UNITED ONLINE INC - FORM 10-Q

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

FORM 10-Q


(Mark One)
ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2010
Or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number 000-33367

UNITED ONLINE, INC.
(Exact name of Registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		77-0575839 (I.R.S. Employer Identification No.)
21301 Burbank Boulevard, Woodland Hills, California (Address of principal executive office)		91367 (Zip Code)

(818) 287-3000
(Registrant's telephone number, including area code)

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 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer ý		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

There were 85,970,433 shares of the Registrant's common stock outstanding at October 29, 2010.

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UNITED ONLINE, INC.

INDEX TO FORM 10-Q

For the Quarter Ended September 30, 2010

			Page

PART I.		FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		Unaudited Condensed Consolidated Balance Sheets at September 30, 2010 and December 31, 2009	4
		Unaudited Condensed Consolidated Statements of Operations for the Quarters and Nine Months Ended September 30, 2010 and 2009	5
		Unaudited Condensed Consolidated Statements of Comprehensive Income for the Quarters and Nine Months Ended September 30, 2010 and 2009	6
		Unaudited Condensed Consolidated Statement of Stockholders' Equity for the Nine Months Ended September 30, 2010	7
		Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009	8
		Notes to Unaudited Condensed Consolidated Financial Statements	9
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	21
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
	Item 4.	Controls and Procedures	48
PART II.		OTHER INFORMATION	49
	Item 1.	Legal Proceedings	49
	Item 1A.	Risk Factors	50
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
	Item 6.	Exhibits	68
SIGNATURES			70

In this document, "United Online," "UOL," the "Company," "we," "us" and "our" refer to United Online, Inc. and its subsidiaries.

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services; pricing; competition; strategies; and new business initiatives, products, services, and features. Potential factors that could affect the matters about which the forward-looking statements are made include, among others, the factors disclosed in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and additional factors that accompany the related forward-looking statements in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as the date hereof. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that may cause actual performance and results to differ materially from those predicted. Reported results should not be considered an indication of future performance. Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

			September 30, 2010			December 31, 2009

Assets
Current assets:
	Cash and cash equivalents		$	89,680		$	115,509
	Accounts receivable, net of allowance for doubtful accounts			45,096			55,874
	Deferred tax assets, net			15,711			15,797
	Other current assets			20,344			25,599

		Total current assets		170,831			212,779
Property and equipment, net				62,092			63,547
Goodwill				460,293			464,151
Intangible assets, net				268,511			292,520
Other assets				14,074			16,937

		Total assets	$	975,801		$	1,049,934

Liabilities and Stockholders' Equity
Current liabilities:
	Accounts payable		$	53,214		$	71,668
	Accrued liabilities			47,322			50,428
	Member redemption liability			19,278			20,666
	Deferred revenue			72,067			74,294
	Current portion of long-term debt			4,531			24,383

		Total current liabilities		196,412			241,439
Member redemption liability				4,796			5,089
Deferred revenue				3,293			3,340
Long-term debt, net of discounts				272,554			304,563
Deferred tax liabilities, net				40,477			44,788
Other liabilities				18,280			18,064

		Total liabilities		535,812			617,283

Commitments and contingencies
Stockholders' equity:
	Common stock			9			8
	Additional paid-in capital			494,285			518,580
	Accumulated other comprehensive loss			(32,668	)		(26,963	)
	Accumulated deficit			(21,637	)		(58,974	)

		Total stockholders' equity		439,989			432,651

		Total liabilities and stockholders' equity	$	975,801		$	1,049,934

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

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UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

			Quarter Ended September 30,						Nine Months Ended September 30,

			2010			2009			2010			2009
Revenues:
	Services		$	115,781		$	138,337		$	363,734		$	434,919
	Products			77,760			77,869			324,218			305,723

		Total revenues		193,541			216,206			687,952			740,642
Operating expenses:
	Cost of revenues—services			25,008			26,274			75,688			83,879
	Cost of revenues—products			59,386			58,288			244,799			223,466
	Sales and marketing			34,783			46,146			133,926			155,584
	Technology and development			14,334			15,700			42,329			49,637
	General and administrative			26,333			28,111			84,576			88,632
	Amortization of intangible assets			8,020			9,013			24,298			26,252
	Restructuring charges			70			—			1,061			—

		Total operating expenses		167,934			183,532			606,677			627,450

Operating income				25,607			32,674			81,275			113,192
Interest income				382			498			1,259			1,184
Interest expense				(5,471	)		(7,542	)		(18,934	)		(24,547	)
Other income (expense), net				(40	)		567			95			698

Income before income taxes				20,478			26,197			63,695			90,527
Provision for income taxes				8,319			10,042			26,358			38,052

Net income			$	12,159		$	16,155		$	37,337		$	52,475

	Income allocated to participating securities			(747	)		(1,222	)		(2,334	)		(3,491	)

Net income applicable to common stockholders			$	11,412		$	14,933		$	35,003		$	48,984

Basic net income per common share			$	0.13		$	0.18		$	0.40		$	0.59

Shares used to calculate basic net income per common share				86,649			84,028			86,479			83,372

Diluted net income per common share			$	0.13		$	0.18		$	0.40		$	0.58

Shares used to calculate diluted net income per common share				87,069			84,688			87,134			83,807

Dividends paid per common share			$	0.10		$	0.10		$	0.30		$	0.30

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

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UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

		Quarter Ended September 30,					Nine Months Ended September 30,

		2010		2009			2010			2009
Net income		$	12,159	$	16,155		$	37,337		$	52,475
	Foreign currency translation		8,862		(4,804	)		(5,705	)		18,406

Comprehensive income		$	21,021	$	11,351		$	31,632		$	70,881

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

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UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

(in thousands)

		Common Stock								Accumulated Other Comprehensive Loss

		Common Stock					Additional Paid-In Capital						Accumulated Deficit			Total Stockholders' Equity
		Shares			Amount		Additional Paid-In Capital						Accumulated Deficit			Total Stockholders' Equity
Balance at January 1, 2010			84,958		$	8	$	518,580		$	(26,963	)	$	(58,974	)	$	432,651
	Exercises of stock options		77			—		254			—			—			254
	Issuance of common stock through employee stock purchase plan		573			—		2,612			—			—			2,612
	Vesting of restricted stock units		2,119			1		(1	)		—			—			—
	Repurchases of common stock		(2,162	)		—		(19,125	)		—			—			(19,125	)
	Dividends and dividend equivalents paid on shares outstanding and restricted stock units		—			—		(27,804	)		—			—			(27,804	)
	Change in dividend equivalents payable on restricted stock units		—			—		173			—			—			173
	Stock-based compensation		—			—		20,913			—			—			20,913
	Foreign currency translation		—			—		—			(5,705	)		—			(5,705	)
	Tax shortfalls from equity awards		—			—		(1,317	)		—			—			(1,317	)
	Net income		—			—		—			—			37,337			37,337

Balance at September 30, 2010			85,565		$	9	$	494,285		$	(32,668	)	$	(21,637	)	$	439,989

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

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UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

				Nine Months Ended September 30,

				2010			2009
Cash flows from operating activities:
	Net income			$	37,337		$	52,475
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			44,503			45,061
		Stock-based compensation			20,913			29,204
		Provision for doubtful accounts receivable			4,070			4,687
		Accretion of discounts and amortization of debt issue costs			3,337			3,883
		Deferred taxes, net			(4,513	)		(4,407	)
		Tax shortfalls from equity awards			(521	)		(2,704	)
		Excess tax benefits from equity awards			(442	)		(94	)
		Other			399			318
	Changes in operating assets and liabilities:
		Accounts receivable			6,414			2,211
		Other assets			7,280			10,312
		Accounts payable and accrued liabilities			(20,504	)		(33,933	)
		Member redemption liability			(1,681	)		(1,086	)
		Deferred revenue			(1,624	)		(1,254	)
		Other liabilities			453			(398	)

			Net cash provided by operating activities		95,421			104,275

Cash flows from investing activities:
	Purchases of property and equipment				(19,064	)		(17,190	)
	Purchases of rights, content and intellectual property				(2,205	)		—
	Proceeds from sales of assets, net				219			14

			Net cash used for investing activities		(21,050	)		(17,176	)

Cash flows from financing activities:
	Payments on term loans				(54,819	)		(42,930	)
	Proceeds from exercises of stock options				254			535
	Proceeds from employee stock purchase plan				2,612			2,490
	Repurchases of common stock				(19,125	)		(5,217	)
	Dividends and dividend equivalents paid on outstanding shares and restricted stock units				(27,804	)		(27,118	)
	Excess tax benefits from equity awards				442			94

			Net cash used for financing activities		(98,440	)		(72,146	)

Effect of foreign currency exchange rate changes on cash and cash equivalents					(1,760	)		1,957
Change in cash and cash equivalents					(25,829	)		16,910
Cash and cash equivalents, beginning of period					115,509			104,514

Cash and cash equivalents, end of period				$	89,680		$	121,424

Supplemental disclosure of non-cash investing and financing activities:
	Increase (decrease) in dividend equivalents payable on restricted stock units			$	(173	)	$	146

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

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS

Description of Business

United Online, Inc. (together with its subsidiaries, "United Online", "UOL" or the "Company") is a leading provider of consumer products and services over the Internet through a number of brands, including FTD, Interflora, Classmates, StayFriends, NetZero, and MyPoints. The Company reports its business in three reportable segments: FTD, Classmates Media and Communications. The Company's FTD segment provides floral and related products and services to consumers and retail florists, as well as to other retail locations offering floral and related products and services. The Company's Classmates Media services are online social networking and online loyalty marketing. The Company's primary Communications services are Internet access and email. On a combined basis, the Company's web properties attract a significant number of Internet users and the Company offers a broad array of Internet marketing services for advertisers.

Basis of Presentation

The Company's unaudited condensed consolidated financial statements for the quarters and nine months ended September 30, 2010 and 2009 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 Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and note disclosures required by GAAP for complete financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited condensed consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for any future periods. The unaudited condensed consolidated balance sheet information at December 31, 2009 is derived from the Company's audited consolidated financial statements, filed on February 23, 2010 with the SEC in the Company's Annual Report on Form 10-K for the year ended December 31, 2009, but does not include all of the disclosures required by GAAP.

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, disclosure of contingent liabilities and the reported amounts of revenues and expenses. Actual results could differ from these estimates and assumptions. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes for the year ended December 31, 2009 included in the Company's Annual Report on Form 10-K.

The most significant areas of the unaudited condensed consolidated financial statements that require management judgment include the Company's revenue recognition, allocation of purchase price in business combinations, goodwill and indefinite-lived intangible assets, definite-lived intangible assets and other long-lived assets, member redemption liability, income taxes, and legal contingencies.

Reclassifications—Certain prior period amounts have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported consolidated results of operations or stockholders' equity.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

Recent Accounting Pronouncements

Credit Quality of Financing Receivables and the Allowance for Credit Losses—In July 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, as codified in Accounting Standards Codification ("ASC") 310. This update enhances the disclosures about the credit quality of financing receivables and the allowance for credit losses, including required disclosures related to credit quality indicators, past due information and modifications of financing receivables. This update will be effective in the quarter ending December 31, 2010 and will affect the disclosures in the Company's Annual Report on Form 10-K for the year ending December 31, 2010.

