UNITED ONLINE INC - 10-Q Quarterly Report

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 ý No o

There were 62,122,455 shares of the registrant's common stock outstanding at April 30, 2004.

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
(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.

1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES

United Online, Inc. ("United Online" or the "Company") is a leading provider of consumer Internet subscription services through a number of brands, including NetZero and Juno. The Company's pay services include Internet access, accelerated dial-up services, premium email, and personal Web-hosting and domain services. It also offers consumers free Internet access, email and Web hosting. The Company's access services are available in more than 6,500 cities across the United States and in Canada. In addition, the Company offers marketers numerous online advertising products as well as online market research and measurement services. The Company is headquartered in Westlake Village, California, with offices in New York, New York; San Francisco, California; Orem, Utah; 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 for financial accounting purposes and the Company's predecessor for financial reporting 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 subsidiary NetBrands, Inc., acquired the Internet access assets of BlueLight.com LLC ("BlueLight").

Juno started offering pay access services in 1998, and NetZero began offering pay access services in January 2001. The NetZero and Juno pay access services differ from their respective free access services in that the hourly and certain other limitations set for the free services do not apply. In addition, the free access services incorporate a number of advertising initiatives, including a persistent on-screen advertising banner, which are not included on the pay access services. United Online's standard pay access services are offered through various pricing plans, generally $9.95 per month. The Company offers accelerated dial-up services for an additional monthly charge of $5.00, or a total charge of $14.95, per month. The Company's accelerated services utilize compression, caching and other technologies that reduce the time for certain Web pages to download to users' computers when compared to its standard dial-up services. The Company also offers premium email services with expanded features and storage capabilities for $9.95 or $24.95 per year.

The accompanying consolidated financial statements are unaudited except for the balance sheet information at December 31, 2003 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, 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 interim periods are not necessarily indicative of the operating results for a full year. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements and related notes for the six months ended December 31, 2003 included in the Company's Transition Report on Form 10-KT filed on February 5, 2004 with the SEC.

The Company applies the provisions of SEC Staff Accounting Bulletin ("SAB") No. 104, 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. 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In general, the Company recognizes revenue related to its billable services and advertising products when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (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 subscriber. The Company's pay subscribers 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 subscribers are recorded on the balance sheet as deferred revenue. The Company offers alternative payment methods to credit cards for certain pay service plans. These alternative payment methods currently include payment by Automated Clearing House ("ACH" or "electronic check"), check or money order and via a pay subscriber's monthly telephone bill. In circumstances where payment is not received in advance, revenue is only recognized if collectibility is reasonably assured.

Advertising and commerce revenues consist primarily of fees from Internet search partners that are generated as a result of users utilizing partner Internet search services, fees generated by users viewing and clicking on third-party Web site banners and text-link advertisements, fees generated by enabling customer registrations for partners and fees from referring users to, or from users making purchases on, sponsors' Web sites. The Company also generates revenues from providing third parties with data analysis capabilities and traditional market research services, such as surveys and questionnaires. Revenues are recognized provided that no significant obligations remain, fees are fixed or determinable, and collection of the related receivable is reasonably assured. The Company recognizes 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 divided by the total number of guaranteed impressions or (ii) ratably over the period in which the advertisement is displayed. The Company's obligations typically include a minimum number of impressions or the satisfaction of other performance criteria. Revenue from performance-based arrangements, including referral revenues, is recognized as the related performance criteria are met and the related fees become fixed and determinable. In determining whether an arrangement exists, the Company ensures that a contract is in place, such as a standard insertion order or a fully executed customer-specific agreement. The Company assesses 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 generally 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.

Stock-Based Compensation—The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN") 44, Accounting for Certain Transactions Involving Stock Compensation, and Emerging Issues Task Force ("EITF") Issue No. 00-23, Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FIN No. 44 and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123. Under APB Opinion No. 25, employee stock-based compensation expense is recognized over the vesting period based on the difference, if any, on the date of grant, between the fair value of the Company's stock and the exercise price. The Company accounts for stock issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Compensation expense is recorded in accordance with FIN 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, an interpretation of APB Opinions No. 15 and 25.

As required by SFAS No. 148, the following provides pro forma net income and pro forma net income per common share disclosures for stock-based awards as if the fair-value-based method defined in SFAS No. 123 had been applied.

For each option granted up to and including September 23, 1999, the Company calculated the minimum fair value on the date of 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, using the following weighted-average assumptions:

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

		Quarter Ended March 31,
		2004			2003
Net income, as reported		$	12,361		$	6,962
	Add: Stock-based compensation included in net income		477			28
	Deduct: Total stock-based compensation determined under fair value-based method for all awards, net of tax		(6,427	)		(6,019	)

Pro forma net income		$	6,411		$	971

Net income per share—basic, as reported		$	0.20		$	0.11

Net income per share—basic, pro forma		$	0.10		$	0.02

Net income per share—diluted, as reported		$	0.18		$	0.10

Net income per share—diluted, pro forma		$	0.10		$	0.01

The following table summarizes the stock-based compensation included in the following operating expenses (in thousands):

			Quarter Ended March 31,
			2004		2003
Operating expenses:
	Cost of billable services		$	—	$	3
	Sales and marketing			83		5
	Product development			—		1
	General and administrative			394		19

		Total stock-based compensation	$	477	$	28

Income Taxes—Income taxes are accounted for under SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, the Company reviews both positive and negative evidence pursuant to the requirements of SFAS No. 109, including current and historical results of operations, the annual limitation on utilization of net operating loss carryforwards pursuant to Internal Revenue Code section 382, future income projections and potential tax-planning strategies.

Legal Contingencies—The Company is currently involved in certain legal proceedings (see Note 7). The Company records liabilities related to pending litigation when an unfavorable outcome is probable and management can reasonably estimate the amount of loss. The Company has not recorded liabilities for certain pending litigation because of the uncertainties related to assessing both the amount and the probable outcome of those claims. As additional information becomes available, the Company continually assesses the potential liability related to all pending litigation.

Short-term investments at March 31, 2004 consist of the following (in thousands):

		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
U.S. corporate notes		$	28,086	$	888	$	—		$	28,974
Government agencies			97,461		1,159		(56	)		98,564

	Total	$	125,547	$	2,047	$	(56	)	$	127,538

Gross unrealized gains and losses are presented net of tax in accumulated other comprehensive income on the consolidated balance sheets. The Company recognized $0.1 million of net realized gains during the March 2004 quarter. The Company had no material realized gains or losses from the sale of investments in the March 2003 quarter.

Maturities of short-term investments at March 31, 2004 were as follows (in thousands):

At March 31, 2004, receivables from two customers each comprised approximately 19% of the consolidated accounts receivable balance.

For the March 2004 quarter, the company recorded a tax provision of $8.8 million on pre-tax income of $21.1 million, resulting in an annualized effective tax rate of approximately 41.5%. For the March 2003 quarter, the company recorded a tax provision of $0.8 million on pre-tax income of $7.7 million, which resulted in an annualized effective tax rate of approximately 10%. The difference in effective tax rates is attributable primarily to the actual utilization of federal and state net operating loss and credit carryforwards in the March 2003 quarter, the benefit of which had not been previously recognized. For the March 2004 quarter, the benefit resulting from the actual utilization of net operating loss and credit carryforwards during the period was recognized in a prior period and has no impact on the effective tax rate for the current period.

Consistent with prior periods, in determining the need for a valuation allowance at March 31, 2004, the company reviewed both positive and negative evidence pursuant to the requirements of SFAS No. 109, including current and historical results of operations, the annual limitation on utilization of net operating loss carryforwards pursuant to Internal Revenue Code (the "Code") Section 382, future income projections and potential tax-planning strategies. Based upon the Company's assessment of all available evidence, it concluded that, with the exception of the net deferred tax assets that are expected to be utilized through December 31, 2005, it is not more likely than not that the remaining deferred tax assets will be realized. This conclusion is based primarily on the Company's history of net operating losses as compared to only a recent trend of profitable operations, the potential for future stock option deductions to significantly reduce taxable income, our annual net operating loss limitations under

Section 382 of the Code and the need to generate significant amounts of taxable income in future periods, on a consistent and prolonged basis, in order to utilize the remaining deferred tax assets. The Company will continue to monitor all available evidence and reassess the potential realization of its deferred tax assets. If the Company continues to meet its financial projections and improve its results of operations, or if circumstances otherwise change, it is reasonably possible that the Company may release all, or a portion, of the remaining valuation allowance in the near term. Any such release would result in recording a tax benefit that would increase net income in the period the allowance is released. Additionally, any such release may result in the further reduction of goodwill and intangible assets acquired in connection with the Merger.

The following table sets forth the computation of basic and diluted net income per share for the March 2004 and 2003 quarters (in thousands, except per share amounts):

		Quarter Ended March 31,
		2004			2003
Numerator:
	Net income	$	12,361		$	6,962

Denominator:
	Weighted average common shares—basic		63,091			62,601
	Adjustment to weighted average for common shares subject to repurchase		(621	)		(399	)

	Adjusted weighted average common shares—basic		62,470			62,202

Effect of dilutive securities:
	Stock options, restricted shares, warrants and employee stock purchase plan shares		4,882			5,436

	Weighted average common shares—diluted		67,352			67,638

Net income per share—basic		$	0.20		$	0.11

Net income per share—diluted		$	0.18		$	0.10

The diluted per share computations exclude options and unvested common stock, which are antidilutive. The number of antidilutive shares at March 31, 2004 and 2003 was 5.6 million and 2.0 million, respectively. At March 31, 2004, there were approximately 14.4 million option shares outstanding with a weighted average exercise price of $11.68 per share.

In January 2004, the Board of Directors issued 575,000 restricted shares of common stock at par value to certain of the Company's executive officers. The shares vest entirely at the end of the four-year period from the date of grant. In connection with these shares, the Company recorded deferred stock-based compensation of $11.4 million, which will be amortized on a straight-line basis over the four-year period.

In January 2004, the Board of Directors approved stock option grants of 1.2 million shares to the Company's executive officers. The shares are immediately exercisable, vest over a three-year period from the date of grant and have an exercise price of $18.70.

In January 2004, the Compensation Committee of the Board of Directors approved stock option grants of 0.1 million shares to the members of the Board. The shares are immediately exercisable, vest monthly over a one-year period from the date of grant and have an exercise price of $18.70.

The Company's Board of Directors authorized a common stock repurchase program that allows the Company to repurchase shares of its common stock through open market or privately negotiated transactions based on prevailing market conditions and other factors. As of March 31, 2004, the Company had repurchased $100 million of its common stock. On April 22, 2004, the Board of Directors authorized the Company to purchase up to an additional $100 million of its common stock through May 31, 2005.

