experienced reductions in advertising and commerce revenues from significant customers and may experience additional reductions in the future. We derived approximately 36% of our advertising and commerce revenues and approximately 4% of our total revenues for the three and nine months ended March 31, 2003 from our agreement with GM compared to approximately 38% and 34%, respectively, of advertising and commerce revenues and approximately 5% and 6%, respectively, of total revenues for the three and nine months ended March 31, 2002. Our current agreement with GM expires in December 2003 and will not be renewed. Historically, we have provided GM with reductions in the dollar amount of their advertising commitments and they may be provided additional reductions in the future. We can give no assurance that we will continue to derive the amount of anticipated advertising and commerce revenues from GM during the remainder of the term of the agreement. We do not anticipate that the GM agreement will be replaced by other arrangements that will generate comparable revenues and, as such, anticipate a decline in advertising and commerce revenues following the December 2003 quarter. The termination or renegotiation of agreements with significant customers, as well as the timing of orders under agreements with significant customers, may cause significant fluctuations in our quarterly advertising and commerce revenues. Our business, results of operations and financial condition may be materially and adversely affected if we are unable either to maintain or renew our agreements with significant customers or to replace such agreements with similar agreements with new customers.

Before deciding to invest in our company or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information in this report and our other filings with the SEC. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect us. If any of these risks actually occur, our business, financial condition or results of operations could be seriously harmed. In that event, the market price of our common stock could decline and you may lose all or part of your investment.

We cannot predict our success because our business model is unproven and changing.

Juno began offering e-mail services in April 1996 and NetZero began offering Internet access services in October 1998. Each company has made significant changes to its business model to address changes in the market as well as other factors. We may make additional changes to each company's business model in the future. These factors make it difficult to evaluate or predict our performance. We cannot assure you that our current business model will be successful, that we will not make significant changes to our model or that any changes we make to our model will be successful.

Our stock price could fall if we are unable to maintain or increase profitability.

We achieved profitability in the September 2002 quarter, and we have been profitable in each subsequent quarter. However, both NetZero and Juno have a history of losses. NetZero incurred net losses of approximately $334.5 million from its inception in July 1997 through September 2001. Juno incurred net losses of approximately $191.3 million from its inception in June 1995 through September 2001. During the year ended June 30, 2002, United Online incurred a $47.8 million net loss. Although our goal is to increase revenues and profitability, we cannot assure you that we will be successful in doing so, or that we will maintain profitability. We may never be successful in implementing our business strategies or in addressing the risks and uncertainties facing our company. We cannot assure you that we will be able to sustain or increase profitability on a quarterly or annual basis. If we fail to maintain or increase profitability, the market price for our common stock would suffer which may adversely affect our ability to raise capital and retain key employees.

Our business is subject to fluctuations that may negatively impact the price of our common stock.

Our revenues, expenses, operating results and pay user additions have varied in the past and may fluctuate significantly in the future due to a variety of factors including, without limitation, fluctuations in our pay and free user base, changes in the number of hours users use our services, the impact of competition, changes in our business model and service offerings, changes in the market for Internet advertising, the effect of significant contracts with advertisers and vendors, and fluctuations in marketing and telecommunications expenses. In addition, many of our operating expenses are based on our expectations of our future revenues and are relatively fixed in the short term. We cannot assure you that we will achieve the expectations or projections made by our management. Furthermore, we may be unable to adjust spending quickly enough to offset any revenue shortfall, which may cause our business and financial results to suffer. Future results of operations may also vary for other reasons discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations.

Due to all of the above factors and the other risks discussed in this section, you should not rely on quarter-to-quarter or year-to-year comparisons of our results of operations or pay user additions as an indication of future performance. It is possible that in some future periods our results of operations and pay user additions may be below the projections of our management and expectations of public market analysts and investors. In this event, the price of our common stock is likely to fall.

Our market share and revenues will suffer if we are unable to compete effectively with established and new providers of dial-up and broadband Internet access services.

Competition for users of Internet access services is intense. We compete with established online service and content providers, such as AOL Time Warner, CompuServe and The Microsoft Network; independent national ISPs, such as EarthLink; companies combining their resources to offer Internet services in conjunction with other services such as the agreement between Yahoo! and SBC Internet Services and the arrangement between AOL Time Warner and Walmart.com; national communications companies and local exchange carriers such as AT&T WorldNet, Qwest Communications International, Inc. and Verizon; and cable companies such as Comcast Corporation, Cox Communications, Inc. and Adelphia Communications Corporation. We also compete with local telephone companies and regional and local commercial ISPs.

While we believe our current product offerings compete primarily with other dial-up Internet access offerings, we also compete with broadband offerings. Our larger competitors offer both dial-up and broadband services. We offer broadband services on a limited basis pursuant to an agreement with Comcast Cable Communications, Inc. and we are uncertain whether we will offer broadband services on a more significant scale. We cannot assure you that we will be able to implement such a service successfully, that the service will be offered on other than a limited basis or that we will generate a significant number of users to the service. Our failure to offer competitive broadband services on a significant scale will adversely impact our ability to compete for new users and to retain existing users.

We expect competition to continue to intensify. Historically, there has been significant growth in the number of new users establishing Internet access accounts. It is estimated that approximately 88% of the homes in the United States with computers as of December 2001 had some form of Internet access. As such, the number of dial-up accounts being established by new users is decreasing. In addition, we expect that the aggregate number of dial-up accounts in the United States will decrease in the future due to the growth in broadband services. In addition to offering broadband services, many of our competitors have significantly greater resources and larger marketing budgets and more advanced features and services, and they may offer competing services at a lower price. While many of our competitors price their standard services above our standard offering price, there are other competitors with lower pricing and we cannot assure you that we will be price competitive.

We cannot assure you that we will be able to compete successfully. Our inability to effectively compete could require us to make significant revisions to our strategies and business model, and would likely result in increased costs, decreased revenues and the loss of users, all of which could materially and adversely impact our business, financial position and results of operations.