2. SEGMENT INFORMATION

Segment revenues and segment income from operations were as follows (in thousands):

		Quarter Ended September 30, 2010

		FTD		Classmates Media		Communications		Total
Services		$	27,145	$	33,203	$	32,896	$	93,244
Products			77,760		—		—		77,760
Advertising			141		15,902		7,269		23,312

	Total segment revenues	$	105,046	$	49,105	$	40,165	$	194,316

Segment income from operations		$	12,680	$	11,790	$	15,795	$	40,265

		Quarter Ended September 30, 2009

		FTD		Classmates Media		Communications		Total
Services		$	28,535	$	38,283	$	42,050	$	108,868
Products			77,869		—		—		77,869
Advertising			1,122		20,399		8,629		30,150

	Total segment revenues	$	107,526	$	58,682	$	50,679	$	216,887

Segment income from operations		$	15,253	$	16,998	$	15,613	$	47,864

		Nine Months Ended September 30, 2010

		FTD		Classmates Media		Communications		Total
Services		$	89,421	$	100,368	$	105,179	$	294,968
Products			324,218		—		—		324,218
Advertising			763		48,023		22,266		71,052

	Total segment revenues	$	414,402	$	148,391	$	127,445	$	690,238

Segment income from operations		$	44,302	$	32,844	$	48,632	$	125,778

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

		Nine Months Ended September 30, 2009

		FTD		Classmates Media		Communications		Total
Services		$	93,690	$	115,222	$	135,757	$	344,669
Products			305,723		—		—		305,723
Advertising			5,316		60,088		27,047		92,451

	Total segment revenues	$	404,729	$	175,310	$	162,804	$	742,843

Segment income from operations		$	58,392	$	43,276	$	56,585	$	158,253

A reconciliation of segment revenues to consolidated revenues was as follows for each period presented (in thousands):

		Quarter Ended September 30,						Nine Months Ended September 30,

		2010			2009			2010			2009
Segment revenues:
	FTD	$	105,046		$	107,526		$	414,402		$	404,729
	Classmates Media		49,105			58,682			148,391			175,310
	Communications		40,165			50,679			127,445			162,804
	Intersegment eliminations		(775	)		(681	)		(2,286	)		(2,201	)

Consolidated revenues		$	193,541		$	216,206		$	687,952		$	740,642

A reconciliation of segment operating expenses (which excludes depreciation and amortization of intangible assets) to consolidated operating expenses was as follows for each period presented (in thousands):

		Quarter Ended September 30,						Nine Months Ended September 30,

		2010			2009			2010			2009
Segment operating expenses:
	FTD	$	92,366		$	92,273		$	370,100		$	346,337
	Classmates Media		37,315			41,684			115,547			132,034
	Communications		24,370			35,066			78,813			106,219

Total segment operating expenses			154,051			169,023			564,460			584,590
	Depreciation		6,604			6,177			20,168			18,809
	Amortization of intangible assets		8,054			9,013			24,335			26,252
	Intersegment eliminations		(775	)		(681	)		(2,286	)		(2,201	)

Consolidated operating expenses		$	167,934		$	183,532		$	606,677		$	627,450

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

A reconciliation of segment income from operations (which excludes depreciation and amortization of intangible assets) to consolidated operating income was as follows for each period presented (in thousands):

		Quarter Ended September 30,						Nine Months Ended September 30,

		2010			2009			2010			2009
Segment income from operations:
	FTD	$	12,680		$	15,253		$	44,302		$	58,392
	Classmates Media		11,790			16,998			32,844			43,276
	Communications		15,795			15,613			48,632			56,585

Total segment income from operations			40,265			47,864			125,778			158,253
	Depreciation		(6,604	)		(6,177	)		(20,168	)		(18,809	)
	Amortization of intangible assets		(8,054	)		(9,013	)		(24,335	)		(26,252	)

Consolidated operating income		$	25,607		$	32,674		$	81,275		$	113,192

International revenues are generated by the Company's operations in Europe. International revenues totaled $39.1 million and $132.4 million for the quarter and nine months ended September 30, 2010, respectively. International revenues totaled $39.2 million and $123.8 million for the quarter and nine months ended September 30, 2009, respectively.

Geographic information for long-lived assets, which consist of property and equipment and other assets, was as follows (in thousands):

		September 30, 2010		December 31, 2009

United States		$	66,740	$	71,280
Europe			9,426		9,204

	Total long-lived assets	$	76,166	$	80,484

Segment assets are not reported to, or used by, the Company's chief operating decision maker to allocate resources to or assess performance of the segments and, therefore, pursuant to ASC 280, Segment Reporting, total segment assets have not been disclosed.

3. BALANCE SHEET COMPONENTS

Other Current Assets

Other current assets consisted of the following (in thousands):

		September 30, 2010		December 31, 2009

Prepaid expenses		$	13,222	$	14,112
Gift cards related to member redemption liability			2,164		4,017
Floral-related inventories, net			3,109		4,035
Other			1,849		3,435

	Total	$	20,344	$	25,599

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. BALANCE SHEET COMPONENTS (Continued)

Property and Equipment

Property and equipment consisted of the following (in thousands):

		September 30, 2010			December 31, 2009

Computer software and equipment		$	176,008		$	159,359
Land and buildings			17,388			17,671
Furniture and fixtures			14,323			16,485

			207,719			193,515
Less: accumulated depreciation and amortization			(145,627	)		(129,968	)

	Total	$	62,092		$	63,547

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

		September 30, 2010		December 31, 2009

Employee compensation and related expenses		$	21,727	$	22,475
Income taxes payable			9,119		8,565
Non-income taxes payable			5,146		5,325
Customer deposits			3,030		3,636
Reserve for pending legal settlement			2,298		2,200
Other			6,002		8,227

	Total	$	47,322	$	50,428

4. GOODWILL, INTANGIBLE ASSETS AND OTHER LONG-LIVED ASSETS

Goodwill

The changes in goodwill by reportable segment for the nine months ended September 30, 2010 were as follows (in thousands):

			FTD			Classmates Media			Communications			Total

Balance at January 1, 2010:
	Goodwill (excluding impairment charges)		$	445,931		$	124,731		$	13,227		$	583,889
	Accumulated impairment charges			(114,000	)		—			(5,738	)		(119,738	)

		Goodwill at January 1, 2010		331,931			124,731			7,489			464,151
	Foreign currency translation			(3,849	)		(9	)		—			(3,858	)

Balance at September 30, 2010:
	Goodwill (excluding impairment charges)			442,082			124,722			13,227			580,031
	Accumulated impairment charges			(114,000	)		—			(5,738	)		(119,738	)

		Goodwill at September 30, 2010	$	328,082		$	124,722		$	7,489		$	460,293

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. GOODWILL, INTANGIBLE ASSETS AND OTHER LONG-LIVED ASSETS (Continued)

Intangible Assets

Intangible assets consisted of the following (in thousands):

		September 30, 2010

		Gross Value		Accumulated Amortization			Net
Pay accounts and free accounts		$	100,840	$	(90,688	)	$	10,152
Customer contracts and relationships			112,037		(45,919	)		66,118
Trademarks and trade names			182,753		(16,930	)		165,823
Software and technology			46,554		(22,468	)		24,086
Rights, content and intellectual property			6,804		(4,472	)		2,332

	Total	$	448,988	$	(180,477	)	$	268,511

		December 31, 2009

		Gross Value		Accumulated Amortization			Net
Pay accounts and free accounts		$	100,825	$	(88,935	)	$	11,890
Customer contracts and relationships			112,575		(31,856	)		80,719
Trademarks and trade names			184,020		(14,912	)		169,108
Software and technology			46,726		(16,279	)		30,447
Rights, content and intellectual property			4,602		(4,246	)		356

	Total	$	448,748	$	(156,228	)	$	292,520

The Company's acquired trademarks and trade names of $229.8 million related to the acquisition by the Company of FTD Group, Inc. (together with its subsidiaries, "FTD") in August 2008, prior to impairment charges, are indefinite-lived and, accordingly, there is no associated amortization expense or accumulated amortization. At September 30, 2010 and December 31, 2009, the FTD trademarks and trade names after impairment and foreign currency translation adjustments totaled $157.0 million and $158.2 million, respectively.

5. CREDIT AGREEMENTS

UOL Credit Agreement

In connection with the acquisition by the Company of FTD in August 2008, United Online, Inc. entered into a $60 million senior secured credit agreement with Silicon Valley Bank (the "UOL Credit Agreement") and borrowed $60 million thereunder. The net proceeds of the term loan under the UOL Credit Agreement were used to finance, in part, the acquisition of FTD. In April 2010, United Online, Inc. paid $14.7 million to retire this credit facility.

FTD Credit Agreement

In connection with the FTD acquisition in August 2008, UNOLA Corp., then an indirect wholly-owned subsidiary of United Online, Inc., which subsequently merged into FTD Group, Inc., entered into a $425 million senior secured credit agreement with Wells Fargo Bank National Association, as Administrative Agent (the "FTD Credit Agreement"), consisting of (i) a term loan A facility of up to

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. CREDIT AGREEMENTS (Continued)

$75 million, (ii) a term loan B facility of up to $300 million, and (iii) a revolving credit facility of up to $50 million.

The changes in the Company's debt balances, net of discounts, for the nine months ended September 30, 2010 were as follows (in thousands):

		Balance at January 1, 2010		Repayments of Debt			Accretion of Discounts		Balance at September 30, 2010

UOL Credit Agreement		$	24,383	$	(24,819	)	$	436	$	—
FTD Credit Agreement, term loan A			59,779		(5,835	)		423		54,367
FTD Credit Agreement, term loan B			244,784		(24,165	)		2,099		222,718
FTD Credit Agreement, revolving credit facility			—		—			—		—

	Total	$	328,946	$	(54,819	)	$	2,958	$	277,085

Future minimum principal payments based upon scheduled mandatory debt payments under the FTD Credit Agreement, excluding required prepayments based on excess cash flows, were as follows at September 30, 2010 (in thousands):

				Year Ending December 31,

		Total Gross Debt		Year Ending December 31,
		Total Gross Debt		2011		2012		2013		2014
FTD Credit Agreement, term loan A		$	55,356	$	5,032	$	7,129	$	43,195	$	—
FTD Credit Agreement, term loan B			229,269		1,764		2,351		2,351		222,803

	Total	$	284,625	$	6,796	$	9,480	$	45,546	$	222,803

At September 30, 2010, the borrowing capacity under the FTD revolving credit facility, which was reduced by $1.1 million in outstanding letters of credit, was $48.9 million.

Subject to certain exceptions, FTD Group, Inc. is required to make annual prepayments of a portion of the term loans under the FTD Credit Agreement based on excess cash flow as defined in the FTD Credit Agreement.

6. FAIR VALUE MEASUREMENTS

ASC 820, Fair Value Measurements and Disclosures, establishes a three-tiered hierarchy that draws a distinction between market participant assumptions based on (i) quoted prices (unadjusted) in active markets for identical assets and liabilities (Level 1); (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2); and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). The following table presents information about assets at September 30, 2010 that are required to be measured at fair value on a recurring basis (in thousands):

Description		Level 1 Fair Value

Money market funds		$	55,841

The Company estimated the fair value of its long-term debt using a discounted cash flow technique that incorporates a market interest yield curve with adjustments for duration and risk profile. In

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. FAIR VALUE MEASUREMENTS (Continued)

determining the market interest yield curve, the Company considered, among other factors, its estimate of its credit rating. The Company estimated its credit rating as BBB/BB+ for the long-term debt associated with the FTD Credit Agreement, resulting in a discount rate of 4%. The table below summarizes the fair value estimates for long-term debt, net of discounts, including current portion, at September 30, 2010, as defined by ASC 825, Disclosures about Fair Value of Financial Instruments (in thousands):

		Carrying Amount			Estimated Fair Value

Long-term debt, net of discounts, including current portion		$	277,085		$	311,035

7. STOCKHOLDERS' EQUITY

Common Stock Repurchases

United Online, Inc.'s Board of Directors authorized a common stock repurchase program (the "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 through December 31, 2010. The Company repurchased 2.2 million shares of common stock under the Program for $11.0 million in the quarter ended September 30, 2010. From August 2001 through September 30, 2010, the Company had repurchased $150.2 million of its common stock under the Program, leaving $49.8 million of authorization remaining under the Program.

Shares withheld upon the vesting of restricted stock units and upon the issuance of stock awards to pay applicable required employee withholding taxes are considered common stock repurchases, but are not counted as purchases against the Program. Upon vesting of restricted stock units or issuance of stock awards, the Company currently does not collect the applicable required employee withholding taxes from employees. Instead, the Company automatically withholds, from the restricted stock units that vest, and from the stock awards that are issued, the portion of those shares with a fair market value equal to the amount of the required employee withholding taxes due, which is accounted for as a repurchase of common stock. The Company then pays the applicable withholding taxes in cash. The amounts remitted in the nine months ended September 30, 2010 and 2009 were $8.2 million and $5.2 million, respectively, for which the Company withheld 1.4 million and 0.9 million shares of common stock, respectively, that were underlying the restricted stock units which vested and stock awards that were issued. For information regarding the common stock repurchases consummated during the quarter ended September 30, 2010, see "Item 2. Unregistered Sales of Equity Securities and Use of Proceeds," which appears elsewhere in this Quarterly Report on Form 10-Q.

Dividends

Dividends are paid on shares of common stock outstanding as of the record date. In addition, dividend equivalents are generally paid on unvested restricted stock units outstanding as of the record date.

In February, April and July 2010, United Online, Inc.'s Board of Directors declared quarterly cash dividends of $0.10 per share of common stock. The dividends were paid on February 26, 2010, May 28, 2010 and August 31, 2010 and totaled $9.1 million, $9.4 million and $9.3 million, respectively, including dividend equivalents paid on outstanding restricted stock units.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. STOCKHOLDERS' EQUITY (Continued)

In October 2010, United Online, Inc.'s Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock. The record date for the dividend is November 12, 2010 and the dividend will be paid on November 30, 2010.