Share repurchases executed under the common stock repurchase program at March 31, 2004 were as follows (in thousands, except per share amounts):

Period		Shares Repurchased(1)	Average Price Paid per Share		Maximum Approximate Dollar Value that May Yet be Purchased Under the Program
August 2001		138	$	1.67	$	9,770
November 2001		469		1.77		8,940
February 2002		727		3.38		6,485
August 2002		288		7.51		27,820
February 2003		193		9.43		26,005
May 2003		281		13.51		22,207
November 2003		2,024		19.76		48,706
February 2004		2,887		16.86		—

	Total	7,007	$	14.26	$	—

The Company's financial commitments, including its operating leases and purchase commitments for telecommunications and media are as follows at March 31, 2004 (in thousands):

In connection with the relocation of its corporate offices to Woodland Hills, California in March 2004 the Company entered into a lease for office space for approximately 112,000 square feet. The lease, which expires in September 2014, represents a total commitment of $34.5 million.

On April 20, 2001, Jodi Bernstein, on behalf of himself and all others similarly situated, filed a lawsuit in the United States District Court for the Southern District of New York against NetZero, certain officers and directors of NetZero and the underwriters of NetZero's initial public offering, Goldman Sachs Group, Inc., BancBoston Robertson Stephens, Inc. and Salomon Smith Barney, Inc. The complaint alleges 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 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 the offering; and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate NetZero shares to those customers in the offering in exchange for which the customers agreed to purchase additional NetZero shares in the aftermarket at pre-determined prices. Plaintiffs are seeking injunctive relief and damages. Additional lawsuits setting forth substantially similar allegations were also served against NetZero on behalf of additional plaintiffs in April and May 2001. The case against NetZero was consolidated with approximately 300 other suits filed against more than 300 issuers that conducted their initial public offerings between 1998 and 2000, their underwriters and an unspecified number of their individual corporate officers and directors (the "Consolidated Cases."). Counsel for the plaintiffs, the issuers and the insurers for the issuers have entered into a Memorandum of Understanding regarding a proposed settlement in the Consolidated Cases, which is subject to court approval and other conditions.

On May 17, 2001, plaintiff Ann Louise Truschel filed an action in the Supreme Court of the State of New York for the County of New York against Juno on behalf of herself and all others similarly situated. Plaintiff alleges unjust enrichment, unfair and deceptive business practices and breach of contract. Specifically, plaintiff alleges 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. Plaintiff is seeking damages, injunctive relief and attorneys' fees. On May 3, 2004, the court approved a settlement agreement.

On December 19, 2002, plaintiff William Kleen filed a lawsuit in the Supreme Court of the State of New York for the County of New York against Juno on behalf of himself and all others similarly situated. Plaintiff alleges unjust enrichment, unfair and deceptive business practices and breach of contract. Specifically, plaintiff alleges 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. Plaintiff is seeking damages, injunctive relief and attorneys' fees. On May 3, 2004, the court approved a settlement agreement.

On August 21, 2001, Juno commenced an adversary proceeding in U.S. Bankruptcy Court in the Southern District of New York against Smart World Technologies, LLC, dba "Freewwweb," (the "Debtor"), a provider of free Internet access that had elected to cease operations and had sought the protection of Chapter 11 of the Bankruptcy Code. The adversary proceeding arose out of a subscriber referral agreement between Juno and Freewwweb. In response to the commencement of the adversary proceeding, Freewwweb and its principals filed a pleading with the Bankruptcy Court asserting that Juno is obligated to pay compensation in an amount in excess of $80 million as a result of Juno's conduct in connection with the subscriber referral agreement. In addition, a dispute arose between Juno and UUNET Technologies, Inc., an affiliate of MCI WorldCom Network Services, Inc., regarding the value of services provided by UUNET, with UUNET claiming in excess of $1,000,000 and Juno

claiming less than $300,000. On April 25, 2003, Juno, the Committee of Unsecured Creditors, WorldCom and UUNET (allegedly the largest secured creditor) entered into a Stipulation of Settlement. The Stipulation of Settlement provides for the payment by Juno of $5.5 million in final settlement of all claims against Juno. The Stipulation of Settlement has been approved by the court and the Debtor has filed a notice of appeal of the decision. The appeal has been argued by the parties and is awaiting a ruling by the court. At March 31, 2004, the Company had liabilities recorded of approximately $5.5 million.

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, financial position, results of operations or cash flows, the results of litigation are inherently uncertain and the Company can provide no assurance that it will not be materially and adversely impacted by the results of such proceedings. The Company has established reserves for certain of the matters discussed above and such reserves are reflected in the consolidated financial statements.

The Company is subject to various other legal proceedings and claims that arise in the ordinary course of business. Management believes the amount, and ultimate liability, if any, with respect to these actions will not materially affect the Company's business, 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 business, financial position, results of operations or cash flows.

In April 2004, the Company acquired substantially all of the assets associated with the consumer Web-hosting business of About, Inc. for approximately $12.2 million in cash, subject to certain working capital adjustments. The business offers consumers a variety of free and affordable personal Web-site services, including hosting, domain and email services. The results of this business will be included in the Company's consolidated financial statements from the date of acquisition.

In connection with the relocation of its corporate offices to Woodland Hills, California, in April 2004 a $2.0 million letter of credit was issued, reducing the total amount available under the Company's line of credit to $22.3 million.

In April 2004, the Company terminated certain leases associated with its principal corporate offices in Westlake Village, California. As a result of these lease terminations, the Company will incur lease termination fees of approximately $1.2 million in the June 2004 quarter. The Company anticipates additional facility exit costs, including further lease termination costs and depreciation and amortization expense related to certain furniture, fixtures and leasehold improvements primarily in the June 2004 and September 2004 quarters.

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 the Internet access market, our user base, the advertising market, operating expenses, operating efficiencies, revenues, capital requirements 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. Such 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 Quarterly Report on Form 10-Q, our Transition Report on Form 10-KT as filed with the SEC on February 5, 2004 and our other filings with the SEC set forth some of the important risk factors that may affect our business, financial position, results of operations and cash flows. Statements indicating factors that we believe may impact our results are not intended to be exclusive. We undertake no obligation to revise or update publicly any forward-looking statements, other than as required by law.

We are a leading provider of consumer Internet subscription services through a number of brands, including NetZero and Juno. Our pay services include Internet access, accelerated dial-up services, premium email, and personal Web-hosting and domain services. We also offer consumers free Internet access, email and Web hosting. Our access services are available in more than 6,500 cities across the United States and in Canada. In addition, we offer marketers numerous online advertising products as well as online market research. At March 31, 2004, we had approximately 3.1 million subscribers to our pay services and approximately 5.4 million active users, including pay subscribers. Total pay subscribers currently includes Internet access subscribers and premium email subscribers who do not subscribe to one of our Internet access services. "Active" users include all pay subscribers, including subscribers to our premium email services, and those free users who have logged onto our services during the preceding 31-day period.

Juno started offering pay access services in 1998, and NetZero began offering pay access services in January 2001. Our pay access services differ from their respective free access services in that the hourly and certain other limitations set for the free services do not apply. In addition, the free access services incorporate a number of advertising initiatives, including a persistent on-screen advertising banner, which are not included on the pay access services. Our standard pay access services are offered through various pricing plans, generally $9.95 per month. We also offer "accelerated" dial-up access services for an additional $5.00 per month, or a total monthly charge of $14.95. Our accelerated dial-up services utilize compression, caching and other technologies that reduce the time for certain Web pages to download to users' computers when compared to our standard dial-up access services. At March 31, 2004, subscribers to our accelerated dial-up services and premium email services comprised approximately 29% and less than 1%, respectively, of our total pay subscriber base. During the December 2003 quarter, NetZero and Juno began offering premium email services with expanded features and storage capabilities for $9.95 or $24.95 per year.

In April 2004, we acquired substantially all of the assets associated with the consumer Web-hosting business of About, Inc. for approximately $12.2 million in cash. The business offers consumers personal Web-site services, including hosting, domain and email services. As of the date of acquisition, the

business maintained over 3 million free, advertising-supported Web sites and had approximately 53,000 pay subscribers.

United Online commenced operations in September 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.

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 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"). 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 interim periods are not necessarily indicative of the operating results for a full year.

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

We apply the provisions of SEC Staff Accounting Bulletin ("SAB") No. 104, 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. 104 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 or services have been rendered, (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 subscriber. Our pay subscribers 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 electronic check, or "ACH", personal check or money order and through a pay subscriber's local telephone company. In circumstances where payment is not received in advance, revenue is only recognized if collectibility is reasonably assured.

Advertising and commerce revenues primarily consist of fees from Internet search partners that are generated as a result of users utilizing partner Internet search services, fees generated by users viewing or clicking on third-party advertisements, fees generated by enabling customer registrations for partners and fees from referring users to, or from users making purchases on, sponsors' Web sites. We also generate revenues from providing third parties with data analysis capabilities and traditional market research services, such as surveys and questionnaires. Revenues are recognized provided that no significant obligations remain, fees are fixed or determinable, and collection of the related receivable is reasonably assured. We recognize advertising and sponsorship revenues in the periods in which the advertisement or sponsorship placement is displayed, based upon the lesser of (i) impressions delivered

divided by the total number of guaranteed impressions or (ii) ratably over the period in which the advertisement is displayed. Our obligations typically include a minimum number of impressions or the satisfaction of other performance criteria. Revenue from performance-based arrangements, including referral revenues, is recognized as the related performance criteria are met and when the fees become fixed and determinable. In determining whether an arrangement exists, we ensure that a 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 generally 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.

Income taxes are accounted for under SFAS No. 109. Under SFAS No. 109, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amount expected to be realized. In determining the need for a valuation allowance, we review both positive and negative evidence pursuant to the requirements of SFAS No. 109, including current and historical results of operations, the annual limitation on utilization of net operating loss carryforwards pursuant to Section 382 of the Code, future income projections and potential tax-planning strategies.

We are currently involved in legal proceedings, certain of which are discussed 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 certain 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 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.