Restrictions on our free services may result in significant reductions in our free user base.

NetZero and Juno have, from time to time, implemented restrictions and limitations on their free services and may impose additional restrictions and limitations in the future. As a result of these measures and other factors, we have experienced a decline in our free user base and a decrease in the number of new users registering for our free services. We also have focused our marketing efforts on marketing our pay services, not our free services. These measures may adversely impact our reputation as a provider of free services and make it more difficult to recruit new free users. Since a portion of our strategy is to increase our pay user base by converting free users to pay users, reductions in our free user base may adversely impact this strategy. We cannot assure you that these measures will not adversely impact our business.

If we are unable to grow our pay user base, we may not be able to grow revenues.

Growth in our pay user base will be critical to our future success. Increasing our pay user base involves two components: converting our free service users to our pay service and gaining new pay

users who have not previously used our free service. We have experienced, and may experience in the future, decreases in our free user base, which we believe will cause us to rely more heavily on signing up more pay users who have not previously used our free service. In addition, as our pay user base grows, we are required to obtain an increasing number of pay users to replace the users who cancel their service. We are competing directly with other pay service offerings and we cannot assure you we will achieve success in signing up new pay users. The average cost to acquire a pay user in our industry is significantly higher than we anticipate spending, and we cannot assure you that we will be able to acquire new pay users at a reasonable cost. If we experience decreases in our pay user base or increased costs in acquiring new pay users, our business, results of operations and financial position will be adversely impacted.

We are relying on the migration of free users to our pay services as a major source of our pay users. Since July 1998, Juno has advertised to its free users encouraging them to upgrade, and NetZero initiated a similar campaign in March 2001. There is a risk that repeated exposure to these advertisements may cause their effectiveness to decline. Furthermore, to the extent that our number of active free users declines, we will have a smaller pool of free users to solicit, further reducing the absolute number of potential migrations to our pay services. The rate at which users of the free service upgrade to our pay services has, from time to time, declined and may continue to decline, which would adversely impact our ability to retain or grow our pay user base.

If we are unable to retain users, our business and financial results will suffer.

Our business and financial results are dependent on the number of users of our services. Our number of active users has a significant impact on our ability to attract advertisers, the number of advertising impressions we have available to sell, and on how many pay service users we can potentially acquire by soliciting users of our free service. Our number of pay service users is critical to our ability to generate revenues. Each month, an average of four to five percent of our pay service users cancel their accounts or have their accounts terminated. These percentages do not include those users who sign up for our pay service without previously using our free service and whose accounts are terminated within 30 days of registration. Each month, an even higher percentage of free users becomes inactive. This is due to competition, the imposition of limitations on our free services, changes in pricing plans and other factors. In addition, there may be significant overlap between NetZero's and Juno's active free user bases, so the actual combined active user base may be less than anticipated.

We anticipate further significant reductions in our free user base if we implement additional restrictions on our free services. We may also, in the future, make additional changes to the terms or prices of our pay services, which may result in additional pay user attrition. If these or other factors result in the loss of a significant number of users, our business and financial results will suffer. We cannot assure you that we will be able to effectively retain users or generate enough new users to make up for lost users.

If we fail to maintain or grow our revenues while controlling the costs of our pay services, our business may suffer.

Our ability to generate significant revenues from our pay services will be critical to our future success. Generating pay revenues includes increasing our pay user base as well as maintaining or increasing our pricing. Juno has offered a variety of pricing programs and has, in certain cases, increased the pricing to certain users based on their usage. Juno's monthly prices have ranged from $1.95 to $29.95 per month. A significant number of users who have experienced price increases have discontinued their service, which adversely impacts revenues.

Our ability to offer profitably a value-priced pay service may be adversely impacted if there is an increase in Internet usage by our pay users. We believe that our average usage per pay user may be less

than that of certain of our competitors, and the average usage per pay user may increase in the future. If the average monthly usage for our pay users exceeds our expectations, or if our average hourly telecommunications cost increases, we may not be able to operate our value-priced pay services profitably. We may have to impose hourly limits on our pay services or increase our standard pricing, either of which could adversely impact our ability to attract and retain users to our pay services or compete effectively.

Advertising revenues are intended to be an important component of our strategy and revenue base going forward. Our revenues from advertising have, from time to time, decreased from quarter-to-quarter due to a variety of factors, including the deterioration of the online advertising market and the decrease in capital available to Internet companies. We have experienced a number of situations where our advertising arrangements are terminated early, are not renewed, are renewed at significantly lower rates or are repriced during the term of the arrangement. Our success may depend on our ability to effectively target users based on demographic and other information. We may encounter technical, legal and other limitations on this ability.

Competition for Internet-based advertising revenues is intense and the demand for advertising space has declined. These and other factors have caused Internet advertising rates to decline, and it is possible that rates will continue to decline in the future. Many of our advertising competitors have longer operating histories, greater name recognition, larger user bases, significantly greater financial, technical, sales, development and marketing resources and more established relationships with advertisers than we do. We must also compete with television, radio, cable and print media for a share of advertisers' total advertising budgets. Advertisers may be reluctant to devote a significant portion of their advertising budget to Internet advertising if they perceive the Internet to be a limited or ineffective advertising medium.

In light of these factors, we cannot assure you that we will be able to maintain or grow advertising revenues.

Our business is highly dependent on our billing system, which is based on third-party software and internally developed software.

We license from Portal the software necessary to operate our billing system. In addition, our billing system includes internally developed software. Customer billing is a highly complex process, and our billing system must efficiently interface with other third parties' systems such as the systems of credit card processing companies and other companies to whom we outsource billing functions. Our ability to accurately and efficiently bill our users is dependent on the successful operation of our billing system and third parties' systems upon which we rely. In addition, our ability to offer new pay services or alternative billing plans is dependent on our ability to customize our billing system. Issues associated with our billing system could cause a variety of problems including the failure to bill users on a timely basis, over-charging or under-charging users, inaccurate financial and customer data, credit card chargebacks, delays in new product or billing plan introductions and other billing-related errors. Such problems may lead to inaccurate reporting from time to time, which could adversely affect our business and financial results. We have experienced billing problems from time to time and may experience additional problems in the future. The failure of Portal to provide software upgrades and technical support, the failure of the Portal software or internally developed software to operate accurately, problems with our credit card processor or other billing vendors and any other failures or errors in our billing system could materially and adversely affect our business and financial results.