The payment of future dividends is discretionary and is subject to determination by United Online, Inc.'s Board of Directors each quarter following its review of the Company's financial performance and other factors. Dividends are declared and paid out of the Company's surplus, as defined and computed in accordance with the General Corporation Law of the State of Delaware.

8. STOCK-BASED COMPENSATION PLANS

Stock-Based Compensation

The following table summarizes the stock-based compensation that has been included in the following captions within the unaudited condensed consolidated statements of operations for each of the periods presented (in thousands):

		Quarter Ended September 30,				Nine Months Ended September 30,

		2010		2009		2010		2009
Operating expenses:
Cost of revenues—services		$	112	$	201	$	426	$	728
Cost of revenues—products			7		20		37		20
Sales and marketing			976		1,421		3,179		4,120
Technology and development			722		1,202		2,550		3,713
General and administrative			4,875		6,748		14,721		20,623

	Total stock-based compensation	$	6,692	$	9,592	$	20,913	$	29,204

Recent Awards

Effective February 15, 2010, the Compensation Committee of the Board of Directors of United Online, Inc. (the "Compensation Committee") approved grants of 1.0 million restricted stock units with a grant-date fair value equal to $6.5 million to certain members of the Company's senior management. Each restricted stock unit entitles the recipient to receive one share of United Online Inc.'s common stock upon vesting. The restricted stock units will vest as to one-third of the total number of shares awarded annually over a three-year period beginning February 15, 2010.

Effective February 15, 2010, the Secondary Compensation Committee of the Board of Directors of United Online, Inc. approved grants of 1.2 million restricted stock units with a grant-date fair value equal to $7.7 million to certain of the Company's non-executive officer employees. The restricted stock units will vest as to twenty-five percent of the total number of shares awarded annually over a four-year period beginning February 15, 2010.

Effective February 15, 2010, the Compensation Committee approved grants of 0.7 million shares of common stock with a grant-date fair value equal to $3.7 million to the Company's executive officers in connection with awards earned under the 2009 Management Bonus Plan.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. NET INCOME PER COMMON SHARE

The following table sets forth the computation of basic and diluted net income per common share for the quarters and nine months ended September 30, 2010 and 2009 (in thousands, except per share amounts):

		Quarter Ended September 30,						Nine Months Ended September 30,

		2010			2009			2010			2009
Numerator:
Net income		$	12,159		$	16,155		$	37,337		$	52,475
	Income allocated to participating securities		(747	)		(1,222	)		(2,334	)		(3,491	)

Net income applicable to common stockholders		$	11,412		$	14,933		$	35,003		$	48,984

Denominator:
Shares used to calculate basic net income per common share			86,649			84,028			86,479			83,372

	Add: Dilutive effect of non-participating securities		420			660			655			435

Shares used to calculate diluted net income per common share			87,069			84,688			87,134			83,807

Basic net income per common share		$	0.13		$	0.18		$	0.40		$	0.59

Diluted net income per common share		$	0.13		$	0.18		$	0.40		$	0.58

The diluted net income per common share computations exclude stock options and restricted stock units which are antidilutive. Weighted-average antidilutive shares for the quarter and nine months ended September 30, 2010 were 3.0 million and 2.6 million, respectively. Weighted-average antidilutive shares for the quarter and nine months ended September 30, 2009 were 3.4 million and 6.0 million, respectively.

10. RESTRUCTURING CHARGES

For the nine months ended September 30, 2010, the Company recorded restructuring charges totaling $1.1 million primarily related to the closure of certain FTD call center facilities in the United States and the United Kingdom. These restructuring charges primarily included lease termination costs and employee termination benefits.

11. LEGAL CONTINGENCIES

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. LEGAL CONTINGENCIES (Continued)

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. The case against NetZero was coordinated 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 parties in the approximately 300 coordinated class actions, including NetZero, the underwriter defendants in the NetZero class action, and the plaintiff class in the NetZero action, have reached an agreement in principle under which the insurers for the issuer defendants in the coordinated cases will make a settlement payment on behalf of the issuers, including NetZero. On October 5, 2009, the district court issued an order granting final approval of the settlement and certifying the settlement class. Certain individuals have appealed the October 5, 2009 order and one objector has filed a brief in support of his appeal of the judgment approving the settlement. The schedule for filing an opposition to the appeal has not yet been determined.

In 2009, a committee of the United States Senate commenced an investigation of post-transaction sales practices and the companies that have engaged in such practices. As part of such investigation, the Company received a request for information from the committee and has cooperated with, and responded to, such request. In addition, Classmates Online, Inc. received a civil investigative demand from the Attorney General for the State of Washington, and Classmates Online, Inc. and FTD, Inc. received subpoenas from the Attorney General for the State of New York, regarding their respective investigations into such practices and the companies that have engaged in them, including these subsidiaries. The Company has been cooperating with the investigations and in August 2010, each of Classmates Online, Inc. and FTD, Inc. entered into an Assurance of Discontinuance with the Attorney General for the State of New York to resolve its investigation. As part of such resolution, Classmates Online, Inc. and FTD, Inc. paid $960,000 and $640,000, respectively, to a fund that will pay for consumer education, refunds and the costs of the investigation of the Attorney General for the State of New York. FTD.com Inc. and Classmates Online, Inc. have also received subpoenas from the Attorney General for the State of Kansas and the Attorney General for the State of Maryland, respectively. These subpoenas were issued on behalf of a Multistate Work Group that consists of the Attorneys General for the following states: Delaware, Florida, Idaho, Illinois, Kansas, Maine, Maryland, Michigan, New Mexico, New Jersey, North Dakota, Ohio, Oregon, Pennsylvania, Texas, and Vermont. Based on the subpoenas, the Company believes the primary focus of the inquiries concerns certain post-transaction sales practices in which these subsidiaries previously engaged with certain third-party vendors. In addition, Classmates Online, Inc. has received a subpoena from the Attorney General for the District of Columbia regarding its marketing, billing, and renewal practices, including, without limitation, its post-transaction sales practices. The Company is cooperating with these investigations. However, the Company cannot predict the outcome of these or any other governmental investigations or other legal actions or their potential implications for the Company's business. There are no assurances that additional governmental investigations or other legal actions will not be instituted in connection with the Company's former post-transaction sales practices or other current or former business practices.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. LEGAL CONTINGENCIES (Continued)

The Company is subject to various legal proceedings, investigations, claims, and litigation that can involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to defend. There can be no assurance that such legal proceedings, investigations, claims, and litigation, which are inherently uncertain, will not materially and adversely affect the Company's business, financial condition, results of operations, or cash flows. At September 30, 2010, the Company had a reserve of $2.3 million for a pending legal settlement.

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q and the documents incorporated herein by reference contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, as amended, based on our current expectations, estimates and projections about our operations, industry, financial condition, performance, results of operations, and liquidity. Statements containing words such as "may," "believe," "anticipate," "expect," "intend," "plan," "project," "projections," "business outlook," "estimate," or similar expressions constitute forward-looking statements. These forward-looking statements include, but are not limited to, statements about future financial performance; revenues; segment metrics; operating expenses; market trends, including those in the markets in which we compete; operating and marketing efficiencies; liquidity; cash flows and uses of cash; dividends; capital expenditures; depreciation and amortization; tax payments; foreign currency exchange rates; hedging arrangements; our ability to repay indebtedness, pay dividends and invest in initiatives; our products and services; pricing; competition; strategies; and new business initiatives, products, services, and features. Potential factors that could affect the matters about which the forward-looking statements are made include, among others, the factors disclosed in the section entitled "Risk Factors" in this Quarterly Report on Form 10-Q and additional factors that accompany the related forward-looking statements in this Quarterly Report on Form 10-Q and our other filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as the date hereof. Any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that may cause actual performance and results to differ materially from those predicted. Reported results should not be considered an indication of future performance. Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

We are a leading provider of consumer products and services over the Internet through a number of brands including FTD, Interflora, Classmates, StayFriends, NetZero, and MyPoints. Our FTD segment provides floral and related products and services to consumers and retail florists, as well as to other retail locations offering floral and related products and services. Our Classmates Media segment services are online social networking and online loyalty marketing. Our primary Communications segment services are Internet access and email. On a combined basis, our web properties attract a significant number of Internet users, and we offer a broad range of Internet marketing services for advertisers.

Segment Definitions

We report our businesses in three reportable segments:

Segment		Products and Services

FTD		Floral and related products and services for consumers, retail florists and other retail locations
Classmates Media		Online social networking and online loyalty marketing services
Communications		Internet access, email, Internet security, and web hosting services

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Segment Services

FTD

FTD Group, Inc. (together with its subsidiaries, "FTD") is a leading provider of floral and related products and services to consumers and retail florists, as well as to other retail locations offering floral and related products and services, in the United States ("U.S."), Canada, the United Kingdom ("U.K."), and the Republic of Ireland. The business uses the highly recognized FTD and Interflora brands, both supported by the Mercury Man logo. FTD is a nationwide floral marketer, which we refer to as FTD's consumer business, and a provider of floral network services, which we refer to as FTD's floral network business. These businesses are complementary, as the majority of floral orders generated by the consumer business are fulfilled and hand-delivered by the members of the FTD floral network. FTD does not own or operate any retail locations.

Consumer Business. FTD is a leading marketer of flowers and specialty gift items to consumers. FTD operates in the U.S. and Canada, primarily through the www.ftd.com website and 1-800-SEND-FTD toll-free telephone number, and in the U.K. and the Republic of Ireland through the www.interflora.co.uk and www.interflora.ie websites and various telephone numbers. FTD also operates mobile websites that are optimized for mobile phones with Internet connections. While floral arrangements and plants are FTD's primary offerings, FTD also markets and sells other specialty gift items including gourmet food, special occasion gifts, bath and beauty products, jewelry, wine and gift baskets, chocolates, and stuffed animals.

Floral Network Business. FTD provides a comprehensive suite of products and services that promote revenue growth and enhance the operating efficiencies of its floral network members, including services that enable such members to receive, send and deliver floral orders. Floral network members include traditional retail florists, as well as other retailers offering floral and related products and services, that are located primarily in the U.S., Canada, the U.K., and the Republic of Ireland. The large network of floral network members provides an order fulfillment vehicle for our consumer business and allows FTD to offer same-day delivery capability (subject to certain limitations) to populations throughout the U.S., Canada, the U.K., and Ireland.

Classmates Media

Our Classmates Media services include online social networking under the Classmates brand and online loyalty marketing under the MyPoints brand. Our Classmates Media services also include international online social networking under the StayFriends and Trombi brands.

Online Social Networking. Our social networking websites enable users to locate and interact with acquaintances from their past, with school affiliations as the primary focus. Led by our flagship Classmates website (www.classmates.com) that serves the U.S. and Canada, our social networking services have a large and diverse population of users, with over 60 million registered accounts at September 30, 2010.

Our social networking members can choose between free membership and a paid subscription offering additional features. Free accounts constitute the vast majority of our social networking accounts. Revenues from our social networking services are derived from subscription fees and advertising fees.

Online Loyalty Marketing. MyPoints connects advertisers with its members by allowing members to earn rewards points for engaging in online activities. MyPoints is a free service for consumers who need only provide their name, zip code, gender, date of birth, and an email address to register. Members register to receive direct email marketing and other online loyalty promotions, and earn points for responding to email offers, taking market research companies' surveys, shopping online at the MyPoints

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website (www.mypoints.com) which serves as a shopping portal, searching the Internet through a MyPoints branded toolbar, playing MyPoints branded online games, and engaging in other online activities. Rewards points are redeemable primarily in the form of third-party gift cards from over 75 merchants, including, among others, retailers, theaters, restaurants, airlines, and hotels. Participating merchants include, among others, iTunes, Marriott, and Target.

Communications

Our principal Communications pay service is dial-up Internet access, offered under the NetZero and Juno brands. We also offer broadband services, email, Internet security services, and web hosting services. Most of our Communications revenues are derived from dial-up Internet access pay accounts.

Internet Access Services. Our Internet access services consist of dial-up and, to a much lesser extent, broadband services. Our dial-up Internet access services are provided on both a free and pay basis, with the free services subject to hourly and other limitations. Basic pay dial-up Internet access services include Internet access and an email account, although we also offer an enhanced email service as a stand-alone pay service. In addition, we offer accelerated dial-up Internet access services which can significantly reduce the time for certain web pages to download when compared to our basic dial-up Internet access services. Our accelerated dial-up Internet access services are also bundled with additional benefits including pop-up blocking, antivirus software and enhanced email storage. Our dial-up Internet access services are available in more than 11,000 cities across the U.S. and Canada.