The following table sets forth (in thousands, except percentages), for the periods presented, selected historical statements of operations data. The information contained in the table below is unaudited and should be read in conjunction with Critical Accounting Policies and Estimates, Liquidity and Capital Resources and Financial Commitments included in this Item 2 as well as the unaudited

consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

			Quarter Ended March 31,
			2004		% of Revenue		2003			% of Revenue
Statements of Operations Data:
Revenues:
	Billable services		$	97,682	91	%	$	66,035		89	%
	Advertising and commerce			9,993	9			7,784		11

		Total revenues		107,675	100			73,819		100

Operating expenses:
	Cost of billable services			25,580	24			23,592		32
	Cost of free services			1,725	1			3,134		4
	Sales and marketing			43,118	40			23,623		32
	Product development			6,101	5			5,964		8
	General and administrative			7,257	7			7,126		10
	Amortization of intangible assets			3,964	4			3,964		5
	Restructuring charges			—	—			(215	)	—

		Total operating expenses		87,745	81			67,188		91

Operating income				19,930	19			6,631		9
Interest and other income, net				1,206	1			1,105		1

	Income before income taxes			21,136	20			7,736		10
Provision for income taxes				8,775	9			774		1

Net income			$	12,361	11	%	$	6,962		9	%

Billable services revenues consist primarily of monthly fees charged to users for dial-up Internet access services, accelerated dial-up services and, to a lesser extent, fees charged to users for live telephone technical support and premium email services. Our pay Internet access services have been offered under a number of pricing plans, generally ranging from $1.95 to $29.95 per month. Currently, our most common pricing plan for our standard dial-up Internet access service is $9.95 per month. We currently charge an additional $5.00 per month, or a total monthly charge of $14.95, for our accelerated dial-up services. We generally charge our users $1.95 per minute for live telephone technical support, and we currently charge $0.89 or $2.08 per month for our premium email services, which are billed on an annual basis.

Our billable services revenues are primarily dependent on two factors: the average number of pay subscribers for a period and the average monthly revenue per pay subscriber for a period. The average number of pay subscribers is a simple average calculated based on the number of pay subscribers at the beginning and end of a period. Average monthly revenue per pay subscriber is calculated by dividing billable services revenues for a period by the average number of pay subscribers for that period. Average monthly revenue per pay subscriber may fluctuate from period to period as a result of a variety of factors including the introduction of new pay services, such as our accelerated dial-up and premium email services, and the penetration of these types of services as a percentage of total subscribers; the timing of pay subscribers joining and leaving our services during a period; the use of

discounted pricing plans; the use of promotions such as a free month of service; increases or decreases in the price of our services; and changes in the mix of pay subscribers and their related pricing plans.

Billable services revenues increased by $31.6 million, or 48%, to $97.7 million for the March 2004 quarter, compared to $66.0 million for the March 2003 quarter. The increase was due to an increase in our average number of pay subscribers and an increase in our average monthly revenue per pay subscriber. Our average number of pay subscribers was approximately 2,993,000 during the March 2004 quarter, compared to approximately 2,290,000 during the March 2003 quarter. The increase in our average number of pay subscribers resulted from a number of factors including an expansion of our online and offline distribution channels, increased spending on marketing and promoting our pay services, in particular our accelerated services, and a significant number of our free users upgrading to our pay services. Our total pay subscriber base increased by approximately 203,000 during the March 2004 quarter compared to approximately 229,000 in the March 2003 quarter. While we currently anticipate that our pay subscriber base will continue to increase in the near term, we do not anticipate that the growth in pay access subscribers will be comparable to what we experienced in comparable year-ago periods. Future changes in our pay subscriber base will be dependent on a number of factors including the number of free users upgrading to pay services, changes in our marketing and related distribution channels, the number of pay subscribers who cancel their accounts or have their accounts terminated, changes in our marketing expenditures, the effectiveness of our marketing activities, the effects of seasonality, the impact of new types of pay services, increasing competition and future acquisitions, if any. Average monthly revenue per pay subscriber was $10.88 for the March 2004 quarter, compared to $9.61 for the March 2003 quarter. The increase in average monthly revenue per pay subscriber was due to an increase in the number of access subscribers purchasing our accelerated dial-up services, which were introduced in March 2003 and are currently offered for an additional $5.00 per month, or a total monthly charge of $14.95, compared to $9.95 per month for our standard dial-up services. At March 31, 2004, subscribers to our accelerated dial-up and premium email services comprised approximately 29% and less than 1% of our total pay subscriber base, respectively.

In April 2004, we acquired substantially all of the assets associated with the consumer Web-hosting business of About, Inc. The business offers consumers personal Web-site services, including hosting, domain and email services. As of the date of the acquisition, the business maintained over 3 million free, advertising-supported Web sites and had approximately 53,000 pay subscribers. The results of this business will be included in our consolidated financial statements from the date of acquisition.

Our advertising and commerce revenues consist of fees from our Internet search partners that are generated as a result of our users utilizing our partners' Internet search services, fees generated by our users viewing and clicking on third-party Web site advertisements and fees from referring our users to, and our users making purchases on, sponsors' Web sites. We also generate revenues from providing third parties with data analysis capabilities and traditional market research services, such as surveys and questionnaires. Our advertising and commerce revenues are generated from both our pay subscribers and free users. Factors impacting our advertising and commerce revenues generally include changes in orders from significant customers, the state of the online search and advertising markets, increases or decreases in our active user base, limitations on our free services and increases or decreases in advertising inventory available for sale. In the past, we have imposed limitations on our free services that have adversely impacted our volume of advertising inventory.

Advertising and commerce revenues increased by $2.2 million, or 28%, to $10.0 million for the March 2004 quarter, compared to $7.8 million for the March 2003 quarter. The increase was primarily due to an increase in fees derived from our Internet search partner as a result of more favorable pricing and expanded search services and an overall increase in advertising and commerce sales. We derived approximately 35% and 21% of our advertising and commerce revenues for the March 2004

and 2003 quarters, respectively, from Internet search fees primarily provided through our search agreement with Overture Services, Inc. ("Overture"), a subsidiary of Yahoo! Inc. In November 2003, we amended our agreement with Overture, which included among other items an extension of the term through March 2007. The increase in search revenue was partially offset by a $0.7 million decrease in revenue generated from our agreement with General Motors ("GM"), which expired in December 2003. The revenue recognized from GM during the March 2004 quarter was primarily related to an unanticipated final performance bonus received during the March 2004 quarter. We derived approximately 21% of our advertising and commerce revenues for the March 2004 quarter from GM, compared to approximately 36% for the March 2003 quarter.

Our agreement with GM expired in December 2003 and was not renewed. The GM agreement has not been replaced by a similar arrangement. We are no longer eligible to earn performance bonuses from GM and, as a result of the expiration of our agreement, we do not anticipate any significant revenues from GM in future periods. We believe we will experience a significant decrease in advertising and commerce revenues commencing in the June 2004 quarter from the level achieved in the March 2004 quarter as a result of the expiration of the GM agreement.

Cost of billable services includes direct costs of billable services and costs that have been allocated to billable services based on the aggregate hourly usage of our pay access subscribers as a percentage of total hours used by our active users. Direct costs consist of costs related to providing telephone technical support, customer billing and billing support to our pay subscribers. Allocated costs consist primarily of telecommunications and data center costs, personnel and overhead-related costs associated with operating our network and data centers, and depreciation of network computers and equipment.

Cost of billable services increased by $2.0 million, or 8%, to $25.6 million for the March 2004 quarter, compared to $23.6 million for the March 2003 quarter. The increase is due to a $0.8 million increase in customer support and billing-related costs, a $0.8 million increase in network personnel and overhead-related costs allocated to billable services and a $0.6 million increase in telecommunications costs. These costs were partially offset by a $0.2 million decrease in network depreciation allocated to billable services. Customer support and billing-related costs increased as a result of the increase in the average number of pay access subscribers. Network personnel and overhead-related costs allocated to billable services increased due to the increase in telecommunications hours utilized by pay access subscribers as a percentage of total telecommunications hours purchased. Telecommunications costs increased as a result of an increase in the average number of pay access subscribers, which was partially offset by a 17% decrease in average hourly telecommunications costs and, to a lesser extent, a decrease in the average hourly usage per pay access subscriber. Our average hourly telecommunications costs decreased as a result of better port utilization, improvements made in allocating our telecommunications usage to our lower cost vendors and lower telecommunications prices. Telecommunications hours allocated to our pay access subscriber base increased to approximately 92% of total telecommunications hours purchased during the March 2004 quarter, compared to approximately 86% during the March 2003 quarter. Depreciation expense allocated to billable services has decreased due to network assets placed in service in prior years becoming fully depreciated and significantly lower levels of capital expenditures in recent years versus prior years.

Cost of billable services as a percentage of billable services revenues was 26.2% in the March 2004 quarter, compared to 35.7% in the March 2003 quarter. This decrease resulted from an increase in average monthly revenue per pay access subscriber due to significant adoption of our accelerated dial-up services; a decrease in average hourly telecommunications costs per pay access subscriber; decreased customer billing and support costs per pay access subscriber as a result of better pricing obtained from our primary customer support vendor; decreased depreciation expense; and a slight decrease in average hourly usage per pay access subscriber, partially offset by increased credit card processing fees.

Changes in our average monthly revenue per pay subscriber and, as a result, our cost of billable services as a percentage of billable services revenues, will be highly dependent on our mix of pay subscribers, particularly the percentage of our pay subscribers purchasing our accelerated dial-up services. Our costs to service an accelerated dial-up subscriber as compared to our costs to service a subscriber of our standard dial-up services are, on average, lower as a percentage of revenues derived from such services. As such, if we are not successful in continuing to increase our percentage of accelerated dial-up subscribers, or if due to competitive or other factors we decrease our pricing for accelerated dial-up services, it is likely that our cost of billable services as a percentage of billable services revenues would be adversely impacted. While our average hourly telecommunications costs decreased, we may experience increased average hourly telecommunications costs in future periods, particularly if we expand our service coverage to additional geographic areas where telecommunications costs are higher. Additionally, while the average hourly usage of our pay access subscribers decreased slightly in the March 2004 quarter compared to the March 2003 quarter, we may experience increased average hourly usage in future periods. Continued growth in the number of pay access subscribers purchasing our accelerated dial-up services may result in increased average hourly usage in the future since these subscribers have shown higher average monthly usage compared to our standard dial-up access subscribers.

Cost of free services includes direct costs incurred in providing certain telephone technical support services to our free access users as well as costs that have been allocated to free services based on the aggregate hourly usage of our free access users as a percentage of total hours used by our active access users. Allocated costs consist primarily of telecommunications and data center costs, personnel and overhead-related costs associated with operating our network and data centers, and depreciation of network computers and equipment.

Cost of free services decreased by $1.4 million, or 45%, to $1.7 million for the March 2004 quarter, compared to $3.1 million for the March 2003 quarter. The decrease was due to a $1.0 million decrease in telecommunications costs, a $0.2 million decrease in network personnel and overhead-related costs allocated to cost of free services, a $0.1 million decrease in network depreciation allocated to free services and a $0.1 million decrease in customer support costs allocated to free services. The decrease in telecommunications costs is a result of a decrease in average hourly telecommunications costs, a decrease in the number of active free access users and a decrease in the average hourly usage of our free access users. Our active free access user base consisted of approximately 2.3 million users at March 31, 2004, compared to approximately 2.8 million users at March 31, 2003. This decrease in active free access users has resulted primarily from active free access users upgrading to our pay services and fewer new users signing up for our free access services. Depreciation expense allocated to free access services has decreased due to assets placed in service in prior years becoming fully depreciated, significantly lower levels of capital expenditures in recent years versus prior years and a decrease in free access users as a percentage of total active access users. Telecommunications hours allocated to our free access user base decreased to approximately 8% of total telecommunications hours purchased during the March 2004 quarter, compared to approximately 14% during the March 2003 quarter.