If we are unable to successfully integrate acquisitions into our operations, then we may not realize the benefits associated with such acquisitions and our financial condition and results of operations may be adversely affected.

In September 2001 we completed the Merger. While the vast majority of the integration has been completed, additional efforts are ongoing and we cannot assure you that all integration efforts will be completed successfully. In November, we acquired certain assets of BlueLight's value-priced Internet access and e-mail service, and integration efforts are ongoing. We may acquire other companies or undertake other business combinations that can complement our current or planned business activities. We are currently evaluating the possibility of acquiring and integrating additional ISPs offering pay services. Acquisitions may not be available at the times or on terms acceptable to us, or at all. In addition, acquiring a business involves many risks, including:

We cannot assure you that we will make any further acquisitions, that we will be able to obtain additional financing for such acquisitions, if necessary, or that any acquisitions will be successful.

We also may not realize the benefits associated with our intangible assets, including those associated with acquisitions. During the quarter ended March 31, 2001, we determined the carrying value of certain assets was impaired using the undiscounted cash flow method and the market comparison method. An impairment charge relating to goodwill, intangible assets and other assets totaling approximately $48.6 million was recorded during the quarter, reflecting the amount by which the carrying amount of the assets exceeded their respective fair values. The impairment consisted of approximately $33.5 million for goodwill and approximately $15.1 million for other acquired intangible assets and other assets. We cannot assure you that we will not experience similar impairment losses related to the Merger or otherwise in the future. Any such loss could adversely and materially impact our results of operations and financial condition.

We face numerous costs, operational and legal risks, and other uncertainties associated with our provision of free Internet access to consumers. These risks include risks that our pay users will cancel their subscription and switch to our free service and risks that the number of hours used by our free users, and the costs of providing the service may increase.

If the number of our users who remain on, or return to, the free service is significant, our business and financial results may suffer. As users of the service spend more time connected, the costs we incur to provide the service increase. If aggregate hours of connection time associated with our free services increase, our business and financial results may suffer.

We may not be able to grow or retain our user base if we are unsuccessful in maintaining our brands and marketing our services.

If we are unsuccessful in maintaining and continuing to market our brands, we may not be able to grow or retain our user base. Promotion of our brands will depend on our success in providing high-quality Internet products and services. If our users and advertisers do not perceive our existing products and services as high quality, or if we introduce new products or services or enter into new business ventures that are not favorably received by our users and advertisers, then we may be unsuccessful in building brand recognition and brand loyalty in the marketplace.

Our marketing activities may be insufficient to increase or maintain the size of our pay user base and may be insufficient to develop or maintain awareness of our services. We have relied on a variety of cash-intensive subscriber acquisition activities in the past, including the distribution of CD's, the acquisition of competitors, fee-based referral agreements and extensive advertising and promotions. We could be required to incur significant marketing expenses to maintain or grow our user base, potentially resulting in increased user acquisition costs. If we incur costs in implementing marketing campaigns without generating sufficient new users, or if capital limitations or other factors prevent us from implementing marketing campaigns, or if marketing campaigns undertaken by competitors cause attrition in our user base, our business and financial results will suffer.

Our advertising and commerce revenues would significantly decrease if we lose key marketing and advertising relationships.

We have entered into a number of advertising agreements with third parties. The number of terminations or nonrenewals of various types of advertising contracts by our partners has increased. In particular, Internet companies have scaled back the resources devoted to advertising. In light of the concentration of our advertisers within the Internet industry, we expect that we will continue to experience a significant number of terminations or nonrenewals in the future.

A small number of customers have accounted for, and may in the future account for, a significant portion of our advertising and commerce revenues. Each of NetZero and Juno has previously experienced reductions in revenues from material customers. For example, LookSmart, GM and Cisco have been material customers of NetZero. The LookSmart agreement was terminated in January 2001 and the Cisco agreement was terminated in August 2001. NetZero was not able to replace either agreement with a comparable arrangement. During the three and nine months ended March 31, 2003, GM represented approximately 36% of our advertising and commerce revenues. Our agreement with them expires in December 2003 and will not be renewed. We have provided them with reductions in their advertising obligations in the past and may do so in the future. We can give no assurance that we will continue to derive the amount of revenues from GM that we currently do during the remainder of the agreement. We do not anticipate that the GM agreement will be replaced by other arrangements that will generate comparable revenues and, as such, anticipate a decline in advertising and commerce revenues following the December 2003 quarter.

The termination or renegotiation of significant agreements, as well as the timing of orders under such agreements, has caused, and may in the future cause, significant fluctuations in our quarterly results. Our business, results of operations and financial condition will be materially and adversely affected if we are unable either to maintain or renew our significant agreements or to replace such agreements with similar agreements with new customers.

Our business is dependent on a small number of telecommunications carriers and our inability to maintain agreements at attractive rates with such carriers may negatively impact our business.

Our business substantially depends on the capacity, affordability, reliability and security of our telecommunications networks. Only a small number of telecommunications providers offer the network

services we require, and the majority of our telecommunications services are currently purchased from Leve13 Communications LLC, ICG Telecom Group, Inc., and UUNET Technologies, Inc., a WorldCom company. Several vendors have ceased operations or ceased offering the services we require, causing us to switch vendors. In addition, several vendors are experiencing significant financial difficulties and may be unable to perform satisfactorily or to continue to offer their service. In particular, UUNET and StarNet, Inc. are in bankruptcy proceedings, and ICG Telecom Group recently emerged from bankruptcy proceedings. The loss of vendors has resulted, and may in the future result, in increased costs, decreased service quality and the loss of users. In particular, the failure of Leve13 Communications, ICG Telecom Group or UUNET Technologies to continue to provide the scope, quality and pricing of services currently provided could materially and adversely affect our business. Certain of our telecommunications services are provided pursuant to short-term agreements that the providers can terminate or elect not to renew. In addition, each of our telecommunications carriers provides network access to some of our competitors, and could choose to grant those competitors preferential network access or pricing. Many of our telecommunications providers compete, or have announced an intention to compete, with us in the market to provide consumer Internet access. As a result, any or all of our current telecommunications service providers could discontinue providing us with service at rates acceptable to us, or at all, which could materially and adversely affect our business, results of operations and financial condition.