Our broadband Internet access services consist of digital subscriber lines (also known as "DSL") services that we purchase from third parties and resell under our own brands. These services are primarily used as a means to retain users who are leaving our dial-up Internet access services and we have conducted very limited marketing of our broadband Internet access services to the general public.

Key Business Metrics

We review a number of key business metrics to help us monitor our performance and trends affecting our businesses, and to develop forecasts and budgets. These key measures are:

FTD Segment Metrics

Consumer Orders. We monitor the number of consumer orders for floral and gift products during a given period. Consumer orders are orders delivered during the period that originated in the U.S. and Canada, primarily from the www.ftd.com website and the 1-800-SEND-FTD telephone number, and in the U.K. and the Republic of Ireland, primarily from the www.interflora.co.uk and www.interflora.ie websites and various telephone numbers. Orders originating with a florist or other retail location for delivery to consumers are not included. The number of consumer orders received may fluctuate significantly from period to period due to seasonality resulting from the timing of key holidays; general economic conditions; fluctuations in marketing expenditures on initiatives designed to attract new and retain existing customers; changes in pricing for our floral, plant and specialty gift products or competitive offerings; and changing consumer preferences, among other factors.

Average Order Value. We monitor the average value for consumer orders delivered in a given period, which we refer to as the average order value. Average order value represents the average U.S. Dollar amount received for consumer orders delivered during a period. This average U.S. Dollar amount is determined after translating local currency amounts received for orders delivered principally in the U.K. and the Republic of Ireland into U.S. Dollars. Average order value includes merchandise revenue and shipping and service fees paid by the consumer, less certain discounts and certain refunds. Average order values may fluctuate from period to period based on the average foreign currency exchange rates; product mix; changes in merchandise pricing, shipping and service fees; levels of certain refunds issued; and discounts, among other factors.

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Classmates Media and Communications Segment Metrics

Pay Accounts. We generate a significant portion of our revenues from our pay accounts and they represent one of the most important drivers of our business model. A pay account is defined as a member who has subscribed to, and paid for, our Classmates Media or Communications services, and whose subscription has not terminated or expired. A pay account does not equate to a unique subscriber since one subscriber could have several pay accounts. At any point in time, our pay account base includes a number of accounts receiving a free period of service as either a promotion or retention tool and a number of accounts that have notified us that they are terminating their service but whose service remains in effect. In general, the key metrics that affect our revenues from our pay accounts base include the number of pay accounts and the average monthly revenue per pay account ("ARPU"). A pay account generally becomes a free account following the expiration or termination of the related subscription.

ARPU. We monitor ARPU, which is a monthly measure calculated by dividing services revenues generated from the pay accounts of our Classmates Media or Communications segment, as applicable, for a period (after translation into U.S. Dollars) by the average number of segment pay accounts for that period, divided by the number of months in that period. The average number of pay accounts is the simple average of the number of pay accounts at the beginning and end of a period. ARPU may fluctuate significantly from period to period as a result of a variety of factors, including, but not limited to, the extent to which promotional, discounted or retention pricing is used to attract new, or retain existing, paying subscribers; changes in the mix of pay services and the related pricing plans; increases or decreases in the price of our services; the timing of pay accounts being added or removed during a period; and the average foreign currency exchange rate between the U.S. Dollar and the Euro.

Churn. To evaluate the retention characteristics of our membership base, we also monitor the percentage of pay accounts that terminate or expire, which we refer to as our average monthly churn rate. Our average monthly churn rate is calculated as the total number of pay accounts that terminated or expired in a period divided by the average number of pay accounts for that period, divided by the number of months in that period. Our average monthly churn percentage may fluctuate from period to period due to our mix of subscription terms, which affects the timing of subscription expirations, and other factors. We make certain normalizing adjustments to the calculation of our churn percentage for periods in which we add a significant number of pay accounts due to acquisitions. For our Communications segment pay accounts, we do not include in our churn calculation those accounts canceled during the first 30 days of service unless the accounts have upgraded from free accounts, although a number of such accounts will be included in our account totals at any given measurement date. Subscribers who cancel one pay service but subscribe to another pay service are not necessarily considered to have canceled a pay account depending on the services and, as such, our segment churn rates are not necessarily indicative of the percentage of subscribers canceling any particular service.

Active Accounts. We monitor the number of active accounts among our membership base. Classmates Media segment active accounts are defined as the sum of all social networking pay accounts as of the date presented; the monthly average for the period of all free social networking accounts who have visited our domestic or international social networking websites (excluding The Names Database) at least once during the period; and the monthly average for the period of all online loyalty marketing members who have earned or redeemed points during such period. Communications segment active accounts include all Communications segment pay accounts as of the date presented combined with the number of free Internet access and email accounts that logged on to our services at least once during the preceding 31 days.

In general, we count and track pay accounts and free accounts by unique member identifiers. Users have the ability to register for separate services under separate brands and member identifiers independently. We do not track whether a pay account has purchased more than one of our services

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unless the account uses the same member identifier. As a result, total active accounts may not represent total unique users.

Key Metrics

The table below sets forth, for the quarterly periods presented, as applicable, our consolidated revenues, segment revenues, consumer orders, average order value, average currency exchange rate, pay accounts (at the end of the period), segment churn (monthly average for the period), ARPU (monthly average for the period), and segment active accounts (monthly average for the period).

Revenues and operating results from our FTD segment are impacted by seasonal holiday timing variations and fluctuations in foreign currency exchange rates. As such, we believe that comparisons of our FTD segment's revenues and operating results for any period with those of the immediately preceding period or, in some instances, the same period of the preceding fiscal year, may be of limited relevance in evaluating its historical financial performance and predicting its future financial performance.

				Quarter Ended

				September 30, 2010			June 30, 2010			March 31, 2010			December 31, 2009			September 30, 2009
Consolidated:
	Revenues (in thousands)			$	193,541		$	242,686		$	251,725		$	249,490		$	216,206
FTD:
	Segment revenues (in thousands)			$	105,046		$	152,669		$	156,687		$	141,116		$	107,526
		% of consolidated revenues			54	%		63	%		62	%		57	%		50	%
	Consumer orders (in thousands)				1,085			1,851			1,813			1,594			1,075
	Average order value			$	60.77		$	58.76		$	59.42		$	60.14		$	61.29
	Average currency exchange rate: GBP to USD				1.55			1.49			1.54			1.63			1.64
Classmates Media:
	Segment revenues (in thousands)			$	49,105		$	48,784		$	50,502		$	60,712		$	58,682
		% of consolidated revenues			25	%		20	%		20	%		24	%		27	%
	Pay accounts (in thousands)				4,795			4,982			4,988			4,886			4,785
	Segment churn				3.5	%		3.1	%		3.2	%		3.8	%		3.8	%
	ARPU			$	2.26		$	2.22		$	2.29		$	2.53		$	2.71
	Segment active accounts (in millions)				15.0			16.1			17.5			19.4			16.9
Communications:
	Segment revenues (in thousands)			$	40,165		$	42,039		$	45,241		$	48,429		$	50,679
		% of consolidated revenues			21	%		17	%		18	%		19	%		23	%
	Pay accounts (in thousands):
		Access			801			880			967			1,036			1,118
		Other			295			300			306			314			322

			Total pay accounts		1,096			1,180			1,273			1,350			1,440
	Segment churn				4.0	%		4.2	%		4.3	%		4.4	%		4.6	%
	ARPU			$	9.58		$	9.57		$	9.41		$	9.43		$	9.43
	Segment active accounts (in millions)				1.9			2.0			2.1			2.2			2.3

Critical Accounting Policies, Estimates and Assumptions

Goodwill

During the quarter ended June 30, 2010, we performed an interim impairment assessment of goodwill for our MyPoints reporting unit. We determined that an interim impairment assessment for the MyPoints reporting unit was appropriate as a result of updated projections for 2010 results of

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operations, which indicated significant expected underperformance compared to previously-forecasted results for 2010. Goodwill allocated to the MyPoints reporting unit was $49.1 million at June 30, 2010. Our interim assessment analysis did not result in any impairment charges during the second quarter of 2010 as the fair value of our MyPoints reporting unit exceeded its carrying value by approximately 20%. The estimated fair value for the MyPoints reporting unit was determined using a combination of the income approach and the market approach. The determination of whether or not goodwill is impaired involves a significant level of judgment in the assumptions underlying the approaches used to determine the estimated fair value of the MyPoints reporting unit, including judgments about appropriate discount rates and revenue growth. Our analysis included sufficient tolerance for sensitivity in key assumptions.

Financial Statement Presentation

Revenues

Services Revenues

FTD

FTD services revenues consist of fees charged to its floral network members for access to the FTD and Interflora brands and the Mercury Man logo, access to the floral networks, credit card processing services, e-commerce websites services, online advertising tools, and telephone answering, order-taking, transmission, and clearing-house services.

Classmates Media and Communications

Classmates Media services revenues consist of amounts charged to pay accounts for social networking services. Communications services revenues consist of amounts charged to pay accounts for Internet access, email, web hosting, Internet security, and other services, with substantially all of such revenues associated with Internet access. Our Classmates Media and Communications services revenues are primarily dependent on two factors: the average number of pay accounts for a period and the ARPU. In general, we charge our pay accounts in advance of providing a service, which results in the deferral of services revenue to the period in which the services are provided.

Products Revenues

Products revenues consist of merchandise revenue and related shipping and service fees, less discounts and refunds, for FTD consumer orders as well as revenues generated from sales of containers, software and hardware systems, cut flowers, packaging and promotional products, and a wide variety of other floral-related supplies to floral network members. We do not generate products revenues from our Classmates Media segment or our Communications segment.

Advertising Revenues

We provide advertising opportunities to marketers with both brand and direct response objectives through a full suite of display, search, email, and text-link opportunities across our various properties. We also offer targeting technologies, website sponsorships and website integrations.

FTD

FTD advertising revenues consist primarily of post-transaction sales that are generated when FTD consumers are presented with third-party offers immediately after completing a purchase on the www.ftd.com and www.interflora.co.uk websites.

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Classmates Media

Our online social networking services generate advertising revenues primarily from display advertisements and from post-transaction sales occurring after Classmates members have completed the pay account registration process. Advertising inventory on our social networking websites includes text and graphic placements on the user home page, profile page, class list page, and most other pages on our websites. We also sell a portion of our advertising inventory through third-party advertising resellers.

Our online loyalty marketing service revenues are derived from advertising fees, consisting primarily of fees based on performance measures, that are generated when emails are transmitted to members, when members respond to emails, when members complete online transactions, and when members engage in a variety of other activities including, but not limited to, games, Internet searches and market research surveys.

Communications

Our Communications services generate advertising revenues from search placements, display advertisements and online market research. Substantially all of our Communications advertising revenues are generated from our Internet access services. Advertising revenues also include intercompany commissions from our Classmates Media segment which are included in reported segment results and are eliminated upon consolidation.

Cost of Revenues

FTD

FTD cost of revenues includes product costs; shipping and delivery costs; costs associated with taking orders; printing and postage costs; costs related to FTD's product quality guarantee; systems installation, training and support costs; data center costs; personnel- and overhead-related costs associated with operating our networks and data centers; depreciation of network computers and equipment; license fees; costs related to providing customer support; costs related to customer billing for floral network members; fees associated with the storage and processing of customer credit cards and associated bank fees; and domain name registration fees.

Classmates Media

Classmates Media cost of revenues includes costs of points earned by members of our online loyalty marketing service; data center costs; personnel- and overhead-related costs associated with operating our networks and data centers; depreciation of network computers and equipment; license fees; costs related to providing customer support; costs related to customer billing and billing support for our pay accounts; fees associated with the storage and processing of customer credit cards and associated bank fees; and domain name registration fees.

Communications

Communications cost of revenues includes telecommunications and data center costs; personnel- and overhead-related costs associated with operating our networks and data centers; depreciation of network computers and equipment; license fees; costs related to providing customer support; costs related to customer billing and billing support for our pay accounts; fees associated with the storage and processing of customer credit cards and associated bank fees; and domain name registration fees.