Sales and marketing expenses include advertising and promotion expenses, fees paid to distribution partners to acquire new pay subscribers, personnel-related expenses for sales and marketing personnel and telemarketing costs incurred to acquire and retain pay subscribers and up sell pay subscribers to additional services, such as our accelerated dial-up and premium email services. We have expended significant amounts on sales and marketing, including national branding campaigns comprised of television, Internet, sponsorships, radio, print and outdoor advertising. 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. Media production costs are expensed the first time the advertisement is run. Media and agency fees are expensed over the period the advertising runs.

Sales and marketing expenses increased by $19.5 million, or 83%, to $43.1 million for the March 2004 quarter, compared to $23.6 million for the March 2003 quarter. The increase is primarily attributable to a $16.3 million increase in marketing, promotion and distribution costs as a result of an expansion in marketing activities that focus on promoting our accelerated dial-up services, increasing our pay subscriber base, and building our brands. Additionally, sales and marketing expenses increased as a result of a $3.0 million increase in telemarketing expenses related to customer acquisition, retention and up sell activities and a $0.2 million increase in personnel-related expenses. We expect to continue to increase our marketing expenditures in the near term by expanding our distribution efforts, which would result in increased fees paid to distribution partners to acquire new pay subscribers.

In August 2003, we entered into a three-year agreement with Best Buy Co, Inc. to distribute the NetZero and Juno pay access services in Best Buy's channels beginning in October 2003. We are required to pay Best Buy a fee for each pay access subscriber we acquire through Best Buy's channels. If we acquire a significant number of pay access subscribers through Best Buy, this agreement could account for a substantial percentage of our marketing expenses in future periods.

Our marketing expenditures and the allocation of our marketing resources among our various services may vary significantly from quarter to quarter. In the near term, we anticipate allocating a significant portion of our expenditures to our accelerated access services, which may result in a lower number of new pay access subscribers signing up for our standard services. Other than the Best Buy agreement and certain upfront television commitments, many of our marketing commitments are short term in nature and we may choose to increase or decrease our marketing expenditures in future periods depending on a number of factors including the effectiveness of our marketing activities, changes in the number of pay subscribers, and the impact of such activities on our results of operations. Any future decreases in our marketing expenditures would likely impact our ability to increase our pay subscriber base. While we intend to increase our marketing expenditures in the near term, there is no assurance that we will continue to do so or that increased marketing expenditures will be successful in growing or maintaining our pay subscriber base.

Product development expenses include expenses for the maintenance of existing software and technology and the development of new or improved software and technology, including personnel-related expenses for the software engineering department and the costs associated with operating our facility in India. Costs incurred by us to develop, enhance, manage, monitor and operate our services are generally expensed as incurred, except for certain costs relating to the acquisition and development of internal-use software, which are capitalized and depreciated over their estimated useful lives, generally three years or less.

Product development expenses increased by $0.1 million, or 2%, to $6.1 million for the March 2004 quarter, compared to $6.0 million for the March 2003 quarter. The increase was the result

of a $1.2 million increase in personnel-related expenses as a result of increased headcount and compensation costs, offset by a $0.9 million decrease in depreciation and a $0.2 million decrease in overhead-related costs. Depreciation expense allocated to product development decreased as a result of assets placed in service in prior years becoming fully depreciated and significantly lower levels of capital expenditures in recent years versus prior years. We intend to increase headcount in our software engineering department and at our facility in India in the near term, and, as a result, we expect to incur higher compensation costs in future periods related to product development.

General and administrative expenses include personnel-related expenses for executive, finance, legal, human resources and internal customer support personnel. In addition, general and administrative expenses include fees for professional legal and accounting 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.

General and administrative expenses increased by $0.1 million, or 2%, to $7.3 million for the March 2004 quarter, compared to $7.1 million for the March 2003 quarter. The increase in general and administrative expenses was the result of a $0.4 million increase in stock-based charges related to restricted stock issued to certain of our executive officers in January 2004, a $0.3 million increase in personnel-related expenses as a result of higher compensation costs and a $0.3 million increase in overhead-related costs. These increases were offset by a $0.7 million decrease in legal settlement costs primarily as a result of a $0.4 million charge recognized in the March 2003 quarter and the recognition of a $0.2 million credit in the March 2004 quarter to decrease a previously estimated legal settlement liability.

In connection with the relocation of our corporate offices to Woodland Hills, California, in March 2004 we entered into a lease for office space for approximately 112,000 square feet. The lease, which expires in September 2014, represents a total commitment of $34.5 million and will result in higher rent expense in future periods.

In April 2004, we terminated certain leases associated with our principal corporate offices in Westlake Village, California. As a result of these lease terminations, we will incur lease termination fees of approximately $1.2 million in the June 2004 quarter. We anticipate additional facility exit costs, including further lease termination costs and depreciation and amortization expense related to certain furniture, fixtures and leasehold improvements primarily in the June 2004 and September 2004 quarters.

Amortization of intangible assets includes amortization of acquired pay subscribers and free users, purchased technologies and other identifiable intangible assets. At March 31, 2004, we had approximately $26.8 million in net identifiable intangible assets primarily resulting from the Merger and the acquisition of the Internet access assets of BlueLight. At March 31, 2004, we had approximately $9.5 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. Amortization of intangible assets remained constant for the March 2004 quarter compared to the March 2003 quarter.

During the March 2003 quarter, 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.

Interest income consists of earnings on our cash, cash equivalents and short-term investments. Interest expense consists of interest expense on capital leases and the amortization of premiums on certain of our short-term investments. Other income consists of realized gains and losses recognized in connection with the sale of short-term investments.

Interest income remained constant for the March 2004 quarter compared to the March 2003 quarter as a result of higher average cash balances offset by lower average returns due to a shift toward tax-exempt holdings. Other income associated with net realized gains on our short-term investments was $0.1 million for the March 2004 quarter.

For the March 2004 quarter, we recorded a tax provision of $8.8 million on pre-tax income of $21.1 million, resulting in an annualized effective tax rate of approximately 41.5%. For the March 2003 quarter, we recorded a tax provision of $0.8 million on pre-tax income of $7.7 million, which resulted in an effective tax rate of approximately 10%. The difference in effective tax rates is primarily attributable to the actual utilization of federal and state net operating loss and credit carryforwards in the March 2003 quarter, the benefit of which had not been previously recognized. For the March 2004 quarter, the benefit resulting from the actual utilization of net operating loss and credit carryforwards during the period was recognized in a prior period and has no impact on the effective tax rate for the current period.

Consistent with prior periods, in determining the need for a valuation allowance at March 31, 2004, we reviewed both positive and negative evidence pursuant to the requirements of SFAS No. 109, Accounting for Income Taxes, including current and historical results of operations, the annual limitation on utilization of net operating loss carryforwards pursuant to Internal Revenue Code (the "Code") Section 382, future income projections and potential tax-planning strategies. Based upon our assessment of all available evidence, we concluded that, with the exception of the net deferred tax assets that are expected to be utilized through December 31, 2005, it is not more likely than not that the remaining deferred tax assets will be realized. This conclusion is based primarily on our history of net operating losses as compared to only a recent trend of profitable operations, the potential for future stock option deductions to significantly reduce taxable income, our annual net operating loss limitations under Section 382 of the Code and the need to generate significant amounts of taxable income in future periods, on a consistent and prolonged basis, in order to utilize the remaining deferred tax assets. We will continue to monitor all available evidence and reassess the potential realization of our deferred tax assets. If we continue to meet our financial projections and improve our results of operations, or if circumstances otherwise change, it is reasonably possible that we may release all, or a portion, of the remaining valuation allowance in the near term. Any such release would result in recording a tax benefit that would increase net income in the period the allowance is released. Additionally, any such release may result in the further reduction of goodwill and intangible assets acquired in connection with the Merger.

From inception through June 30, 2002, our business was financed primarily through the sale of equity securities. However, beginning in the September 2002 quarter, our business generated positive cash flows from operations. Our total cash, cash equivalent and short-term investment balances

increased by approximately $17.9 million, or 10%, to $189.4 million at March 31, 2004 compared to $171.5 million at March 31, 2003. In summary, our cash flows were as follows (in thousands):

	Quarter Ended March 31,
	2004		2003
Net cash provided by operating activities	34,785		16,005
Net cash provided by (used for) investing activities	3,683		(15,395	)
Net cash used for financing activities	(47,792	)	(2,148	)

Net cash provided by operating activities increased by $18.8 million, or 117%. Significant factors that have impacted the variability in our cash provided by operating activities in these periods are as follows:

Based on our current projections, we expect to continue to generate positive cash flows from operations through the remainder of 2004, and we anticipate that our future cash flows from operations and existing cash, cash equivalent and short-term investment balances will be sufficient to fund our operations over the next year. We intend to use our existing cash balances and future cash generated from operations to acquire complimentary services, businesses or technologies; to repurchase shares of our common stock if we believe market conditions to be favorable; and to fund future capital expenditures.

Net cash provided by investing activities increased by $19.1 million. Significant factors that have impacted the variability in our cash used for investing activities in these periods are as follows:

In prior years, we have invested significantly in our network infrastructure, software licenses, leasehold improvements, and computer equipment and we may need to make further significant investments in the future. Capital expenditures for the March 2004 quarter were $1.0 million. We anticipate that our total capital expenditures for 2004 will be in the range of $14 million to $16 million. Our anticipated capital expenditures for 2004 include approximately $5.5 million of capital expenditures associated with the relocation of our Westlake Village headquarters to accommodate increased headcount and approximately $1.5 million associated with the recent acquisition of our Web-hosting business. The actual amount of future capital expenditures may fluctuate due to a number of factors including, without limitation, future acquisitions and new business initiatives which are difficult to predict and could change significantly over time. Additionally, significant technological advances may require us to make capital expenditures to develop or acquire new equipment or technology in order to replace aging or technologically obsolete equipment.

Net cash used for financing activities increased by $45.6 million. Significant factors that have impacted the variability in our cash provided by or used for financing activities in these periods are as follows:

We currently have access to a $25 million unsecured revolving line of credit with Silicon Valley Bank, which expires in December 2004. The interest rates available for borrowings are based on current market factors. This facility is available for general corporate purposes. While we believe that we currently possess adequate cash reserves, the line of credit provides us with additional financial flexibility with respect to short-term working capital requirements. At March 31, 2004, a $0.7 million letter of credit in connection with one of our leased facilities was outstanding, reducing the total amount available under the line of credit. In April 2004, a $2.0 million letter of credit was issued in connection with the lease of our new headquarters, reducing the total amount available under the line of credit to $22.3 million.