Market rates for telecommunications services used in our business have declined significantly in recent years. We do not anticipate that such rates will continue to decline in the future. General market forces, the failure of providers, regulatory issues and other factors could result in increased rates. Any increase in market rates would increase the cost of providing our services and, if significant, could materially adversely affect our business, results of operations and financial condition.

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

If our third-party telecommunications service providers deliver unacceptable service, the quality of our Internet access service would suffer. In this event, we would likely lose users who are dissatisfied with our service. Since we do not have direct control over our telecommunications carriers' network reliability and the quality of their service, we cannot assure you that we will be able to provide consistently reliable Internet access for our users.

We do not offer Internet access in all areas. Many potential users may be unable to access our services through a point of presence that is within their local calling area. These users may be particularly reluctant to use our services to access the Internet due to the telecommunications charges that they would incur. We cannot be sure if or when additional infrastructure developments by our telecommunications providers will establish points of presence that cover these areas at costs acceptable to us.

If we fail to manage our telecommunications or our internal network capacities, our service levels may suffer or we may experience increased per-user costs.

We will have to accurately anticipate our future telecommunications capacity needs within lead-time requirements. If we fail to procure sufficient quantities of telecommunications services, we may be unable to provide our users with acceptable service levels. We also run the risk of purchasing excessive amounts of telecommunications services. In that event, we would be required to bear the costs of excess telecommunications capacity without commensurate increases in revenues. We have experienced such overcapacity in the past, and we may experience overcapacity in the future. Our failure to effectively manage telecommunications costs would likely have a material adverse effect on our business, results of operations, financial position and cash flow.

In addition, we may from time to time experience increases in our telecommunications usage, which exceed our then-available telecommunications capacity and the capacity of our internal servers. As a result, users may be unable to register or log on to our service, may experience a general slow-down in their Internet access or may be disconnected from their sessions. Excessive user demand could also result in system failures of our internal server networks, which would prevent us from generating advertising revenues. Inaccessibility, interruptions or other limitations on the ability to access our service due to excessive user demand, or any failure of our servers to handle user traffic, could have a material adverse effect on our reputation and our revenues.

We may not successfully develop and market new products in a timely or cost-effective manner; consumers or advertisers may not accept our new products.

We may not be able to compete effectively if we are not able to adapt to changes in technology and industry standards, and to develop and introduce new and enhanced products and service offerings. New products may be dependent on our obtaining needed technology or services from third parties. We also believe that our ability to compete successfully will also depend upon the continued compatibility of our services with products offered by various vendors.

We have expended, and may in the future expend, significant resources developing and implementing new products. Product development involves a number of uncertainties, including unanticipated delays and expenses. New products may have technological problems or may not be accepted by our users or advertisers. Several of the new products we have offered, or intend to offer, are intended to generate additional revenues for us. We cannot assure you that such products will provide us with any meaningful revenue.

In April 2003, we began marketing NetZero HiSpeed and Juno SpeedBand at $14.95 per month. These services combine a standard NetZero or Juno pay account with compression and caching technologies that reduce the average time for certain web pages to download to users' computers when compared to standard dial-up services. We have devoted significant resources to the development of these services, including the integration of technologies licensed from a third party with our technologies, and we intend to continue to devote significant resources to the continued development, marketing and provisioning of these services. While these services result in faster web surfing over a dial-up connection, these services do not provide the same benefits as broadband services such as a continuous connection or faster downloads of music and video files. In addition, the technologies underlying the services are complex and we may encounter issues with the operation, provisioning or the performance of the service. There can be no assurance that we will be successful in marketing these services. Even if we are successful in marketing these services to new and existing users, problems with these services could adversely affect our business in a number of ways, including increased account terminations and refunds.

We may not be able to compete effectively if we are not able to protect our proprietary rights.

If we are not able to protect our proprietary rights, we may not be able to compete effectively. We principally rely upon patent, copyright, trade secret and contract laws to protect our proprietary technology. We cannot be certain that we have taken adequate steps to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technologies. In addition, since we provide our Internet access software for free, we are extremely susceptible to various forms of unauthorized use of our software. These actions could adversely affect our brand names.

In addition, both Juno and NetZero have engaged in lawsuits and expended significant resources attempting to enforce their proprietary rights. We may attempt to enforce our proprietary rights in the future, which could result in significant costs without a corresponding economic or competitive benefit.

We may incur substantial costs and diversion of management resources if we are accused of infringing upon the proprietary rights of others.

Third parties may assert claims against us for infringement of their proprietary rights and these claims may be successful. In addition, a number of third-party owners of patents have claimed to hold patents that cover various forms of online transactions or online technology. As with other online service providers, patent claims could be asserted against us based upon our services or technologies. We have had claims asserted against us in the past although we do not believe that any claims are material to our business.

We could incur substantial costs and diversion of management resources in the defense of any claims relating to proprietary rights. Parties making these claims could secure a judgment awarding substantial damages as well as injunctive or other equitable relief that could effectively block our ability to use our products in the United States or abroad. If a third party asserts a claim relating to proprietary technology or information against us, we may seek licenses to the intellectual property from the third party. We cannot be certain, however, that third parties will extend licenses to us on commercially reasonable terms, or at all. If we fail to obtain the necessary licenses or other rights, it could materially and adversely affect our ability to operate our business.

A security breach, virus or inappropriate use by Internet users could disrupt our service.