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Sales and Marketing

Sales and marketing expenses include expenses associated with promoting our brands, products and services and with generating advertising revenues. Expenses associated with promoting our brands, products and services include advertising and promotion expenses; fees paid to distribution partners, third-party advertising networks and co-registration partners to acquire new pay and free accounts; personnel and overhead-related expenses for marketing, merchandising, customer service, and sales personnel; and telemarketing costs incurred to acquire and retain pay accounts and up-sell pay accounts to additional services. Expenses associated with generating advertising revenues include sales commissions and personnel-related expenses. We have expended significant amounts on sales and marketing, including branding and customer acquisition campaigns consisting of television, Internet, sponsorships, radio, print, and outdoor advertising, and on retail and other performance-based distribution relationships. 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 costs are expensed over the period the advertising runs.

Technology and Development

Technology and development expenses include expenses for product development, maintenance of existing software and technology and development of new or improved software and technology, including personnel-related expenses for our technology group in various office locations. Costs incurred by us to manage and monitor our technology and development activities are expensed as incurred. Costs relating to the acquisition and development of internal-use software are capitalized when appropriate and depreciated over their estimated useful lives, generally three years.

General and Administrative

General and administrative expenses include personnel-related expenses for executive, finance, legal, human resources, facilities, internal audit, investor relations, and internal customer support personnel. In addition, general and administrative expenses include, among other costs, professional fees for legal, accounting and financial services; insurance; occupancy and other overhead-related costs; office relocation costs; non-income taxes; and expenses incurred as a result of settlements, judgments, fines, penalties, assessments, or other resolutions related to litigation, arbitration, investigations, disputes, or similar matters, or reserves for any of the foregoing. General and administrative expenses also include expenses resulting from actual or proposed transactions such as business combinations, mergers, acquisitions, and financing transactions, including expenses for advisors and representatives such as investment bankers, consultants, attorneys, and accounting firms.

Amortization of Intangible Assets

Amortization of intangible assets principally includes amortization of: acquired pay accounts and free accounts; certain acquired trademarks and trade names; purchased software and technology; acquired customer and advertising contracts and related relationships; acquired rights, content and intellectual property; and other acquired identifiable intangible assets. In accordance with the provisions set forth in ASC 350, goodwill and indefinite-lived intangible assets are not being amortized but are 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 indicate the fair value of a reporting unit is below its carrying value.

Restructuring Charges

Restructuring charges consist of costs associated with the realignment and reorganization of our operations and generally include severance expenses and facility closure and relocation costs.

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Interest Income

Interest income consists of earnings on our cash, cash equivalents and short-term investments held from time to time, and interest on long-term receivables from FTD's technology system sales.

Interest Expense

Interest expense consists of interest expense on our credit facilities, including accretion of discounts and amortization of debt issue costs, and interest expense relating to our interest rate cap.

Other Income (Expense), Net

Other income (expense), net, generally consists of realized gains and losses recognized in connection with the sale of short-term investments, gains and losses on the sale of assets, equity earnings on investments in subsidiaries, and gains and losses on foreign currency exchange rate transactions. Additionally, other income (expense), net, consists of realized and unrealized gains and losses on foreign currency forward contracts and one-time, non-operating income and expenses.

Results of Operations

The following tables set forth, for the periods presented, selected historical statements of operations data. The information contained in the tables below should be read in conjunction with Liquidity and Capital Resources, Contractual Obligations, and Other Commitments included in this Item 2 as well as "Quantitative and Qualitative Disclosures About Market Risk" included in Part I, Item 3 of this Quarterly Report on Form 10-Q, and the unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Unaudited condensed consolidated financial information was as follows (in thousands):

			Quarter Ended September 30,						Nine Months Ended September 30,

			2010			2009			2010			2009
Revenues			$	193,541		$	216,206		$	687,952		$	740,642
Operating expenses:
	Cost of revenues			84,394			84,562			320,487			307,345
	Sales and marketing			34,783			46,146			133,926			155,584
	Technology and development			14,334			15,700			42,329			49,637
	General and administrative			26,333			28,111			84,576			88,632
	Amortization of intangible assets			8,020			9,013			24,298			26,252
	Restructuring charges			70			—			1,061			—

		Total operating expenses		167,934			183,532			606,677			627,450

Operating income				25,607			32,674			81,275			113,192
Interest income				382			498			1,259			1,184
Interest expense				(5,471	)		(7,542	)		(18,934	)		(24,547	)
Other income (expense), net				(40	)		567			95			698

Income before income taxes				20,478			26,197			63,695			90,527
Provision for income taxes				8,319			10,042			26,358			38,052

Net income			$	12,159		$	16,155		$	37,337		$	52,475

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Information for our three reportable segments was as follows (in thousands):

			FTD				Classmates Media				Communications

			Quarter Ended September 30,				Quarter Ended September 30,				Quarter Ended September 30,
			2010		2009		2010		2009		2010		2009
Revenues			$	105,046	$	107,526	$	49,105	$	58,682	$	40,165	$	50,679
Operating expenses:
	Cost of revenues			63,197		62,581		8,794		7,918		9,867		11,469
	Sales and marketing			16,451		16,731		14,371		19,016		4,201		10,745
	Technology and development			2,608		2,993		6,070		5,966		3,382		4,615
	General and administrative			10,040		9,968		8,080		8,784		6,920		8,237
	Restructuring charges			70		—		—		—		—		—

		Total operating expenses		92,366		92,273		37,315		41,684		24,370		35,066

Segment income from operations			$	12,680	$	15,253	$	11,790	$	16,998	$	15,795	$	15,613

			FTD				Classmates Media					Communications

			Nine Months Ended September 30,				Nine Months Ended September 30,					Nine Months Ended September 30,
			2010		2009		2010			2009		2010		2009
Revenues			$	414,402	$	404,729	$	148,391		$	175,310	$	127,445	$	162,804
Operating expenses:
	Cost of revenues			257,056		237,604		24,835			25,821		30,416		36,328
	Sales and marketing			71,126		67,463		47,089			57,802		16,363		31,434
	Technology and development			8,505		9,029		17,208			20,206		9,800		14,154
	General and administrative			32,261		32,241		26,506			28,205		22,234		24,303
	Restructuring charges			1,152		—		(91	)		—		—		—

		Total operating expenses		370,100		346,337		115,547			132,034		78,813		106,219

Segment income from operations			$	44,302	$	58,392	$	32,844		$	43,276	$	48,632	$	56,585

A reconciliation of segment revenues to consolidated revenues was as follows for each period presented (in thousands):

		Quarter Ended September 30,						Nine Months Ended September 30,

		2010			2009			2010			2009
Segment revenues:
	FTD	$	105,046		$	107,526		$	414,402		$	404,729
	Classmates Media		49,105			58,682			148,391			175,310
	Communications		40,165			50,679			127,445			162,804
	Intersegment eliminations		(775	)		(681	)		(2,286	)		(2,201	)

Consolidated revenues		$	193,541		$	216,206		$	687,952		$	740,642

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		Quarter Ended September 30,						Nine Months Ended September 30,

		2010			2009			2010			2009
Segment operating expenses:
	FTD	$	92,366		$	92,273		$	370,100		$	346,337
	Classmates Media		37,315			41,684			115,547			132,034
	Communications		24,370			35,066			78,813			106,219

Total segment operating expenses			154,051			169,023			564,460			584,590
	Depreciation		6,604			6,177			20,168			18,809
	Amortization of intangible assets		8,054			9,013			24,335			26,252
	Intersegment eliminations		(775	)		(681	)		(2,286	)		(2,201	)

Consolidated operating expenses		$	167,934		$	183,532		$	606,677		$	627,450

		Quarter Ended September 30,						Nine Months Ended September 30,

		2010			2009			2010			2009
Segment income from operations:
	FTD	$	12,680		$	15,253		$	44,302		$	58,392
	Classmates Media		11,790			16,998			32,844			43,276
	Communications		15,795			15,613			48,632			56,585

Total segment income from operations			40,265			47,864			125,778			158,253
	Depreciation		(6,604	)		(6,177	)		(20,168	)		(18,809	)
	Amortization of intangible assets		(8,054	)		(9,013	)		(24,335	)		(26,252	)

Consolidated operating income		$	25,607		$	32,674		$	81,275		$	113,192

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Quarter and Nine Months Ended September 30, 2010 compared to Quarter and Nine Months
Ended September 30, 2009

The following table presents our consolidated operating results as a percentage of consolidated revenues for the quarters and nine months ended September 30, 2010 and 2009.

			Quarter Ended September 30,						Nine Months Ended September 30,

			2010			2009			2010			2009
Revenues				100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses:
	Cost of revenues			43.6			39.1			46.6			41.5
	Sales and marketing			18.0			21.3			19.5			21.0
	Technology and development			7.4			7.3			6.2			6.7
	General and administrative			13.6			13.0			12.3			12.0
	Amortization of intangible assets			4.1			4.2			3.5			3.5
	Restructuring charges			—			—			0.2			—

		Total operating expenses		86.8			84.9			88.2			84.7

Operating income				13.2			15.1			11.8			15.3
Interest income				0.2			0.2			0.2			0.2
Interest expense				(2.8	)		(3.5	)		(2.8	)		(3.3	)
Other income (expense), net				—			0.3			—			0.1

Income before income taxes				10.6			12.1			9.3			12.2
Provision for income taxes				4.3			4.6			3.8			5.1

Net income				6.3	%		7.5	%		5.4	%		7.1	%

Consolidated Results

Revenues. Consolidated revenues decreased by $22.7 million, or 10%, to $193.5 million for the quarter ended September 30, 2010, compared to $216.2 million for the quarter ended September 30, 2009. The decrease was due to a $10.5 million decrease in revenues from our Communications segment, a $9.6 million decrease in revenues from our Classmates Media segment and a $2.5 million decrease in revenues from our FTD segment. Consolidated revenues related to our FTD, Classmates Media and Communications segments constituted 54.1%, 25.3% and 20.7%, respectively, of our total segment revenues for the quarter ended September 30, 2010, compared to 49.6%, 27.1% and 23.4%, respectively, for the quarter ended September 30, 2009. As a result of a number of factors, including those discussed throughout the results of operations discussion, we anticipate consolidated revenues and operating income will decrease in 2010 as compared to 2009.

Consolidated revenues decreased by $52.7 million, or 7%, to $688.0 million for the nine months ended September 30, 2010, compared to $740.6 million for the nine months ended September 30, 2009. The decrease was due to a $35.4 million decrease in revenues from our Communications segment and a $26.9 million decrease in revenues from our Classmates Media segment, partially offset by a $9.7 million increase in revenues from our FTD segment. Consolidated revenues related to our FTD, Classmates Media and Communications segments constituted 60.0%, 21.5% and 18.5%, respectively, of our total segment revenues for the nine months ended September 30, 2010, compared to 54.5%, 23.6% and 21.9%, respectively, for the nine months ended September 30, 2009.

Cost of Revenues. Consolidated cost of revenues decreased by $0.2 million, or less than 1%, to $84.4 million for the quarter ended September 30, 2010, compared to $84.6 million for the quarter ended September 30, 2009. Consolidated cost of revenues as a percentage of consolidated revenues

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increased to 43.6% for the quarter ended September 30, 2010, compared to 39.1% for the prior-year period. The decrease of $0.2 million was due to a $1.6 million decrease in cost of revenues associated with our Communications segment. The decrease was partially offset by a $0.9 million increase in cost of revenues associated with our Classmates Media segment and a $0.6 million increase in cost of revenues associated with our FTD segment. Cost of revenues related to our FTD, Classmates Media and Communications segments constituted 77.2%, 10.7% and 12.1%, respectively, of our total segment cost of revenues for the quarter ended September 30, 2010, compared to 76.3%, 9.7% and 14.0%, respectively, for the quarter ended September 30, 2009.

Consolidated cost of revenues increased by $13.1 million, or 4%, to $320.5 million for the nine months ended September 30, 2010, compared to $307.3 million for the nine months ended September 30, 2009. Consolidated cost of revenues as a percentage of consolidated revenues increased to 46.6% for the nine months ended September 30, 2010, compared to 41.5% for the prior-year period. The increase of $13.1 million was due to a $19.5 million increase in cost of revenues associated with our FTD segment and a $0.8 million increase in depreciation expense. These increases were partially offset by a $5.9 million decrease in cost of revenues associated with our Communications segment and a $1.0 million decrease associated with our Classmates Media segment. Cost of revenues related to our FTD, Classmates Media and Communications segments constituted 82.3%, 8.0% and 9.7%, respectively, of our total segment cost of revenues for the nine months ended September 30, 2010, compared to 79.3%, 8.6% and 12.1%, respectively, for the nine months ended September 30, 2009.