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, repurchasing our

common stock, 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 in a timely manner, on acceptable terms, or at all. Our failure to raise sufficient capital when needed could have a material adverse effect on our business, financial position, 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.

Our financial commitments, including our operating leases and purchase commitments for telecommunications and media are as follows at March 31, 2004 (in thousands):

Before deciding to invest in our company or to maintain or increase your investment, you should carefully consider the risks described below as well as 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 position, results of operations and cash flows could be adversely impacted. In that event, the market price of our common stock could decline and you may lose all or part of your investment.

Our results of operations have varied in the past and may fluctuate significantly in the future due to a variety of factors, many of which are outside our control and difficult to predict. The following are some of the factors that may affect us from period to period and may affect our long-term performance:

In addition, the number of pay subscribers and free users on our services and the mix in our pay subscriber base from period to period has fluctuated significantly in the past and may fluctuate significantly in the future. Projecting the number and mix of pay subscribers on our services in future periods is inherently difficult and the rate at which users sign up for or terminate our services will vary as a result of a number of factors, many of which are out of our control. These factors include, without

limitation, the effects of competition, seasonality, trends in the Internet access industry, user satisfaction with our services and the impact of our marketing efforts.

We have entered into agreements with third parties that result in payments based upon the number of subscribers acquired through the third parties' marketing channels. In certain cases, such as our agreement with Best Buy, the number of subscribers acquired during a particular quarter could vary significantly from our expectations. If the number of subscribers acquired through such a channel significantly exceeded our expectations during a quarter, the resulting payment obligation could adversely impact our results of operations in the quarter during which the subscribers were acquired, although our results of operations would be impacted positively in future periods due to the additional subscribers. Alternatively, if the number of subscribers acquired through such a channel was significantly less than our expectations and we had limited our marketing expenditures during the quarter based on our initial expectations, our results of operations for such quarter might be positively impacted but our user growth for the quarter and our results of operations in future periods may be negatively impacted.

As a result of the foregoing and the other factors discussed in this report, you should not rely on period-to-period comparisons as an indication of future or long-term performance. In addition, these factors create difficulties with respect to our ability to forecast our financial performance and user metrics accurately. We believe that these difficulties in forecasting present even greater challenges for financial analysts who publish their own estimates of our future financial results and user metrics. We cannot assure you that we will achieve the expectations or financial projections made by our management or by the financial analysts. In the event we do not achieve such expectations or projections, the price of our common stock could be adversely affected.

Competition for subscribers of Internet access and email services is intense. We compete with established online service and content providers such as AOL and MSN; independent national ISPs such as EarthLink; companies combining their resources to offer Internet services in conjunction with other services such as Yahoo! and SBC Internet Services, and AOL and Walmart.com; national communications companies and local exchange carriers such as AT&T WorldNet, Qwest Communications International, Inc. and Verizon; cable companies such as Comcast Corporation, Cox Communications, Inc., Charter Communications, Inc. and Adelphia Communications Corporation; local telephone companies; and regional and local commercial ISPs. We also compete against companies that offer services or products such as personal computers, bundled with, or as promotions for, Internet access services. We believe that the primary competitive factors determining success in the market for Internet access users include price, speed, a reputation for reliability of service, effective customer support, easy to use and reliable software, geographic coverage and scope of services. Other important factors include the timing and introduction of new products and services as well as general economic trends. While we believe that we compete favorably with respect to price and most of these factors, many of our competitors have an advantage over us with respect to specific factors, particularly technical support and scope of services.

Our monthly pricing for our standard dial-up services is currently lower than the monthly pricing of the premium dial-up services of most of our major competitors. Certain significant competitors, however, are engaging in more aggressive pricing of their dial-up services either under their primary brands or alternative brands, such as AOL's CompuServe and Netscape brands and EarthLink's PeoplePC brand. In particular, AOL recently began offering services priced at $9.95 per month under its Netscape Online brand that are designed to compete directly with our standard offering. A certain

number of our new subscribers are subscribers switching from the AOL premium dial-up service, and the CompuServe and Netscape services may, in addition to being additional competition in the value-priced market, adversely impact the number of subscribers switching from the AOL premium dial-up service to our services. In addition, our competitors are engaging in a number of aggressive pricing plans to entice new users and keep existing users from leaving their services, such as one or more free months of service or extended periods of discounted pricing, which are less expensive than our current offerings, and many of our competitors do not charge an additional monthly fee for their accelerated service. We believe this increased competition has adversely impacted our ability to obtain new pay subscribers and may adversely impact our ability to maintain or grow our pay subscriber base in the future. In addition, we have increased our emphasis on marketing our accelerated services, and decreased our marketing efforts on our standard access services, which may adversely impact our pay subscriber growth. We cannot assure you that some or all of our competitors will not further reduce their pricing on their primary or alternative brands or adopt other aggressive competitive strategies that may adversely impact our ability to compete effectively and grow our subscriber base.

A significant portion of our billable services revenue growth since early 2003 has been attributable to new subscribers to our accelerated services. When we began offering this service in early 2003, many of our competitors either did not offer a similar service or charged substantially more than we charge for a similar service. Since that time, several competitors have either decreased their price for these services or have bundled these services into their premium services with no additional fee. Certain competitors have either begun marketing these services, or have indicated that they will market these services, as a feature of their value-priced services and these services may be offered at a price point similar to or lower than our offering. In addition, several of our competitors have increased their emphasis on marketing these services. Increased competition for subscribers to accelerated services could adversely impact our ability to grow or maintain our accelerated services subscriber base, or could cause us to lower or eliminate our pricing for these services, which would adversely impact our results of operations. We cannot assure you that we will be able to continue to maintain or grow our accelerated services subscriber base at current price levels, or at all.

Most of our major competitors also offer significantly greater technical support and scope of services than we currently offer. Some competitors have made content a significant factor in their offerings, and we do not currently offer our own content. Our decision not to offer a broader variety of services may adversely impact our ability to compete. Our ability to compete effectively for new subscribers could be negatively impacted to the extent that our competitors offer additional features, functionality or services that we do not currently offer.

In addition, many of our competitors have significantly greater brand recognition than we do and spend significantly more on marketing their services than we do. The success of our business model is predicated upon maintaining a marketing budget that is sufficient to grow our revenues while increasing profitability. As a result, we have not participated as extensively as our major competitors in a variety of large distribution channels, such as being pre-bundled on branded computers or being offered at retail outlets of many different major franchises, where the marketing costs have historically been higher than we have previously been willing to spend. To the extent our competitors spend significantly more than we do in these and other channels, or if we do not participate in channels that become the key channels for acquiring new subscribers or selling additional subscription services, we may be at a competitive disadvantage. If we choose to participate more widely in more costly distribution channels, our results of operations could be negatively impacted. If our marketing expenditures increase and are not successful in increasing our revenues by increasing our subscriber base or by selling additional services, our results of operations would be negatively impacted. Our competitors also routinely offer free trial periods, and if we choose to offer similar free trial periods on a significant scale, it may adversely impact our results of operations. There is no assurance that our

marketing resources will be sufficient for us to continue to compete effectively with our major competitors.

The number of U.S. households using broadband has grown significantly over the last few years and is expected to continue to grow. Broadband access, which includes cable, digital subscriber lines ("DSL"), satellite and wireless, generally offers users faster connection and download speeds than dial-up access for a higher monthly fee, currently ranging from an estimated $27 to $55 per month. Recently, pricing for broadband services, particularly for introductory promotional periods or for services with slower speeds, has been declining and the pricing gap between broadband and premium dial-up access services has been narrowing. Many industry analysts estimate that, as a result of broadband adoption, the total number of dial-up accounts in the U.S. has declined and will continue to decline. The decline in the size of the dial-up market could accelerate significantly if broadband services become widely available at lower prices or if there is significant consumer adoption of broadband applications, such as online video, telephony and music downloads, which depend upon connections that provide significant bandwidth. In addition, several companies bundle broadband services with their cable or phone services, which may result in lower prices of the broadband service to the consumer. We currently offer a broadband service in Nashville and Indianapolis through Comcast Corporation's cable systems. The service, however, is not value-priced and we have had a minimal number of subscribers sign up for it. We currently do not plan to offer broadband services on a significant scale, which will adversely impact our ability to compete for new subscribers and to retain existing subscribers.

We expect competition for subscribers to continue to intensify and cannot assure you that we will be able to compete successfully. Our inability to compete effectively 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 subscribers, all of which could materially and adversely impact our business, financial condition, results of operations and cash flows.

We believe that the competitive factors determining success in the market for advertising customers include the size and demographic profile of a user base, the ability to access efficiently a large number of potential advertisers, the ability to target users based on a variety of criteria, pricing and geographic coverage. While we believe that we compete favorably with respect to many of these factors, several of our competitors have an advantage over us with respect to specific factors, particularly size of user base and the ability to access efficiently a large number of potential advertisers. We compete for revenues with major ISPs, content providers, large Web publishers, Web search engine and portal companies, Internet advertising providers, content aggregation companies, and various other companies that facilitate Internet advertising. Many of these companies have longer operating histories, greater name recognition, larger user bases and significantly greater financial, technical and sales and marketing resources than we do. This may allow them to devote greater resources to the development, promotion and sale of their products and services. These competitors may also engage in more extensive research and development, undertake more far-reaching marketing campaigns and adopt more aggressive pricing policies. Historically, competition and a slowing of the growth of online advertising have resulted in, and may continue to result in, reductions in the number of advertisers on our services, price reductions and reductions in advertising revenues. We also compete with television, radio, cable and print media for a share of advertisers' total advertising budgets.

Increasing our pay subscriber base will be critical to our continued success. Increasing our pay subscriber base involves two components: converting users of our free services to our pay services and gaining new pay subscribers who have not previously used our free services. From time to time, we

have implemented restrictions and limitations on our free services that have caused a decline in our free user base. We may place additional restrictions and limitations on our free services in the future, which would likely result in a further reduction in our free user base. We also have focused our marketing efforts on our pay services, not our free services. As a result, we have experienced a decrease in the number of new users registering for our free services. Not only has our free user base declined, the rate at which users of the free services upgrade to our pay services has, from time to time, declined and may continue to decline. Decreases in the number of users upgrading from our free services will require us to rely more heavily on signing up pay subscribers who have not previously used one of our free services. We cannot assure you that we will achieve success in signing up new pay subscribers.

Our marketing expenditures may continue to increase and may not be effective in growing our business.