The future success of our business will depend on the security of our network and, in part, on the security of the network infrastructures of our third-party telecommunications service providers, providers of customer support services and other vendors. In addition, the sending of "spam" through our network could result in third parties asserting claims against us. Unauthorized or inappropriate access to our computer systems, including by current or former employees, could potentially jeopardize the security of confidential information, including credit card information, and that could cause losses to our users or us. Users or third parties may also potentially expose us to liability by "identity theft." Users or others may assert claims of liability against us as a result of any failure by us to prevent these network malfunctions and security breaches. Although we intend to use industry-standard security measures, such measures have been circumvented in the past, and we cannot assure you that these measures will not be circumvented in the future. We also cannot assure you that the security measures of our third-party network providers, providers of customer support services or other vendors will be adequate. In addition to potential legal liability as a result of computer viruses or other inappropriate uses or security breaches, we may have to interrupt, delay, or temporarily cease service to our users, which could have a material adverse effect on our revenues and could also result in increased user turnover.

If our software or hardware contains errors, or if we encounter difficulties integrating our systems and technologies, our business could be seriously harmed.

The software and hardware used to operate and provide our services is complex and may contain undetected errors or failures. We have in the past encountered, and may in the future encounter, errors in the software or hardware used to operate our business and provide our services. This has resulted in, and may in the future result in, a number of adverse consequences, which have included or may include:

We have experienced some technical and customer support issues associated with our products and software releases. These issues have resulted in users discontinuing our service and have adversely impacted our revenues. A number of our material technologies and systems, including the software client systems and ad-serving technologies for NetZero, Juno and BlueLight Internet, are based on different platforms. To the extent we attempt to integrate these technologies and systems, we may experience a number of difficulties, errors, failures and unanticipated costs. In addition, our business relies on third-party software including, without limitation, software licensed from Oracle for our internal operations and software licensed from a third party for our NetZero HiSpeed and Juno SpeedBand services. Any significant failure of this software could materially and adversely affect our business. We cannot assure you that we will not experience significant problems in the future.

We are dependent on third parties for technical support and customer service and our business may suffer if they are unable to provide these services, cannot expand to meet our needs or terminate their relationships with us.

Our business and financial results depend, in part, on the availability and quality of live technical and customer support services. We outsource most of these functions to ClientLogic Corporation pursuant to an agreement that terminates in June 2005. As a result, we maintain only a small number of internal customer service personnel. We are not equipped to provide the necessary range of customer service functions in the event that ClientLogic becomes unable or unwilling to offer these services to us. At times, users have experienced lengthy waiting periods to reach representatives trained to provide the technical or customer support they require. ClientLogic has also experienced outages in the past where they were unable to service our users. Maintaining desired customer support levels may require significantly more support personnel than are currently available to us, or significantly greater expense than we feel it is appropriate, or than we are able, to incur. If our relationship with ClientLogic terminates and we are unable to enter into a comparable arrangement with a replacement vendor, if our current vendor is unable to provide the quality and quantity of service required, or if we are unable to develop internally the additional customer service and technical support capacity we expect to need, our business and financial results will suffer. We use technical support staff in India in part for supporting our customers via e-mail. If technical problems are encountered with communication to India, it may impair our ability to provide e-mail support.

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

We may need to raise substantial additional funds in the future to fund our operations, for acquisitions of businesses or technologies or for other purposes. Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or not available when required in sufficient amounts or on acceptable terms, we may not be able to devote sufficient cash resources to continue to provide our services in their current form, acquire additional users, enhance or expand our services, respond to competitive pressures or take advantage of perceived opportunities, and our business and financial results may suffer, or we could be forced to cease our operations entirely.

If we are unable to successfully defend against legal actions against us, we could face substantial liabilities.

We are currently parties to various legal actions. Defending against these lawsuits may involve significant expense and diversion of management's attention and resources from other matters. Due to the inherent uncertainties of litigation, we may not prevail in these actions. In addition, our ongoing operations may continue to subject us to significant litigation and costs in the future. Both the costs of defending lawsuits and any settlements or judgments against us could materially and adversely affect our financial position and results of operations.

Our business could be shut down or severely impacted if a natural disaster occurs.

Our computer equipment and the telecommunications infrastructure of our third-party network providers are vulnerable to damage from fire, earthquakes, power loss, telecommunications failures, and similar events. We have experienced situations where power loss and telecommunications failures have adversely impacted service, although to date such failures have not been material to our operations. A significant portion of our computer equipment, including critical equipment dedicated to our Internet access services, is located at our headquarters in Westlake Village, California and at facilities in Los Angeles, California; San Jose, California; and New York City, New York. A natural disaster or other unanticipated problems at our headquarters or at a network hub, or within a third-party network provider's network, could cause interruptions in the services that we provide. Our systems are not fully redundant. Any prolonged disruption of our services due to system failures could result in user turnover and decreased revenues.

Our business could be severely impacted due to political instability in India.

Approximately 28% of our employees are located in Hyderabad, India. Due to the current political instability between India and Pakistan, it is possible that our India operations could be disrupted. We rely on our employees in India for product development, quality assurance, and customer support. If communications or personnel are disrupted, it could affect our ability to enhance our products or provide certain types of support to our users.

Our ability to operate our business could be seriously harmed if we lose members of our senior management team and other key employees.

Our business is largely dependent on the personal efforts and abilities of our senior management, particularly Mark Goldston, our chairman, chief executive officer and president, and other key personnel. Any of our officers or employees can terminate his or her employment relationship at any time. The loss of these key employees or our inability to attract or retain other qualified employees could seriously harm our business and prospects. We do not carry key man life insurance on any of our employees.

We will not be able to grow our business if we are not able to retain or hire additional personnel.

Our future success also depends on our ability to attract, retain and motivate highly skilled technical, managerial, editorial, merchandising, sales, marketing and customer service personnel. Competition for such personnel is intense, particularly in the Internet and high technology industry. As a result, we may be unable to successfully attract, assimilate or retain qualified personnel.