Sales and Marketing Expenses. Consolidated sales and marketing expenses decreased by $11.4 million, or 25%, to $34.8 million for the quarter ended September 30, 2010, compared to $46.1 million for the quarter ended September 30, 2009. Consolidated sales and marketing expenses as a percentage of consolidated revenues decreased to 18.0% for the quarter ended September 30, 2010, compared to 21.3% for the prior-year period. The decrease of $11.4 million was due to a $6.5 million decrease in sales and marketing expenses associated with our Communications segment, a $4.6 million decrease in sales and marketing expenses associated with our Classmates Media segment and a $0.3 million decrease in sales and marketing expenses associated with our FTD segment. Sales and marketing expenses related to our FTD, Classmates Media and Communications segments constituted 47.0%, 41.0% and 12.0%, respectively, of total segment sales and marketing expenses for the quarter ended September 30, 2010, compared to 36.0%, 40.9% and 23.1%, respectively, for the quarter ended September 30, 2009.

Consolidated sales and marketing expenses decreased by $21.7 million, or 14%, to $133.9 million for the nine months ended September 30, 2010, compared to $155.6 million for the nine months ended September 30, 2009. Consolidated sales and marketing expenses as a percentage of consolidated revenues decreased to 19.5% for the nine months ended September 30, 2010, compared to 21.0% for the prior-year period. The decrease of $21.7 million was due to a $15.1 million decrease in sales and marketing expenses associated with our Communications segment and a $10.7 million decrease in sales and marketing expenses associated with our Classmates Media segment. These decreases were partially offset by a $3.7 million increase in sales and marketing expenses associated with our FTD segment and a $0.3 million increase in depreciation expense. Sales and marketing expenses related to our FTD, Classmates Media and Communications segments constituted 52.9%, 35.0% and 12.2%, respectively, of total segment sales and marketing expenses for the nine months ended September 30, 2010, compared to 43.1%, 36.9% and 20.1%, respectively, for the nine months ended September 30, 2009.

Technology and Development Expenses. Consolidated technology and development expenses decreased by $1.4 million, or 9%, to $14.3 million for the quarter ended September 30, 2010, compared to $15.7 million for the quarter ended September 30, 2009. Consolidated technology and development expenses as a percentage of consolidated revenues were 7.4% for the quarter ended September 30, 2010, compared to 7.3% for the prior-year period. The decrease of $1.4 million was primarily related to a $1.2 million decrease in technology and development expenses associated with our Communications

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segment and a $0.4 million decrease in technology and development expenses associated with our FTD segment. Technology and development expenses related to our FTD, Classmates Media and Communications segments constituted 21.6%, 50.3% and 28.0%, respectively, of total segment technology and development expenses for the quarter ended September 30, 2010, compared to 22.0%, 44.0% and 34.0%, respectively, for the quarter ended September 30, 2009.

Consolidated technology and development expenses decreased by $7.3 million, or 15%, to $42.3 million for the nine months ended September 30, 2010, compared to $49.6 million for the nine months ended September 30, 2009. Consolidated technology and development expenses as a percentage of consolidated revenues decreased to 6.2% for the nine months ended September 30, 2010, compared to 6.7% for the prior-year period. The decrease of $7.3 million was primarily related to a $4.4 million decrease in technology and development expenses associated with our Communications segment, a $3.0 million decrease associated with our Classmates Media segment and a $0.5 million decrease associated with our FTD segment. These decreases were partially offset by a $0.6 million increase in depreciation expense. Technology and development expenses related to our FTD, Classmates Media and Communications segments constituted 23.9%, 48.5% and 27.6%, respectively, of total segment technology and development expenses for the nine months ended September 30, 2010, compared to 20.8%, 46.6% and 32.6%, respectively, for the nine months ended September 30, 2009.

General and Administrative Expenses. Consolidated general and administrative expenses decreased by $1.8 million, or 6%, to $26.3 million for the quarter ended September 30, 2010, compared to $28.1 million for the quarter ended September 30, 2009. Consolidated general and administrative expenses as a percentage of consolidated revenues increased to 13.6% for the quarter ended September 30, 2010, compared to 13.0% for the prior-year period. The decrease of $1.8 million was primarily due to a $1.3 million decrease associated with our Communications segment and a $0.7 million decrease associated with our Classmates Media segment. General and administrative expenses related to our FTD, Classmates Media and Communications segments constituted 40.1%, 32.3% and 27.6%, respectively, of total segment general and administrative expenses for the quarter ended September 30, 2010, compared to 36.9%, 32.5% and 30.5%, respectively, for the quarter ended September 30, 2009.

Consolidated general and administrative expenses decreased by $4.1 million, or 5%, to $84.6 million for the nine months ended September 30, 2010, compared to $88.6 million for the nine months ended September 30, 2009. Consolidated general and administrative expenses as a percentage of consolidated revenues increased to 12.3% for the nine months ended September 30, 2010, compared to 12.0% for the prior-year period. The decrease of $4.1 million was primarily due to a $2.1 million decrease in general and administrative expenses associated with our Communications segment, a $1.7 million decrease in general and administrative expenses associated with our Classmates Media segment and a $0.3 million decrease in depreciation expense. Consolidated general and administrative expenses for the nine months ended September 30, 2010 included $2.0 million of expenses incurred in the first quarter of this year in connection with a potential transaction that failed to consummate. Such expenses were allocated to the FTD, Classmates Media and Communications segments equally and are reflected in the aforementioned results. General and administrative expenses related to our FTD, Classmates Media and Communications segments constituted 39.8%, 32.7% and 27.4%, respectively, of total segment general and administrative expenses for the nine months ended September 30, 2010, compared to 38.0%, 33.3% and 28.7%, respectively, for the nine months ended September 30, 2009.

Amortization of Intangible Assets. Consolidated amortization of intangible assets decreased by $1.0 million, or 11%, to $8.0 million for the quarter ended September 30, 2010, compared to $9.0 million for the quarter ended September 30, 2009. Consolidated amortization of intangible assets decreased by $2.0 million, or 7%, to $24.3 million for the nine months ended September 30, 2010, compared to $26.3 million for the nine months ended September 30, 2009. The decreases were

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primarily due to certain intangible assets related to our acquisition of Classmates Online, Inc. and its subsidiaries in 2004 becoming fully amortized in 2009 and 2010.

Restructuring Charges. Consolidated restructuring charges were $0.1 million and $1.1 million for the quarter and nine months ended September 30, 2010, respectively. There were no restructuring charges for the quarter and nine months ended September 30, 2009. Restructuring charges for the quarter and nine months ended September 30, 2010 were primarily related to the closure of certain FTD call center facilities in the U.S. and the U.K.

Interest Income. Interest income decreased by $0.1 million, or 23%, to $0.4 million for the quarter ended September 30, 2010, compared to $0.5 million for the quarter ended September 30, 2009. Interest income increased by $0.1 million, or 6%, to $1.3 million for the nine months ended September 30, 2010, compared to $1.2 million for the nine months ended September 30, 2009.

Interest Expense. Interest expense decreased by $2.1 million, or 27%, to $5.5 million for the quarter ended September 30, 2010, compared to $7.5 million for the quarter ended September 30, 2009. Interest expense decreased by $5.6 million, or 23%, to $18.9 million for the nine months ended September 30, 2010, compared to $24.5 million for the nine months ended September 30, 2009. The decrease was primarily due to declining debt balances as a result of repayments on our credit facilities.

Other Income (Expense), Net. Other income (expense), net, was $(40,000) and $0.1 million for the quarter and nine months ended September 30, 2010, respectively, compared to $0.6 million and $0.7 million for the quarter and nine months ended September 30, 2009, respectively.

Provision for Income Taxes. For the quarter and nine months ended September 30, 2010, we recorded a provision for income taxes of $8.3 million and $26.4 million, respectively, on pre-tax income of $20.5 million and $63.7 million, respectively, resulting in a year-to-date effective income tax rate of 41.4%. For the quarter and nine months ended September 30, 2009, we recorded a provision for income taxes of $10.0 million and $38.1 million, respectively, on pre-tax income of $26.2 million and $90.5 million, respectively, resulting in a year-to-date effective income tax rate of 42.0%. The year-over-year rate has declined primarily due to the benefit from the decrease in non-deductible stock-based compensation, partially offset by an increase in the year-to-date effective income tax rate as a result of both a higher percentage of permanent differences relative to pre-tax income in the nine months ended September 30, 2010 and a year-over-year decrease in discrete benefits, compared to the nine months ended September 30, 2009.

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FTD Segment Results

The following table presents FTD segment's operating expenses and income from operations as a percentage of FTD revenues for the quarters and nine months ended September 30, 2010 and 2009.

			Quarter Ended September 30,						Nine Months Ended September 30,

			2010			2009			2010			2009
Revenues				100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses:
	Cost of revenues			60.2			58.2			62.0			58.7
	Sales and marketing			15.7			15.6			17.2			16.7
	Technology and development			2.5			2.8			2.1			2.2
	General and administrative			9.6			9.3			7.8			8.0
	Restructuring charges			0.1			—			0.3			—

		Total operating expenses		87.9			85.8			89.3			85.6

Segment income from operations				12.1	%		14.2	%		10.7	%		14.4	%

FTD Revenues. FTD revenues decreased by $2.5 million, or 2%, to $105.0 million for the quarter ended September 30, 2010, compared to $107.5 million for the quarter ended September 30, 2009. Excluding the impact of foreign currency exchange rates of $1.7 million due to a weaker British Pound versus the U.S. Dollar, revenues decreased by $0.8 million, or 1%, compared to the prior-year period, due to a $1.0 million decrease in advertising revenues generated from post-transaction sales. The decrease was partially offset by an increase in consumer order volume.

FTD revenues increased by $9.7 million, or 2%, to $414.4 million for the nine months ended September 30, 2010, compared to $404.7 million for the nine months ended September 30, 2009. Excluding the impact of foreign currency exchange rates of $0.6 million due to a stronger British Pound versus the U.S. Dollar, revenues increased by $9.0 million, or 2%, compared to the prior-year period, due to increased consumer order volume. The increase was partially offset by a decrease in advertising revenues generated from post-transaction sales.

FTD Cost of Revenues. FTD cost of revenues increased by $0.6 million, or 1%, to $63.2 million for the quarter ended September 30, 2010, compared to $62.6 million for the quarter ended September 30, 2009. Excluding the impact of foreign currency exchange rates of $1.1 million, cost of revenues increased by $1.8 million, or 3%, compared to the prior-year period, primarily as a result of an increase in consumer order volume as well as a shift in the mix of products and services sold and increased shipping costs. FTD cost of revenues as a percentage of revenues increased to 60.2% for the quarter ended September 30, 2010, compared to 58.2% for the prior-year period. Cost of revenues as a percentage of revenues was negatively impacted by an increased level of discounts on products sold to consumers, increased shipping costs, a shift in the mix of products and services sold, and a decrease in post-transaction sales, which have minimal cost of revenues.

FTD cost of revenues increased by $19.5 million, or 8%, to $257.1 million for the nine months ended September 30, 2010, compared to $237.6 million for the nine months ended September 30, 2009. Excluding the impact of foreign currency exchange rates of $0.5 million, cost of revenues increased by $18.9 million, or 8%, compared to the prior-year period, primarily as a result of an increase in consumer order volume as well a shift in the mix of products and services sold and increased shipping costs. FTD cost of revenues as a percentage of revenues increased to 62.0% for the nine months ended September 30, 2010, compared to 58.7% for the prior-year period. Cost of revenues as a percentage of revenues was negatively impacted by an increased level of discounts on products sold to consumers,

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increased shipping costs, a shift in the mix of products and services sold, and a decrease in post-transaction sales, which have minimal cost of revenues.

FTD Sales and Marketing Expenses. FTD sales and marketing expenses decreased by $0.3 million, or 2%, to $16.5 million for the quarter ended September 30, 2010, compared to $16.7 million for the quarter ended September 30, 2009. FTD sales and marketing expenses as a percentage of revenues increased slightly to 15.7% for the quarter ended September 30, 2010, compared to 15.6% for the prior-year period.

FTD sales and marketing expenses increased by $3.7 million, or 5%, to $71.1 million for the nine months ended September 30, 2010, compared to $67.5 million for the nine months ended September 30, 2009. FTD sales and marketing expenses as a percentage of revenues increased to 17.2% for the nine months ended September 30, 2010, compared to 16.7% for the prior-year period. The increase was primarily due to higher marketing expenditures related to television advertising for the Valentine's Day and Mother's Day holidays in 2010 and higher customer service costs, partially offset by a decrease in print advertising expenses.