The success of our business model is predicated upon maintaining a marketing budget that is sufficient to grow our revenues while continuing to increase profitability. We have increased our marketing expenditures over time and we expect to continue to increase our marketing expenditures. We may also choose to participate in more costly distribution channels, which could further increase our marketing expenditures. In addition, as we add additional services, such as our accelerated services, premium email services and Web-hosting services, we have allocated, and may continue to allocate, a significant portion of our marketing resources to these additional services with the goal of adding new subscribers as well as selling additional services to our existing subscribers. Our allocation of resources to marketing additional services may adversely affect the overall growth of our pay subscriber base. If our marketing expenditures are not successful in increasing our revenues by increasing our subscriber base or by selling additional services, our business, financial position, results of operations and cash flows could be negatively impacted.

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

Our business and financial results are primarily dependent on the number of users of our services, particularly our pay services. Currently, an average of four to five percent of our pay subscribers cancel their accounts or have their accounts terminated each month, which we refer to as subscriber churn. We do not include in our churn percentage those users who cancel during a free trial period or who have not converted from our free services and who cancel during their first month. We have experienced a higher churn percentage in our subscriber base using accelerated services than in our subscriber base using only our standard access service, which has resulted in a higher overall churn percentage. We anticipate that we will continue to experience a higher level of churn in our subscriber base using our accelerated services, which may result in additional increases in our overall churn percentage. This is due, in part, to the relatively short time we have been offering accelerated services since, in general, we experience a higher level of churn with respect to new pay subscribers than we do with respect to pay subscribers who have used our service for an extended period of time. The higher level of churn with respect to new pay subscribers makes it particularly difficult to maintain or grow the size of our pay subscriber base following a period of high growth in our pay subscriber base. If we continue to experience a high level of churn in our subscriber base using our accelerated services, it will make it more difficult to grow or retain the size of that base and it may make it more difficult to grow or maintain the size of our overall pay subscriber base. To increase our pay subscriber base, we must minimize the rate of loss of existing pay subscribers while adding new pay subscribers. As our pay subscriber base grows, we will need to add an increasing number of new pay subscribers both to replace users who cancel their service and to grow our pay subscriber base. If we experience an increased percentage of cancellations per month, or if we are unable to attract new pay subscribers in numbers sufficient to increase our overall pay subscriber base, our business, financial position, results of operations and cash flows will be adversely affected.

In addition, the number of active users of our free services has a significant impact on our ability to attract advertisers, on the number of advertising impressions we have available to sell, and on how many pay subscribers we can potentially acquire through marketing our pay services to our free users. Each month, a significant number of free users become inactive and we may experience continued declines in our active free user base, particularly if we continue to focus all of our marketing efforts on our pay services or impose additional limitations on our free services. In addition, there may be a significant overlap between NetZero's and Juno's active free user bases, so the actual number of unique free users in our active free user base may be lower than we expect.

If we experience a significant decrease in our active free user base or an increase in our rate of cancellations for our pay services, particularly for our accelerated services, our business, financial position, results of operations and cash flows may be adversely impacted. We cannot assure you that we will be able to effectively retain users or generate enough new users to make up for lost users.

Our future financial results may suffer if we are unable to maintain or grow our accelerated services subscriber base, or if we are unable to maintain the pricing for these services.

At March 31, 2004, subscribers to our accelerated services comprised approximately 29% of our pay subscriber base. The percentage of our marketing resources dedicated to promoting these services has continued to increase. These services have been instrumental in increasing our average revenue per subscriber and decreasing our cost of billable services as a percentage of billable services revenues. Since we commenced offering these services in early 2003, competition for users of these services has increased and we expect competition to continue to increase. Also, these services are relatively new and there can be no assurance that consumers will continue to find these services attractive at current price levels, if at all. We have experienced a higher level of churn with respect to these services than we have experienced with our standard access services and this trend could continue or increase. In addition, because the provision of these services is technologically complex and we license portions of the underlying technology for these services from a single source, any technological problems or problems with our vendor could adversely impact our ability to effectively provide these services to our users. There can be no assurance that we will be able to continue to attract subscribers to these services, that we will not continue to experience higher churn with respect to these services or that we will be successful in maintaining the pricing for these services.

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 marketing our brands, we may not be able to grow or retain our user base. Promotion of our brands will depend on, among other things, our success in providing high-quality Internet services. If our users and advertisers do not perceive our existing services as high quality, or if we introduce new 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 subscriber base and may be insufficient to develop or maintain awareness of our services. We could be required to incur significant marketing expenses to maintain or grow our user base or sell additional services to our user base, potentially resulting in increased costs without a commensurate increase in revenues. If our marketing campaigns fail to generate sufficient new users or sell additional services to our 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, financial position, results of operations and cash flows could be adversely affected.

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, including our accelerated services.

We may not be able to compete effectively if we are not able to adapt to changes in technology and industry standards or develop and introduce new and enhanced products and services. 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 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.

Our accelerated services combine our standard access services with compression, caching and other 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 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 have encountered, and may in the future continue to encounter, issues with the operation, provisioning or the performance of these services. Problems with these services could adversely affect our business in a number of ways, including increased account cancellations and refunds. We cannot assure you that we will continue to be successful in delivering these services, or that the quality of these services will continue to be competitive.

We cannot assure you that we will be able to successfully manage and integrate our newly acquired Web-hosting business.

In April 2004, we acquired the assets of About, Inc.'s Web-hosting business, which is primarily a Web-hosting business for consumers and, to a lesser extent, small businesses. We do not have experience in this line of business and may not be able to compete successfully in it. There may be unanticipated risks, liabilities and costs associated with this business, and we cannot assure you that this business will have a positive impact on our results of operations. In addition, we cannot assure you that we will be successful in maintaining or growing its pay subscriber base. Our Web-hosting business is also affected by many of the risks and uncertainties that affect our access business and are covered elsewhere in this quarterly report.

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

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 telecommunications costs for such period. We have experienced higher usage in the March quarter and this trend may continue. We also have experienced a lower rate of people signing up for our services during the spring and summer months when compared to the fall and winter months, and we believe this trend will continue. Because our operating history is limited, it is difficult for us to accurately forecast seasonal trends and plan

accordingly. Seasonality may result in significant fluctuations in our results of operations and the number of users signing up for, or accessing, our services.

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

In September 2001 we completed the Merger, in November 2002 we acquired certain assets of BlueLight's Internet access service and in April 2004 we acquired certain assets of About, Inc.'s Web-hosting business. While the integration of the first two of these acquired businesses is substantially complete, we have just begun the integration efforts associated with the Web-hosting business. Our efforts associated with these acquisitions are ongoing and we cannot assure you that these additional efforts will be completed successfully. In addition, we may acquire other companies or undertake other business combinations that we believe may complement our current or future business activities. 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. If we do, however, we cannot assure you that any such acquisitions would be successful.

We may be unable to maintain or grow our advertising revenues, particularly if we lose key advertising relationships.

Advertising and commerce revenues are intended to be an important component of our strategy and revenue base going forward. Our revenues from advertising have in the past fluctuated, and may in the future fluctuate, due to a variety of factors including, without limitation, changes in the online advertising market, decreases in capital available to Internet companies, changes in our advertising inventory and the effect of key advertising relationships.

A small number of customers have accounted for, and may in the future account for, a significant portion of our advertising and commerce revenues. In the past, we have experienced a number of situations where significant advertising arrangements were terminated early, were not renewed, were renewed at significantly lower rates or were renegotiated during the term of the arrangement. Historically, GM represented a significant percentage of our advertising and commerce revenues. Our agreement with GM, however, expired in December 2003 and was not renewed. In addition, we derived approximately 35% of our advertising and commerce revenues during the March 2004 quarter from Internet search fees provided through our agreement with Overture. Our agreement with Overture expires in March 2007. If there were a significant decrease in search fees from our agreement from Overture, such decrease would adversely impact our results of operations. Our business, financial position, results of operations and cash flows may 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.

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 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 our advertising revenues, and we believe we will experience a significant decrease in advertising and commerce revenues commencing in the June 2004 quarter from the levels achieved in recent quarters due to the termination of our agreement with GM.

If our users' usage increases or our telecommunications costs increase, our business may suffer.

An increasing percentage of our total pay subscribers use our accelerated services, and these subscribers have a higher average monthly usage than our standard dial-up users. An increase in Internet usage by our pay access subscribers may adversely impact our profitability. If the average monthly usage of our pay access subscribers exceeds our expectations, or if our average hourly telecommunications cost increases, we may not be able to operate our pay access 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 pay subscribers or compete effectively.

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 and data services we require, and the majority of our telecommunications services is currently purchased from Level 3 Communications LLC, ICG Telecom Group, Inc., and MCI. 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 services. In particular, StarNet, Inc. and Allegiance Telecom Company Worldwide are in bankruptcy proceedings and MCI and Level 3 Communications have a significant amount of debt obligations. 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 Level 3 Communications, ICG Telecom Group or MCI to continue to provide the scope, quality and pricing of services currently provided could materially and adversely affect our business and results of operations. Some 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 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, financial position, results of operations and cash flows.

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 at the same rate in the future, if at all. 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 have a material adverse effect on our business, financial position, results of operations and cash flows.

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 incur 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, financial position, results of operations and cash flows.

In addition, we may from time to time experience increases in our telecommunications usage that 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 services, 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 services 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.

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

If our 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 are unable to successfully defend against legal actions, 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 continue to subject us to significant litigation risks and costs in the future. Both the costs of defending lawsuits and any settlements or judgments against us could materially and adversely affect our business, financial position, results of operations and cash flows.

Our business is highly dependent on our billing and customer support systems, which are based on a combination of third-party software and internally developed software.

The software that operates most of our billing and customer support systems is licensed from Portal Software, Inc. and Remedy, a BMC Software Company, and we use a combination of Portal, Remedy and other third-party and internally developed software applications for customer billing and support. Customer billing and support is a highly complex process, and our systems 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 and support functions. Our ability to accurately and efficiently bill and support our users is dependent on the successful operation of our billing and

support systems and third parties' systems upon which we rely. In addition, our ability to offer new pay services or alternative payment plans is dependent on our ability to customize our billing and support systems. Issues associated with these systems could cause a variety of problems including the failure to bill and collect from users on a timely basis, over-charging or under-charging users, inaccurate financial and customer data, excessive credit card chargebacks or refunds, delays in new product or payment plan introductions and other billing-related errors. Such problems could lead to inaccurate reporting from time to time, which could adversely affect our business, financial position, results of operations and cash flows. We have experienced billing and support problems from time to time and may experience additional problems in the future. The failure of our software vendors to provide software upgrades and technical support, the failure of the Portal, Remedy or internally developed software to operate accurately, problems with our credit card processor or other billing and support vendors and any other failures or errors in our billing and support systems could materially and adversely affect our business, financial position, results of operations and cash flows.