Any staff attrition we experience, whether initiated by the departing employees or by us, could place a significant strain on our managerial, operational, financial and other resources. We cannot assure you that we will be able to identify and hire adequate replacement staff promptly, or at all. Our subsidiaries have engaged in significant staffing reductions in the past and additional staffing reductions may take place. These reductions may make it more difficult for us to integrate their businesses, manage existing, or establish new, relationships with advertisers, vendors and other parties, or to integrate, expand and improve our service offerings. Our business and financial results could suffer as a result of the staff reductions undertaken to date and from any future staff reductions and attrition that might occur.

Government regulation of the provision of Internet access services could decrease our revenues and increase our costs.

Changes in the regulatory environment regarding the Internet could decrease our revenues and increase our costs. As a provider of Internet access services, we are not currently subject to direct

regulation by the FCC. However, some telecommunications carriers have sought to have communications over the Internet regulated by the FCC in the same manner as other more traditional telecommunications services. Local telephone carriers have also petitioned the FCC to regulate ISPs in a manner similar to long distance telephone carriers and to impose access fees on these providers, and some developments suggest that they may be successful in obtaining the treatment they seek. In addition, we operate our services throughout the United States, and regulatory authorities at the state level may seek to regulate aspects of our activities as telecommunications services. As a result, we could become subject to FCC and state regulation as Internet access services and telecommunications services converge.

Changes in, or interpretations of, laws regarding consumer protection could subject us to liability or cause us to change our practices.

Consumer protection laws and enforcement actions regarding advertising and user privacy, especially relating to children, are becoming more prevalent. The FTC has conducted investigations into the privacy practices of companies that collect information about individuals on the Internet. The FTC has also investigated us and other ISPs in connection with marketing, billing and disclosure practices. Juno and the FTC entered into a consent agreement, which was approved by the FTC on June 29, 2001, that provides for redress payments and specific disclosures or notices regarding, among other things, the cost of its Internet access services, its cancellation terms and local versus long-distance charges, as well as the requirement to provide adequate customer support to process cancellations.

Various state agencies as well as individuals have also asserted claims against, or instituted inquiries into, ISPs, including Juno and NetZero, in connection with marketing, billing and disclosure practices. We cannot assure you that our services and business practices, or changes to our services and business practices, will not subject us to claims and liability by private parties, the FTC or other governmental agencies. The enactment of any additional laws or regulations in this area, increased enforcement activity of existing laws and regulations, or claims by individuals could significantly impact our costs or the manner in which we conduct business, all of which could cause our business to suffer and adversely impact our results of operations.

We could be exposed to liability for defamation, negligence and infringement.

Because users download and redistribute materials that are cached or replicated by us in connection with our Internet services, claims could be made against us for defamation, negligence, copyright or trademark infringement, or other theories based on the nature and content of such materials. While we have attempted to obtain safe harbor protection against claims of copyright infringement under the Digital Millennium Copyright Act of 1998, we cannot assure you that we will prevail in any such claims. We also could be exposed to liability because of third-party content that may be accessible through our services, including links to Web sites maintained by our users or other third parties, or posted directly to our Web site and subsequently retrieved by a third party through our services.

Seasonal trends in Internet usage and advertising sales may cause fluctuations in our business.

Seasonal trends could affect revenues, operating expenses and the rate at which users sign up for our services. Decreased usage during seasonal periods could decrease advertising inventory and adversely impact advertising revenue. While increased usage due to seasonality may positively impact advertising revenue, it would also result in increased telecommunication costs for such period. We currently anticipate that Internet usage and the rate at which users sign up for our services will be lower during the spring and summer months. Because our operating history is so limited, it is difficult for us to accurately predict these trends and plan accordingly. It is possible that seasonality could result in significant fluctuations in our operating results.

NetZero's and Juno's stock prices were highly volatile; our stock price has been highly volatile since the Merger and may cause limitations on the trading market for our stock.

The market price of NetZero's and Juno's common stock fluctuated significantly prior to the Merger. The market price of our common stock has fluctuated significantly since our stock began trading on the Nasdaq National Market in September 2001 and it is likely to continue to be volatile with extreme volume fluctuations. The Nasdaq National Market, where most publicly held Internet companies are traded, has experienced substantial price and volume fluctuations. These broad market and industry factors may harm the market price of our common stock, regardless of our actual operating performance, and for this or other reasons we could suffer significant declines in the market price of our common stock.

At March 31, 2003, approximately 42 million shares were outstanding and available for resale, subject to volume and manner of sale limitations applicable to affiliates under Rule 144. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, or the perception that such sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a price that we think is appropriate, or at all.

We may issue common stock resulting in dilution to our stockholders, and the dilutive effect of these issuances would increase to the extent that our stock price declines.

Juno entered into a number of relationships in which it could use its common stock to compensate third parties for services, including subscriber referral services, and we may enter into additional such relationships in the future. If the price of our common stock should decline, our electing to pay with common stock would entail issuing a relatively larger number of shares, increasing the dilutive effect on our stockholders, and potentially impairing our ability to execute financing transactions. Additionally, the third parties to whom we issue common stock will generally have registration rights that require us to register these shares of common stock for resale in the public markets. The market price of our common stock could decline as a result of sales of these shares in the market, or the perception that such sales could occur. If we raise additional funds, acquire assets, or obtain goods or services through the issuance of equity securities, stockholders may experience significant dilution of their ownership interest and the newly issued securities may have rights superior to those of our common stock. The dilutive effect of these issuances will be increased to the extent our share price declines.

We have anti-takeover provisions that may make it difficult for a third party to acquire us.

Provisions of our certificate of incorporation, our bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders because of a premium price offered by a potential acquirer. In addition, our board of directors adopted a stockholder rights plan which is an anti-takeover measure that will cause substantial dilution to a person who attempts to acquire the company on terms not approved by our board of directors.

We do not plan to pay dividends in the foreseeable future and, as a result, you will need to sell your shares in order to realize a near-term return on your investment.