FTD Technology and Development Expenses. FTD technology and development expenses decreased by $0.4 million, or 13%, to $2.6 million for the quarter ended September 30, 2010, compared to $3.0 million for the quarter ended September 30, 2009. FTD technology and development expenses as a percentage of revenues decreased to 2.5% for the quarter ended September 30, 2010, compared to 2.8% for the prior-year period. The decrease was primarily due to lower web hosting costs.

FTD technology and development expenses decreased by $0.5 million, or 6%, to $8.5 million for the nine months ended September 30, 2010, compared to $9.0 million for the nine months ended September 30, 2009. FTD technology and development expenses as a percentage of revenues decreased slightly to 2.1% for the nine months ended September 30, 2010, compared to 2.2% for the prior-year period. The decrease was primarily due to lower web hosting costs and lower personnel-related costs.

FTD General and Administrative Expenses. FTD general and administrative expenses remained flat at $10.0 million for the quarter ended September 30, 2010, compared to the quarter ended September 30, 2009. FTD general and administrative expenses as a percentage of revenues increased to 9.6% for the quarter ended September 30, 2010, compared to 9.3% for the prior-year period.

FTD general and administrative expenses increased by $0.1 million to $32.3 million for the nine months ended September 30, 2010, compared to $32.2 million for the nine months ended September 30, 2009. FTD general and administrative expenses as a percentage of revenues decreased to 7.8% for the nine months ended September 30, 2010, compared to 8.0% for the prior-year period. The increase in general and administrative expenses was largely attributable to expenses of $0.7 million related to a potential transaction in the first quarter of this year that failed to consummate and a $0.4 million charge, net of an insurance reimbursement, related to the resolution of the investigation of the Attorney General for New York, as well as an increase in professional fees associated with such matter. These increases were partially offset by a decrease in bad debt expense and a decrease in stock-based compensation.

FTD Restructuring Charges. FTD recorded restructuring charges of $0.1 million and $1.2 million, respectively, for the quarter and the nine months ended September 30, 2010. These charges were primarily related to the closure of certain call center facilities in the U.S. and the U.K. There were no restructuring charges for the quarter and nine months ended September 30, 2009.

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Classmates Media Segment Results

The following table presents the Classmates Media segment's operating expenses and income from operations as a percentage of Classmates Media revenues for the quarters and nine months ended September 30, 2010 and 2009.

			Quarter Ended September 30,						Nine Months Ended September 30,

			2010			2009			2010			2009
Revenues				100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses:
	Cost of revenues			17.9			13.5			16.7			14.7
	Sales and marketing			29.3			32.4			31.7			33.0
	Technology and development			12.4			10.2			11.6			11.5
	General and administrative			16.5			15.0			17.9			16.1
	Restructuring charges			—			—			(0.1	)		—

		Total operating expenses		76.0			71.0			77.9			75.3

Segment income from operations				24.0	%		29.0	%		22.1	%		24.7	%

Classmates Media Revenues. Classmates Media revenues decreased by $9.6 million, or 16%, to $49.1 million for the quarter ended September 30, 2010, compared to $58.7 million for the quarter ended September 30, 2009. The decrease was partially due to a $5.1 million decrease in services revenues. Services revenues decreased, despite a 4% increase in our average number of pay accounts from 4.7 million for the quarter ended September 30, 2009 to 4.9 million for the quarter ended September 30, 2010, as a result of a 17% decrease in ARPU from $2.71 for the quarter ended September 30, 2009 to $2.26 for the quarter ended September 30, 2010. The decrease in ARPU was primarily attributable to a greater percentage of discounted pricing plans offered primarily to certain domestic online social networking pay accounts on a promotional basis. At September 30, 2010, the number of pay accounts decreased by 187,000 when compared to June 30, 2010. We anticipate that the number of pay accounts will decline in the fourth quarter of this year by a greater amount than the decline experienced in the quarter ended September 30, 2010. We expect ARPU to increase during the fourth quarter as a large number of pay accounts on discounted pricing plans renew at full price on their anniversary dates; however, we will continue to offer various levels of discounted pricing plans and have no assurance that ARPU will increase in the future. We expect churn to increase further in the fourth quarter primarily because a larger number of pay accounts on discounted pricing plans will have subscription terms expire during the fourth quarter as compared to the third quarter. In addition, Classmates Media advertising revenues decreased by $4.5 million in the quarter ended September 30, 2010, compared to the quarter ended September 30, 2009, primarily due to a decrease in revenues generated from post-transaction sales, partially offset by an increase in revenues generated from our online loyalty marketing service.

Classmates Media revenues decreased by $26.9 million, or 15%, to $148.4 million for the nine months ended September 30, 2010, compared to $175.3 million for the nine months ended September 30, 2009. The decrease was partially due to a $14.9 million decrease in services revenues. Services revenues decreased, despite a 6% increase in our average number of pay accounts from 4.6 million for the nine months ended September 30, 2009 to 4.8 million for the nine months ended September 30, 2010, as a result of an 18% decrease in ARPU from $2.81 for the nine months ended September 30, 2009 to $2.30 for the nine months ended September 30, 2010. The decrease in ARPU was primarily attributable to a greater percentage of discounted pricing plans offered primarily to certain domestic online social networking pay accounts on a promotional basis. In addition, Classmates Media advertising revenues decreased by $12.1 million primarily due to a decrease in revenues

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generated from post-transaction sales in the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009, partially offset by an increase in revenues generated from our online loyalty marketing services.

Classmates Media Cost of Revenues. Classmates Media cost of revenues increased by $0.9 million, or 11%, to $8.8 million for the quarter ended September 30, 2010, compared to $7.9 million for the quarter ended September 30, 2009. Classmates Media cost of revenues as a percentage of Classmates Media revenues increased to 17.9% for the quarter ended September 30, 2010, compared to 13.5% for the prior-year period. The increase of $0.9 million was primarily due to a $0.7 million increase in overhead-related costs and a $0.5 million increase in the cost of points earned by members of our online loyalty marketing service, partially offset by a decrease in credit card processing fees. The increase in cost of revenues as a percentage of Classmates Media revenues was primarily due to the absence of revenues from post-transaction sales, which have minimal costs of revenues.

Classmates Media cost of revenues decreased by $1.0 million, or 4% to $24.8 million for the nine months ended September 30, 2010, compared to $25.8 million for the nine months ended September 30, 2009. Classmates Media cost of revenues as a percentage of Classmates Media revenues increased to 16.7% for the nine months ended September 30, 2010, compared to 14.7% for the prior-year period. The decrease of $1.0 million was primarily due to a $1.4 million decrease in credit card processing fees, partially offset by a $0.3 million increase in overhead-related costs and a $0.3 million increase in the cost of points earned by members of our online loyalty marketing service. The increase in cost of revenues as a percentage of Classmates Media revenues was primarily due to significantly lower revenues from post-transaction sales, which have minimal costs of revenues.

Classmates Media Sales and Marketing Expenses. Classmates Media sales and marketing expenses decreased by $4.6 million, or 24%, to $14.4 million for the quarter ended September 30, 2010, compared to $19.0 million for the quarter ended September 30, 2009. Classmates Media sales and marketing expenses as a percentage of Classmates Media revenues decreased to 29.3% for the quarter ended September 30, 2010, compared to 32.4% for the prior-year period. The decrease of $4.6 million was largely the result of a $3.8 million decrease in marketing costs to acquire new online social networking members and a $0.7 million decrease in personnel- and overhead-related costs as a result of reduced headcount.

Classmates Media sales and marketing expenses decreased by $10.7 million, or 19%, to $47.1 million for the nine months ended September 30, 2010, compared to $57.8 million for the nine months ended September 30, 2009. Classmates Media sales and marketing expenses as a percentage of Classmates Media revenues decreased to 31.7% for the nine months ended September 30, 2010, compared to 33.0% for the prior-year period. The decrease of $10.7 million was largely the result of a $9.7 million decrease in marketing costs to acquire new online social networking members and a $2.5 million decrease in personnel- and overhead-related costs as a result of reduced headcount, partially offset by a $1.5 million increase in costs to acquire new online loyalty marketing members.

Classmates Media Technology and Development Expenses. Classmates Media technology and development expenses increased by $0.1 million, or 2%, to $6.1 million for the quarter ended September 30, 2010, compared to $6.0 million for the quarter ended September 30, 2009. Classmates Media technology and development expenses as a percentage of Classmates Media revenues increased to 12.4% for the quarter ended September 30, 2010, compared to 10.2% for the prior-year period.

Classmates Media technology and development expenses decreased by $3.0 million, or 15%, to $17.2 million for the nine months ended September 30, 2010, compared to $20.2 million for the nine months ended September 30, 2009. Classmates Media technology and development expenses as a percentage of Classmates Media revenues increased slightly to 11.6% for the nine months ended September 30, 2010, compared to 11.5% for the prior-year period. The $3.0 million decrease was

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primarily due to a $3.3 million decrease in personnel- and overhead-related costs as a result of reduced headcount.

Classmates Media General and Administrative Expenses. Classmates Media general and administrative expenses decreased by $0.7 million, or 8%, to $8.1 million for the quarter ended September 30, 2010, compared to $8.8 million for the quarter ended September 30, 2009. Classmates Media general and administrative expenses as a percentage of Classmates Media revenues increased to 16.5% for the quarter ended September 30, 2010, compared to 15.0% for the prior-year period. The decrease of $0.7 million was primarily due to a $0.4 million insurance reimbursement related to the resolution of the investigation of the Attorney General for New York and a $0.3 million favorable non-income tax settlement.

Classmates Media general and administrative expenses decreased by $1.7 million, or 6%, to $26.5 million for the nine months ended September 30, 2010, compared to $28.2 million for the nine months ended September 30, 2009. Classmates Media general and administrative expenses as a percentage of Classmates Media revenues increased to 17.9% for the nine months ended September 30, 2010, compared to 16.1% for the prior-year period. The decrease of $1.7 million was primarily due to a $4.2 million decrease in personnel- and overhead-related costs and a $0.3 million favorable non-income tax settlement in the third quarter of this year. These decreases were partially offset by a $1.0 million increase in professional services and consulting fees, $0.7 million of expenses related to a potential transaction in the first quarter of the year that failed to consummate, a $0.6 million charge, net of insurance reimbursement, related to the resolution of the investigation of the Attorney General for New York, and a $0.4 million increase in a reserve for a pending legal settlement.

Communications Segment Results

The following table presents the Communications segment's operating expenses and income from operations as a percentage of Communications revenues for the quarters and nine months ended September 30, 2010 and 2009.

			Quarter Ended September 30,						Nine Months Ended September 30,

			2010			2009			2010			2009
Revenues				100.0	%		100.0	%		100.0	%		100.0	%
Operating expenses:
	Cost of revenues			24.6			22.6			23.9			22.3
	Sales and marketing			10.5			21.2			12.8			19.3
	Technology and development			8.4			9.1			7.7			8.7
	General and administrative			17.2			16.3			17.4			14.9

		Total operating expenses		60.7			69.2			61.8			65.2

Segment income from operations				39.3	%		30.8	%		38.2	%		34.8	%

Communications Revenues. Communications revenues decreased by $10.5 million, or 21%, to $40.2 million for the quarter ended September 30, 2010, compared to $50.7 million for the quarter ended September 30, 2009. The decrease was primarily due to a $9.2 million decrease in services revenues as a result of a 29% decrease in our average number of dial-up Internet access pay accounts from 1.1 million for the quarter ended September 30, 2009 to 0.8 million for the quarter ended September 30, 2010, partially offset by an increase in ARPU from $9.43 for the quarter ended September 30, 2009 to $9.58 for the quarter ended September 30, 2010. The decrease in Communications revenues was also due to a $1.4 million decrease in advertising revenues resulting from the decrease in pay accounts and a decrease in search revenues following our transition to a new

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search provider in the first quarter of this year. We expect that Communications pay accounts and services revenues will continue to decline.

Communications revenues decreased by $35.4 million, or 22%, to $127.4 million for the nine months ended September 30, 2010, compared to $162.8 million for the nine months ended September 30, 2009. The decrease was primarily due to a $30.6 million decrease in services revenues as a result of a 28% decrease in our average number of dial-up Internet access pay accounts from 1.2 million for the nine months ended September 30, 2009 to 0.9 million for the nine months ended September 30, 2010, partially offset by an increase in ARPU from $9.50 for the nine months ended September 30, 2009 to $9.55 for the nine months ended September 30, 2010. The decrease in Communications revenues was also due to a $4.8 million decrease in advertising revenues resulting from the decrease in pay accounts and a decrease in search revenues following our transition to a new search provider in the first quarter of this year.