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 our customer support services. We outsource a majority of the live technical and billing support 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 seeking live customer support have experienced lengthy waiting periods to reach support personnel who are trained to provide the technical or billing support they require. ClientLogic has also experienced outages in the past where they were unable to support 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 choose to incur. If ClientLogic does not provide us with quality services, or if our relationship with ClientLogic terminates and we are unable to transition such services in-house or to a replacement vendor in an orderly, cost-effective and timely manner, our business, financial position, results of operations and cash flows would suffer. In addition, we prepay significant amounts in advance to ClientLogic under our agreement with them, and any failure by them to perform the services for which we have prepaid would negatively impact our business. We use technical support staff in India in part for supporting our customers via email. If technical problems are encountered with communication to India, it may impair our ability to provide email support.

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 are 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 services and software releases. These issues have resulted in users discontinuing their service and have adversely

impacted our revenues. A number of our material technologies and systems, including the software clients 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, software licensed from Portal and Remedy for billing and customer support, and software licensed from SlipStream Data Inc. for our accelerated services. Any significant failure of this software could materially and adversely affect our business, financial position, results of operations and cash flows. We cannot assure you that we will not experience significant problems in the future.

A security breach or inappropriate use of our network or services could expose us to claims.

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. Unauthorized or inappropriate access to, or use of, our network, computer systems and services could potentially jeopardize the security of confidential information, including credit card information, of our users and of third parties. Third parties have in the past used our network, services and brand names to perpetrate crimes, such as identity theft or credit card theft, and may do so in the future. Users or third parties may assert claims of liability against us as a result of any failure by us to prevent these activities. Although we use security measures, which we believe to be industry standard, we cannot assure you that the measures we take will be successfully implemented or will be effective in preventing these activities. We also cannot assure you that the security measures of our third-party network providers, providers of customer and billing support services or other vendors will be adequate. In addition to potential legal liability, these activities may adversely impact our reputation and may interfere with our ability to provide our services, all of which could have a material adverse effect on our business, financial position, results of operations and cash flows.

Our business is dependent on the continued acceptance of the Internet as an effective medium. Damaging software programs, such as computer viruses, worms and Trojan horses have from time to time been disseminated through the Internet and have caused significant disruption to Internet users. Certain of these programs have disabled the ability of computers to access the Internet, requiring users to obtain technical support in order to gain access to the Internet. Other programs have had the potential to damage or delete computer programs. The development and widespread dissemination of harmful programs has the potential to seriously disrupt Internet usage. If Internet usage is significantly disrupted for an extended period of time, or if the prevalence of these programs results in decreased residential Internet usage, our business could be materially and adversely impacted. Because we do not provide the same level of protection against harmful programs as certain of our competitors provide, our users may be more susceptible to attacks than users of competitive services. If a harmful computer program had a disproportionately adverse impact on our users, it could have a material adverse effect on our business. In addition, actions taken by us or our telecommunications providers to attempt to minimize the spread of harmful programs could adversely impact our users' ability to utilize our services.

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.

Our technology collects and utilizes data derived from user activity. This data is used for advertisement targeting and measuring advertisement performance. Although we believe that we have the right to use this data, we cannot assure you that third parties will not assert claims against us for using this information. In addition, others may claim rights to the same information. We cannot be certain that any of our proprietary rights will be viable or of value in the future since the validity, enforceability and scope of protection of proprietary rights in Internet-related industries is uncertain and still evolving. In particular, we cannot assure you that any of our patent, copyright or trademark applications, now pending or to be filed in the future, will be approved. Even if they are approved, such patents, trademarks or copyrights may be successfully challenged by others or invalidated. We could spend significant funds procuring and attempting to enforce our proprietary rights, and we cannot assure you that such rights will be upheld or will provide us with any significant advantages. If our trademark registrations are not approved because third parties own such trademarks, our use of the trademarks will be restricted unless we enter into arrangements with such third parties. These arrangements may not be available on commercially reasonable terms, or at all.

Governmental agencies and their designees generally regulate the acquisition and maintenance of domain names. The regulation of domain names in the United States and in foreign countries is in flux and may change. As a result, we may be unable to acquire or maintain relevant domain names in the countries that we conduct, or plan to conduct, business. For example, we do not own the domain name www.unitedonline.com. Furthermore, the relationship between regulations governing domain names and laws protecting trademarks and similar proprietary rights is unclear. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon, dilute or otherwise decrease the value of our trademarks and other proprietary rights.

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 parties have claimed to hold patents or other proprietary rights that cover various forms of online transactions, online technology or other technology that may be used in our industry or business. Litigation currently exists between parties unrelated to us regarding certain operating systems used throughout the industry that have been considered open source, and any determination that code previously considered in the public domain is proprietary could result in additional costs throughout our industry. 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 previously asserted 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.

We may not realize the benefits associated with our intangible assets and may be required to record a significant charge to earnings if we must reassess our goodwill or identifiable intangible assets.

We are required, under accounting principles generally accepted in the United States, to review our intangible assets for impairment when events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value amount. Goodwill is required

to be tested for impairment at least annually. In the quarter ended March 31, 2001, we recorded an impairment charge of $48.6 million reflecting the amount by which the carrying amounts of our goodwill and identifiable intangible assets exceeded their respective fair values. At March 31, 2004, we had approximately $26.8 million in identifiable intangible assets and $9.5 million of goodwill. We cannot assure you that we will not experience impairment losses in the future. Any such loss could adversely and materially impact our business, financial condition and results of operations.

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

Our business is largely dependent on the 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, although certain officers are party to employment agreements. 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 and retain highly skilled technical, managerial, sales, marketing and administrative 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.

Government regulation or taxation of the provision of Internet access and other 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. Currently ISPs are considered "information service" providers rather than "telecommunications" providers, and therefore are not directly regulated by the Federal Communications Commission or any other governmental agency, other than with respect to regulations that govern businesses generally, such as regulations related to consumer protection. Accordingly, regulations that apply to telephone companies and other telecommunications common carriers do not apply to us. As information service providers, we also operate under an exemption from the access charges that are assessed by local telephone companies on their customers for providing access to their network. We are also not required to contribute a percentage of our gross revenue to support "universal service" subsidies for local telephone services and other public policy objectives, such as enhanced communications systems for schools, libraries and some health care providers. The FCC, however, has initiated several proceedings in which it is examining the regulatory status of ISPs and is currently reconsidering what types of entities should contribute to the federal universal service funds. 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. If the regulatory status of ISPs changes or if access, universal service, or other charges are imposed on ISPs or on dial-up consumers to access the Internet, our business may be adversely affected.

In addition, the tax treatment of activities on or relating to the Internet is currently unsettled. A number of proposals have been made at the federal, state and local levels and by foreign governments that could impose taxes on the online sale of goods and services and other Internet activities. The Internet Tax Freedom Act, which placed a moratorium on new state and local taxes on Internet commerce expired in November 2003. This moratorium has not been and may not be reinstituted, and future laws imposing taxes or other regulations on the provision of goods and services over the Internet could make it substantially more expensive to operate our business.

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.

It is possible that additional laws and regulations may be adopted that could affect our business covering issues such as bulk email or "spam," access to various types of content by minors, encryption and consumer protection. We cannot predict the impact that future regulatory changes or developments may have on our business, financial condition, results of operations or cash flows. 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 adversely impact our results of operations and cause our business to suffer.

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.

Our business could be shut down or severely impacted by a catastrophic event.

Our computer equipment and the telecommunications infrastructure of our third-party network providers are vulnerable to damage from fire, earthquakes, power loss, telecommunications failures, terrorism and similar events. We have experienced situations where power loss and telecommunications failures have adversely impacted our services, 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; Sunnyvale, California; San Jose, California; and New York, New York. In the past, areas in California have experienced repeated episodes of diminished electrical power supply, or "rolling blackouts." A natural disaster, terrorism, power blackout or other unanticipated problem 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.

A significant number of our employees are located in Hyderabad, India and a portion of our outsourced customer service is in Banglore, India. Due to the current political instability between India and Pakistan, it is possible that our Indian 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.

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

We may need to raise 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, financial condition, results of operations and cash flows may suffer.

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 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.

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.

We maintain a short-term investment portfolio consisting of U.S. commercial paper, U.S. Government or U.S. Government Agency obligations, tax-exempt municipal bonds and money market funds. Our primary objective is the preservation of principal and liquidity while maximizing yield. 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.

On April 20, 2001, Jodi Bernstein, on behalf of himself and all others similarly situated, filed a lawsuit in the United States District Court for the Southern District of New York against NetZero, certain officers and directors of NetZero and the underwriters of NetZero's initial public offering, Goldman Sachs Group, Inc., BancBoston Robertson Stephens, Inc. and Salomon Smith Barney, Inc. The complaint alleges 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 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 the offering; and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate NetZero shares to those customers in the offering in exchange for which the customers agreed to purchase additional NetZero shares in the aftermarket at pre-determined prices. Plaintiffs are seeking injunctive relief and damages. Additional lawsuits setting forth substantially similar allegations were also served against NetZero on behalf of additional plaintiffs in April and May 2001. The case against NetZero was consolidated with approximately 300 other suits filed against more than 300 issuers that conducted their initial public offerings between 1998 and 2000, their underwriters and an unspecified number of their individual corporate officers and directors (the "Consolidated Cases"). Counsel for the plaintiffs, the issuers and the insurers for the issuers have entered into a Memorandum of Understanding regarding a proposed settlement in the Consolidated Cases, which is subject to court approval and other conditions.

On May 17, 2001, plaintiff Ann Louise Truschel filed an action in the Supreme Court of the State of New York for the County of New York against Juno on behalf of herself and all others similarly situated. Plaintiff alleges unjust enrichment, unfair and deceptive business practices and breach of contract. Specifically, plaintiff alleges that Juno was unjustly enriched and deceived consumers by: (i) advertising "free" Internet access services and limiting the usage of heavier users of the service, and (ii) 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. Plaintiff is seeking damages, injunctive relief and attorneys' fees. On May 3, 2004, the court entered an order granting preliminary approved a settlement agreement.

On December 19, 2002, plaintiff William Kleen filed a lawsuit in the Supreme Court of the State of New York for the County of New York against Juno on behalf of himself and all others similarly situated. Plaintiff alleges unjust enrichment, unfair and deceptive business practices and breach of contract. Specifically, plaintiff alleges that Juno was unjustly enriched and deceived consumers by: (i) advertising "free" Internet access services and limiting the usage of heavier users of the service, and (ii) 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. Plaintiff is seeking damages, injunctive relief and attorneys' fees. On May 3, 2004, the court approved a settlement agreement.