We intend to retain any future earnings to finance the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Consequently, stockholders will need to sell shares of common stock in order to realize a return on their investment, if any.

We maintain a short-term investment portfolio consisting of U.S. commercial paper, U.S. Government or U.S. Government Agency obligations and money market funds. The minimum long-term rating is A and if a long-term rating is not available we require a short-term credit rating of A1 and P1. Increases and decreases in short-term interest rates could have a material impact on interest income from our investment portfolio.

Based on their evaluation, as of a date within 90 days of the filing of this Form 10-Q, the Company's Chief Executive Officer and Chief Financial Officer have concluded the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) are effective to ensure that all material information required to be disclosed in this quarterly report has been made known to them in a timely fashion.

There have been no significant changes in the Company's internal controls, or in other factors that could significantly affect the Company's internal controls, subsequent to the date of their evaluation.

A settlement agreement has been reached in the dispute among Juno, Freewwweb and WorldCom, as more fully described in Footnote 10 to the financial statements. Pursuant to the agreement, Juno would be released from all claims in exchange for a $5.5 million cash payment. The settlement is subject to approval by the Freewwweb bankruptcy court and the WorldCom bankruptcy court. We expect that Freewwweb will object to the terms of the settlement. At March 31, 2003, we had liabilities recorded of approximately $5.5 million as an estimate of the amounts for which we believe the WorldCom and Freewwweb claims will be resolved. There can be no assurance that the settlement will be approved by the courts, that the outcome of the litigation will be positive or that we will not be required to pay Freewwweb and WorldCom an amount in excess of the amount currently reserved.

A settlement agreement has also been reached in the dispute between Sprint and Juno in which Sprint was seeking damages of $550,000 plus costs.

On November 15, 2001, the Board of Directors declared a dividend of one preferred share purchase right for each outstanding share of United Online's common stock. The dividend was paid on November 26, 2001 to the stockholders of record at the close of business on that date. Each right entitles the registered holder to purchase from us one unit consisting of one one-thousandth of a share of our Series A junior participating preferred stock.

On April 29, 2003, the Board of Directors voted to amend the Rights Agreement dated as of November 15, 2001 to increase the purchase price per unit from $25 to $140. The rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of our common stock or announces a tender or exchange offer which results in a person owning 15% or more of our common stock. We generally will be entitled to redeem the rights at $0.001 per right at any time until 10 days after a public announcement that a 15% position in our common stock has been acquired or that a tender or exchange offer which would result in a person owning 15% or more of our common stock has commenced. The rights expire on November 26, 2011.

Exhibit No.		Description
3.1*		Amended and Restated Certificate of Incorporation
3.2*		Amended and Restated Bylaws
3.3**		Certificate of Designation for Series A Junior Participating Preferred Stock (included in exhibit 4.1 below).
4.1**		Rights Agreement, dated as of November 15, 2001, between the Company and U.S. Stock Transfer Corporation, which includes the form of Certificate of Designation for the Series A junior participating preferred stock as Exhibit A, and the form of Rights Certificate as Exhibit B
4.2		Amendment No. 1 to Rights Agreement, dated as of April 29, 2003, between Registrant and U.S. Stock Transfer Corporation
10.1+		Amended and Restated Registration Rights Agreement
10.2+		Lease Agreement between Westlake Gardens and Registrant
10.3+		2001 Employee Stock Purchase Plan
10.4+		2001 Stock Incentive Plan

Pursuant to the requirements 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.

Certification of Chief Executive Officer Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Mark R. Goldston, Chairman, Chief Executive Officer and President of United Online, Inc., certify that:

Certification of Chief Financial Officer Pursuant to
Securities Exchange Act Rules 13a-14 and 15d-14
as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Charles S. Hilliard, Executive Vice President, Finance and Chief Financial Officer of United Online, Inc., certify that:

Delaware (State or other jurisdiction of incorporation or organization)	77-0575839 (I.R.S Employer Identification No.)
2555 Townsgate Road, Westlake Village, California (Address of principal executive office)	91361 (Zip Code)

PART I.		FINANCIAL INFORMATION
	Item 1.	Consolidated Balance Sheets at March 31, 2003 (unaudited) and June 30, 2002	3
		Unaudited Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended March 31, 2003 and 2002	4
		Unaudited Consolidated Statements of Cash Flows for the nine months ended March 31, 2003 and 2002	5
		Notes to the Unaudited Consolidated Financial Statements	6
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
	Item 4.	Controls and Procedures	49
PART II.		OTHER INFORMATION
	Item 1.	Legal Proceedings	50
	Item 5.	Other Information	50
	Item 6.	Exhibits and Reports on Form 8-K	50
SIGNATURES			52
CERTIFICATIONS			53

			March 31, 2003			June 30, 2002
			(unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	61,763		$	41,543
	Short-term investments			109,752			97,812
	Restricted cash			111			5,880
	Accounts receivable, net			11,930			7,977
	Other current assets			6,840			3,577

		Total current assets		190,396			156,789
Property and equipment, net				12,518			16,500
Restricted cash				700			305
Goodwill				10,940			10,940
Intangible assets, net				42,618			47,179
Other assets				1,455			1,880

		Total assets	$	258,627		$	233,593

Liabilities and Stockholders' Equity
Current liabilities:
	Accounts payable		$	23,536		$	21,575
	Accrued liabilities			15,255			11,212
	Deferred revenue			23,902			18,815
	Capital leases			98			3,205

		Total current liabilities		62,791			54,807
Commitments and contingencies (Note 10)
Stockholders' equity:
	Common stock			4			4
	Additional paid-in capital			541,313			539,626
	Notes receivable from stockholders			(1,572	)		(1,575	)
	Deferred stock-based charges			(14	)		(107	)
	Accumulated other comprehensive income			3,084			1,015
	Accumulated deficit			(346,979	)		(360,177	)

		Total stockholders' equity		195,836			178,786

		Total liabilities and stockholders' equity	$	258,627		$	233,593

			Three Months Ended March 31,						Nine Months Ended March 31,
			2003			2002			2003			2002
Revenues:
	Billable services		$	66,035		$	44,419		$	175,378		$	93,117
	Advertising and commerce			7,784			6,492			22,309			19,949