Juno and UUNET Technologies, Inc., an affiliate of MCI WorldCom Network Services, Inc., regarding the value of services provided by UUNET, with UUNET claiming in excess of $1.0 million and Juno claiming less than $0.3 million. On April 25, 2003, Juno, the Committee of Unsecured Creditors, WorldCom and UUNET (allegedly the largest secured creditor) entered into a Stipulation of Settlement. The Stipulation of Settlement provides for the payment by Juno of $5.5 million in final settlement of all claims against Juno, and we have reserved $5.5 million in connection with this proceeding. On September 11, 2003, the court issued an order approving the Stipulation of Settlement. On September 12, 2003, the Debtor filed a Notice of Appeal of the order approving the Stipulation of Settlement. The appeal has been argued by the parties and is awaiting a ruling by the court.

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 we do not believe the outcome of the above outstanding legal proceedings, claims and litigation will have a material adverse effect on our business, financial condition, results of operations or cash flows, the results of litigation are inherently uncertain and we cannot assure you that we will not be materially and adversely impacted by the results of such proceedings. Other than with respect to the Consolidated Cases, we have established reserves for the matters discussed above and such reserves are reflected in our consolidated financial statements. We cannot assure you, however, that the reserves that have been established are sufficient to cover the possible losses from outstanding litigation.

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

Our Board of Directors authorized a common stock repurchase program that allows us to repurchase shares of our common stock through open market or privately negotiated transactions based on prevailing market conditions and other factors. As of March 31, 2004, we had repurchased $100 million of our common stock. On April 22, 2004, the Board of Directors authorized us to purchase up to an additional $100 million of our common stock through May 31, 2005.

Share repurchases executed under the common stock repurchase program at March 31, 2004 were as follows (in thousands, except per share amounts):

Period		Shares Repurchased(1)	Average Price Paid per Share		Maximum Approximate Dollar Value that May Yet be Purchased Under the Program
August 2001		138	$	1.67	$	9,770
November 2001		469		1.77		8,940
February 2002		727		3.38		6,485
August 2002		288		7.51		27,820
February 2003		193		9.43		26,005
May 2003		281		13.51		22,207
November 2003		2,024		19.76		48,706
February 2004		2,887		16.86		—

	Total	7,007	$	14.26	$	—

On February 4, 2004, we filed a Current Report on Form 8-K to furnish to the SEC our press release announcing our financial results for the quarter and year ended December 31, 2003.

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on May 3, 2004.


(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, 2004
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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


PART I.		FINANCIAL INFORMATION
	Item 1.	Consolidated Balance Sheets at March 31, 2004 (unaudited) and December 31, 2003	3
		Unaudited Consolidated Statements of Operations and Comprehensive Income for the Quarters Ended March 31, 2004 and 2003	4
		Unaudited Consolidated Statements of Cash Flows for the Quarters Ended March 31, 2004 and 2003	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	44
	Item 4.	Controls and Procedures	44
PART II.		OTHER INFORMATION
	Item 1.	Legal Proceedings	45
	Item 2.	Changes in Securities and Use of Proceeds	46
	Item 6.	Exhibits and Reports on Form 8-K	47
SIGNATURES			49

			March 31, 2004			December 31, 2003
			(unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	61,910		$	71,234
	Short-term investments			127,538			132,489
	Accounts receivable, net			11,546			14,065
	Deferred tax assets, net			17,864			22,707
	Other current assets			7,531			9,390

		Total current assets		226,389			249,885
Property and equipment, net				12,835			13,428
Deferred tax assets, net				2,750			3,666
Goodwill				9,541			9,541
Intangible assets, net				26,774			30,727
Other assets				574			632

		Total assets	$	278,863		$	307,879

Liabilities and Stockholders' Equity
Current liabilities:
	Accounts payable		$	30,141		$	31,388
	Accrued liabilities			17,276			14,028
	Deferred revenue			27,296			24,639

		Total current liabilities		74,713			70,055
Commitments and contingencies (see Note 7)
Stockholders' equity:
	Common stock			6			6
	Additional paid-in capital			500,221			535,228
	Deferred stock-based compensation			(10,971	)		—
	Accumulated other comprehensive income			1,591			1,648
	Accumulated deficit			(286,697	)		(299,058	)

		Total stockholders' equity		204,150			237,824

		Total liabilities and stockholders' equity	$	278,863		$	307,879

				Quarter Ended March 31,
				2004			2003
Cash flows from operating activities:
	Net income			$	12,361		$	6,962
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			5,562			6,773
		Stock-based compensation			477			28
		Deferred taxes			1,881			—
		Tax benefits from stock options			5,254			464
		Other			156			122
		Changes in operating assets and liabilities:
			Accounts receivable		2,519			(618	)
			Other assets		1,917			(1,231	)
			Accounts payable and accrued liabilities		2,001			(240	)
			Deferred revenue		2,657			3,745

		Net cash provided by operating activities			34,785			16,005

Cash flows from investing activities:
	Purchases of property and equipment				(1,005	)		(2,024	)
	Purchases of rights, patents and trademarks				(11	)		—
	Purchases of short-term investments				(38,405	)		(13,626	)
	Proceeds from maturities and sales of short-term investments				43,104			255

		Net cash provided by (used for) investing activities			3,683			(15,395	)

Cash flows from financing activities:
	Payments on capital leases				—			(598	)
	Repayments of notes receivable from stockholders				—			10
	Proceeds from exercises of stock options				914			255
	Repurchases of common stock				(48,706	)		(1,815	)

		Net cash used for financing activities			(47,792	)		(2,148	)

Change in cash and cash equivalents					(9,324	)		(1,538	)
Cash and cash equivalents, beginning of period					71,234			63,301

Cash and cash equivalents, end of period				$	61,910		$	61,763

	Quarter Ended March 31,
	2004		2003
Risk-free interest rate	3	%	3	%
Expected life (in years)	5		5
Dividend yield	0	%	0	%
Volatility	104	%	110	%

		Amortized Cost		Estimated Fair Value
Maturing within 1 year		$	19,786	$	19,797
Maturing between 1 year and 4 years			105,761		107,741

	Total	$	125,547	$	127,538

						Year Ending December 31,
Contractual Obligations				Apr-Dec 2004		Year Ending December 31,
Contractual Obligations		Total		Apr-Dec 2004		2005		2006		2007		2008		Thereafter
Operating leases		$	47,750	$	2,143	$	4,160	$	6,048	$	5,739	$	5,792	$	23,868
Telecommunications purchases			26,472		11,466		10,402		4,604		—		—		—
Media purchases			34,685		33,954		731		—		—		—		—

	Total	$	108,907	$	47,563	$	15,293	$	10,652	$	5,739	$	5,792	$	23,868

			Incorporated by Reference to
		Filed with this Form 10-Q	Incorporated by Reference to
No.	Exhibit Description	Filed with this Form 10-Q	Form	File No.	Date Filed
3.1	Amended and Restated Certificate of Incorporation		8-K	000-33367	10/1/2001
3.2	Amended and Restated Bylaws		8-K	000-33367	10/1/2001
3.3	Certificate of Designation for Series A Junior Participating Preferred Stock (included in exhibit 4.1 below)		8-K	000-33367	11/23/2001
4.1	Rights Agreement, dated as of November 15, 2001, between the Company and U.S. Stock Transfer Corporation, which includes the form of Certificate of Designation for the Series A junior participating preferred stock as Exhibit A, and the form of Rights Certificate as Exhibit B		8-K	000-33367	11/23/2001
4.2	Amendment No. 1 to Rights Agreement, dated as of April 29, 2003, between Registrant and U.S. Stock Transfer Corporation		10-Q	000-33367	5/1/2003
10.1	Amended and Restated Registration Rights Agreement		10-Q	000-33367	11/14/2001
10.2	Lease Agreement between Westlake Gardens and NetZero, Inc.		10-Q	000-33367	11/14/2001
10.3	2001 Amended and Restated Employee Stock Purchase Plan	X		000-33367	5/3/2004
10.4	2001 Stock Incentive Plan		10-Q	000-33367	11/14/2001
10.5	2001 Supplemental Stock Incentive Plan		10-Q	000-33367	11/14/2001
10.6	United Online, Inc. 2004 Management Bonus Plan	X		000-33367	5/3/2004
10.7	Amended and Restated Employment Agreement between the Registrant and Mark R. Goldston		10-K	000-33367	2/5/2004
10.8	Amended and Restated Employment Agreement between Registrant and Charles S. Hilliard		10-K	000-33367	2/5/2004
10.9	Amended and Restated Employment Agreement between the Registrant and Frederic A. Randall, Jr.		10-K	000-33367	2/5/2004
10.10	Amended and Restated Employment Agreement between the Registrant and Brian Woods		10-K	000-33367	2/5/2004
10.11	Office Lease between LNR Warner Center, LLC and NetZero, Inc.	X		000-33367	5/3/2004

31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X	000-33367	5/3/2004
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X	000-33367	5/3/2004
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X	000-33367	5/3/2004
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X	000-33367	5/3/2004

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

		Filed with this Form 10-Q	Incorporated by Reference to
No.	Exhibit Description	Filed with this Form 10-Q	Form	File No.	Date Filed
3.1	Amended and Restated Certificate of Incorporation		8-K	000-33367	10/1/2001
3.2	Amended and Restated Bylaws		8-K	000-33367	10/1/2001
3.3	Certificate of Designation for Series A Junior Participating Preferred Stock (included in exhibit 4.1 below)		8-K	000-33367	11/23/2001
4.1	Rights Agreement, dated as of November 15, 2001, between the Company and U.S. Stock Transfer Corporation, which includes the form of Certificate of Designation for the Series A junior participating preferred stock as Exhibit A, and the form of Rights Certificate as Exhibit B		8-K	000-33367	11/23/2001
4.2	Amendment No. 1 to Rights Agreement, dated as of April 29, 2003, between Registrant and U.S. Stock Transfer Corporation		10-Q	000-33367	5/1/2003
10.1	Amended and Restated Registration Rights Agreement		10-Q	000-33367	11/14/2001
10.2	Lease Agreement between Westlake Gardens and NetZero, Inc.		10-Q	000-33367	11/14/2001
10.3	2001 Amended and Restated Employee Stock Purchase Plan	X		000-33367	5/3/2004
10.4	2001 Stock Incentive Plan		10-Q	000-33367	11/14/2001
10.5	2001 Supplemental Stock Incentive Plan		10-Q	000-33367	11/14/2001
10.6	United Online, Inc. 2004 Management Bonus Plan	X		000-33367	5/3/2004
10.7	Amended and Restated Employment Agreement between the Registrant and Mark R. Goldston		10-K	000-33367	2/5/2004
10.8	Amended and Restated Employment Agreement between Registrant and Charles S. Hilliard		10-K	000-33367	2/5/2004
10.9	Amended and Restated Employment Agreement between the Registrant and Frederic A. Randall, Jr.		10-K	000-33367	2/5/2004
10.10	Amended and Restated Employment Agreement between the Registrant and Brian Woods		10-K	000-33367	2/5/2004
10.11	Office Lease between LNR Warner Center, LLC and NetZero, Inc.	X		000-33367	5/3/2004