		Total revenues		73,819			50,911			197,687			113,066

Operating expenses:
	Cost of billable services (including stock-based charges, see Note 9)			23,592			22,073			66,282			53,615
	Cost of free services (including stock-based charges, see Note 9)			3,134			6,786			10,031			28,764
	Sales and marketing (including stock-based charges, see Note 9)			23,623			11,578			60,153			25,576
	Product development (including stock-based charges, see Note 9)			5,964			6,378			17,625			18,459
	General and administrative (including stock-based charges, see Note 9)			7,126			7,125			19,866			24,289
	Amortization of intangible assets			3,964			4,685			12,447			9,471
	Restructuring charges			(215	)		680			(215	)		3,115

		Total operating expenses		67,188			59,305			186,189			163,289

Income (loss) from operations				6,631			(8,394	)		11,498			(50,223	)
Interest income, net				1,105			1,082			3,166			4,025
Other income, net				—			58			—			1,065

Income (loss) before income taxes				7,736			(7,254	)		14,664			(45,133	)
Provision for income taxes				774			—			1,466			—

Net income (loss)			$	6,962		$	(7,254	)	$	13,198		$	(45,133	)

Unrealized gain (loss) on short-term investments, net of tax				95			(468	)		2,069			(823	)

Comprehensive income (loss)			$	7,057		$	(7,722	)	$	15,267		$	(45,956	)

Net income (loss) per share — basic			$	0.17		$	(0.19	)	$	0.32		$	(1.32	)

Net income (loss) per share — diluted			$	0.15		$	(0.19	)	$	0.30		$	(1.32	)

Shares used to calculate basic net income (loss) per share				41,468			38,951			40,853			34,142

Shares used to calculate diluted net income (loss) per share				45,092			38,951			44,438			34,142

				Nine Months Ended March 31,
				2003			2002
Cash flows from operating activities:
	Net income (loss)			$	13,198		$	(45,133	)
	Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
		Depreciation and amortization			21,642			23,679
		Stock-based charges			93			5,762
		Tax benefit from stock options			880			—
		Other			300			(239	)
		Changes in operating assets and liabilities (excluding the effects of acquisitions):
			Restricted cash		5,374			9,369
			Accounts receivable		(2,342	)		3,148
			Other assets		(2,838	)		3,063
			Accounts payable and accrued liabilities		5,186			(17,160	)
			Deferred revenue		4,043			534

		Net cash provided by (used for) operating activities			45,536			(16,977	)

Cash flows from investing activities:
	Purchases of property and equipment				(4,657	)		(871	)
	Purchases of patent rights				—			(18	)
	Purchases of short-term investments				(40,440	)		(46,587	)
	Proceeds from maturities of short-term investments				30,200			48,756
	Proceeds from sales of assets				—			1,362
	Cash paid for acquisitions, net of cash acquired				(8,388	)		32,307

		Net cash provided by (used for) investing activities			(23,285	)		34,949

Cash flows from financing activities:
	Payments on capital leases				(2,904	)		(3,950	)
	Payments on notes payable				—			(2,143	)
	Repayment of notes receivable from stockholders				66			—
	Proceeds from employee stock purchase plan				843			111
	Proceeds from exercises of stock options				3,944			1,231
	Repurchases of common stock and option shares exercised				(3,980	)		(3,542	)

		Net cash used for financing activities			(2,031	)		(8,293	)

Change in cash and cash equivalents					20,220			9,679
Cash and cash equivalents, beginning of period					41,543			60,087

Cash and cash equivalents, end of period				$	61,763		$	69,766

Supplemental disclosure of non cash investing and financing activities:
	Issuance of common stock and options assumed for acquisitions			$	—		$	81,266

		Year Ending June 30,
		(in thousands)
2004		$	2,686
2005			2,549
2006			2,451
2007			2,292
2008			2,117
Thereafter			2,612

	Total	$	14,707

10.5+		2001 Supplemental Stock Incentive Plan
10.6+		Employment Agreement between the Registrant and Mark R. Goldston
10.7+		Amendment to Employment Agreement between the Registrant and Mark R. Goldston
10.8+		Stock Pledge Agreement between Registrant and Mark R. Goldston
10.9+		Note Secured by Stock Pledge Agreement made by Mark R. Goldston in favor of Registrant
10.10+		Employment Agreement between the Registrant and Charles S. Hilliard
10.11+		Amendment to Employment Agreement between the Registrant and Charles S. Hilliard
10.12+		Stock Pledge Agreement between Registrant and Charles S. Hilliard
10.13+		Note Secured by Stock Pledge Agreement made by Charles S. Hilliard in favor of Registrant
10.14+		Employment Agreement between the Registrant and Frederic A. Randall, Jr.
10.15+		Amendment to Employment Agreement between the Registrant and Frederic A. Randall, Jr.
10.16+		Employment Agreement between the Registrant and Brian Woods
10.17+		Amendment to Employment Agreement between the Registrant and Brian Woods
10.18++		Form of Note Secured by Stock Pledge Agreement made by certain officers of the Company in favor of Registrant
10.19++		Form of Stock Pledge Agreement between Registrant and certain officers of the Company
10.20++		Form of Restricted Stock Purchase Agreement between Registrant and certain officers of the Company
10.21+++		United Online, Inc. Fiscal Year 2003 Management Bonus Plan
99.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	UNITED ONLINE, INC. (REGISTRANT)
Dated: May 1, 2003	By:	/s/ CHARLES S. HILLIARD Charles S. Hilliard Executive Vice President, Finance and Chief Financial Officer

Dated: May 1, 2003	By:	/s/ NEIL P. EDWARDS Neil P. Edwards Senior Vice President, Finance, Treasurer and Chief Accounting Officer

Dated: May 1, 2003
/s/ MARK R. GOLDSTON Mark R. Goldston Chairman, Chief Executive Officer and President