Communications Cost of Revenues. Communications cost of revenues decreased by $1.6 million, or 14%, to $9.9 million for the quarter ended September 30, 2010, compared to $11.5 million for the quarter ended September 30, 2009. Communications cost of revenues as a percentage of Communications revenues increased to 24.6% for the quarter ended September 30, 2010, compared to 22.6% for the prior-year period due to a higher percentage of revenues being generated from our broadband services which have higher costs of revenues than our dial-up services. The decrease of $1.6 million was primarily related to a $0.8 million decrease in customer support and billing-related costs. In addition, Communications cost of revenues decreased as a result of a $0.4 million decrease in telecommunications costs associated with our dial-up Internet access services primarily due to a decrease in the number of dial-up Internet access pay accounts and a decrease in hourly usage per pay account and a $0.3 million decrease in costs associated with our broadband services. We expect cost of revenues as a percentage of revenues to continue to increase as revenues continue to decrease.

Communications cost of revenues decreased by $5.9 million, or 16%, to $30.4 million for the nine months ended September 30, 2010, compared to $36.3 million for the nine months ended September 30, 2009. Communications cost of revenues as a percentage of Communications revenues increased to 23.9% for the nine months ended September 30, 2010, compared to 22.3% for the prior-year period due to a higher percentage of revenues being generated from our broadband services which have higher costs of revenues than our dial-up services. The decrease of $5.9 million was primarily due to a $2.4 million decrease in customer support and billing-related costs due to a decrease in the number of dial-up Internet access pay accounts and a $1.7 million decrease in telecommunications costs associated with our dial-up Internet access services primarily due to a decrease in the number of dial-up Internet access pay accounts and a decrease in hourly usage per pay account. In addition, Communications cost of revenues decreased as a result of a $1.0 million decrease in personnel-related costs as a result of reduced headcount and a $0.6 million decrease in costs associated with our broadband services.

Communications Sales and Marketing Expenses. Communications sales and marketing expenses decreased by $6.5 million, or 61%, to $4.2 million for the quarter ended September 30, 2010, compared to $10.7 million for the quarter ended September 30, 2009. Communications sales and marketing expenses as a percentage of Communications revenues decreased to 10.5% for the quarter ended September 30, 2010, compared to 21.2% for the prior-year period. The decrease in expenses reflects the Company's decision to reduce sales and marketing expenses. The decrease of $6.5 million was primarily attributable to a $3.5 million decline in advertising and promotion costs related to our dial-up Internet access services, a $1.7 million decrease in distribution costs, a $0.5 million decrease in customer service costs related to our dial-up Internet access services, a $0.5 million decrease in personnel- and overhead-related costs as a result of reduced headcount, and a $0.4 million decrease in advertising and promotion costs related to our broadband services.

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Communications sales and marketing expenses decreased by $15.1 million, or 48%, to $16.4 million for the nine months ended September 30, 2010, compared to $31.4 million for the nine months ended September 30, 2009. Communications sales and marketing expenses as a percentage of Communications revenues decreased to 12.8% for the nine months ended September 30, 2010, compared to 19.3% for the prior-year period. The decrease in expenses reflects the Company's decision to reduce sales and marketing expenses. The decrease of $15.1 million was primarily attributable to a $7.8 million decline in advertising and promotion costs related to our dial-up Internet access services, a $4.2 million decrease in distribution costs, a $1.7 million decrease in customer service costs related to our dial-up Internet access services, and a $1.2 million decrease in personnel- and overhead-related expenses as a result of reduced headcount.

Communications Technology and Development Expenses. Communications technology and development expenses decreased by $1.2 million, or 27%, to $3.4 million for the quarter ended September 30, 2010, compared to $4.6 million for the quarter ended September 30, 2009. Communications technology and development expenses as a percentage of Communications revenues decreased to 8.4% for the quarter ended September 30, 2010, compared to 9.1% for the prior-year period. The decrease in expenses was the result of a decrease in personnel- and overhead-related costs as a result of reduced headcount.

Communications technology and development expenses decreased by $4.4 million, or 31%, to $9.8 million for the nine months ended September 30, 2010, compared to $14.2 million for the nine months ended September 30, 2009. Communications technology and development expenses as a percentage of Communications revenues decreased to 7.7% for the nine months ended September 30, 2010, compared to 8.7% for the prior-year period. The decrease of $4.4 million was the result of a decrease in personnel- and overhead-related expenses as a result of reduced headcount.

Communications General and Administrative Expenses. Communications general and administrative expenses decreased by $1.3 million, or 16%, to $6.9 million for the quarter ended September 30, 2010, compared to $8.2 million for the quarter ended September 30, 2009. Communications general and administrative expenses as a percentage of Communications revenues increased to 17.2% for the quarter ended September 30, 2010, compared to 16.3% for the prior-year period. The decrease of $1.3 million was primarily due to a $1.0 million decrease in personnel- and overhead-related costs as a result of reduced headcount and a $0.2 million decrease in bad debt expense. The increase as a percentage of revenues was largely attributable to continued declines in revenues due to continuing declines in the number of dial-up Internet access pay accounts.

Communications general and administrative expenses decreased by $2.1 million, or 9%, to $22.2 million for the nine months ended September 30, 2010, compared to $24.3 million for the nine months ended September 30, 2009. Communications general and administrative expenses as a percentage of Communications revenues increased to 17.4% for the nine months ended September 30, 2010, compared to 14.9% for the prior-year period. The decrease of $2.1 million was due a $2.0 million decrease in personnel- and overhead-related costs as a result of reduced headcount and a $0.8 million decrease in professional services and consulting fees. The decrease was partially offset by $0.7 million of expenses related to a potential transaction in the first quarter of 2010 that failed to consummate. The increase as a percentage of revenues was largely attributable to continued declines in revenues due to continuing declines in the number of dial-up Internet access pay accounts.

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Liquidity and Capital Resources

On August 26, 2008, we completed the acquisition of 100% of the capital stock of FTD Group, Inc. The FTD acquisition was funded, in part, with the net proceeds from (i) a $60 million senior secured credit agreement with Silicon Valley Bank (the "UOL Credit Agreement") and (ii) $375 million of term loan borrowings under senior secured credit facilities with Wells Fargo Bank, National Association, as Administrative Agent (the "FTD Credit Agreement"). In connection with the FTD Credit Agreement, FTD Group, Inc. received a $50 million revolving line of credit. In April 2010, we paid $14.7 million to retire our credit facility with Silicon Valley Bank.

Our total cash and cash equivalent balances decreased by $25.8 million, or 22.4%, to $89.7 million at September 30, 2010, compared to $115.5 million at December 31, 2009. Our summary cash flows for the nine months ended September 30, 2010 and 2009 were as follows (in thousands):

	Nine Months Ended September 30,

	2010			2009
Net cash provided by operating activities	$	95,421		$	104,275
Net cash used for investing activities	$	(21,050	)	$	(17,176	)
Net cash used for financing activities	$	(98,440	)	$	(72,146	)

Nine Months Ended September 30, 2010 compared to Nine Months Ended September 30, 2009

Net cash provided by operating activities decreased by $8.9 million, or 9%, for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. Net cash provided by operating activities is driven by our net income adjusted for changes in working capital and non-cash items, including, but not limited to, depreciation and amortization, stock-based compensation, impairment of goodwill, intangible assets and long-lived assets, deferred taxes, and tax benefits (shortfalls) from equity awards. Net income, adjusted for non-cash items, decreased by $23.3 million to $105.1 million for the nine months ended September 30, 2010, compared to the prior-year period. The decrease was offset by a $14.5 million increase in the change in working capital for the nine months ended September 30, 2010, compared to the prior-year period. Changes in working capital can cause variation in our cash flows provided by operating activities from quarter to quarter due to seasonality, timing and other factors.

Net cash used for investing activities increased by $3.9 million, or 23%, for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. The increase was due to $2.2 million in purchases of rights, content and intellectual property related to acquiring and developing new features for our domestic social networking business and a $1.9 million increase in capital expenditures. We currently anticipate expending between $6 million to $8 million on purchases of rights, content and intellectual property in 2010, primarily for the purpose of acquiring and developing such new features.

Capital expenditures for the nine months ended September 30, 2010 were $19.1 million. We currently anticipate that our total capital expenditures for 2010 will be in the range of $30 million to $32 million. The actual amount of future capital expenditures may fluctuate due to a number of factors including, without limitation, potential future acquisitions and new business initiatives, which are difficult to predict and which could change significantly over time. Additionally, 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 $26.3 million, or 36%, for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. The increase in net cash used for financing activities was primarily due to an increase in common stock repurchases of

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$13.9 million, including $11.0 million under our common stock repurchase program, in the quarter ended September 30, 2010, an increase in payments on term loans of $11.9 million and an increase in the payment of dividends and dividend equivalents of $0.7 million for the nine months ended September 30, 2010, compared to the prior-year period.

The payment of dividends and dividend equivalents is a cash outflow from financing activities. In February, April and July 2010, United Online, Inc.'s Board of Directors declared quarterly cash dividends of $0.10 per share of common stock. The dividends were paid on February 26, 2010, May 28, 2010 and August 31, 2010, respectively, and totaled $9.1 million, $9.4 million and $9.3 million, respectively, including dividend equivalents paid on outstanding restricted stock units. In October 2010, United Online, Inc.'s Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock. The record date for the dividend is November 12, 2010 and the dividend will be paid on November 30, 2010. The payment of future dividends is discretionary and is subject to determination by United Online, Inc.'s Board of Directors each quarter following its review of our financial performance and other factors. In accordance with the terms of the FTD Credit Agreement, cash flows at FTD will, in general, not be available to United Online, Inc. or our segments other than the FTD segment.

Future cash flows from financing activities may also be affected by our repurchases of our common stock. United Online, Inc.'s Board of Directors authorized a common stock repurchase program (the "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 through December 31, 2010. From August 2001 through September 30, 2010, we repurchased a total of $150.2 million of our common stock under the Program and at September 30, 2010, the remaining amount available under the Program was $49.8 million.

Cash flows from financing activities may also be negatively impacted by the withholding of a portion of shares underlying the restricted stock units and stock awards we award to employees. We currently do not collect the applicable required employee withholding taxes from employees upon vesting of restricted stock units and upon the issuance of stock awards. Instead, we automatically withhold, from the restricted stock units that vest and the stock awards that are issued, the portion of those shares with a fair market value equal to the amount of the required employee withholding taxes due. We then pay the applicable withholding taxes in cash. The withholding of these shares, although accounted for as a common stock repurchase, does not reduce the amount available under the Program. Similar to repurchases of common stock under the Program, the net effect of such withholding will adversely impact our cash flows from financing activities. The amounts remitted in the nine months ended September 30, 2010 and 2009 were $8.2 million and $5.2 million, respectively, for which we withheld 1.4 million shares and 0.9 million shares of common stock, respectively, that were underlying the restricted stock units which vested and stock awards that were issued. The amount we pay in future quarters will vary based on our stock price and the number of restricted stock units vesting and stock awards being issued during the quarter.

Based on our current projections, we expect to continue to generate positive cash flows from operations, at least in the next twelve months. We may use our existing cash balances and future cash generated from operations to fund, among other things, both contractual payments and optional prepayments on the outstanding balances under the FTD Credit Agreement; dividend payments, if declared by United Online, Inc.'s Board of Directors; the development and/or acquisition of other services, businesses or technologies; the repurchase of our common stock underlying restricted stock units and stock awards to pay the required employee withholding taxes due on vested restricted stock units and stock awards issued; the repurchase of our common stock under the Program; future capital expenditures and future acquisitions of intangible assets, including rights, content and intellectual property.

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Under the terms of the FTD Credit Agreement, there are significant limitations on our ability to use cash flows generated by the FTD segment for the benefit of United Online, Inc. or the Communications and Classmates Media segments. The FTD Credit Agreement also includes provisions which may require us to make debt prepayments in the event that we generate excess cash flow, as defined in the FTD Credit Agreement, on an annual basis. The assessments of future excess cash flow for FTD, on a standalone basis, require us to forecast its respective cash flows from operations less certain cash outflows, including, but not limited to, those related to capital expenditures and income taxes. The determination of excess cash flow obligations requires us to make significant estimates regarding our cash flows from operations, capital expenditures, income taxes, and other items. Actual results could differ from our current projections and we could be required to pay materially different amounts under the excess cash flow provisions of the FTD Credit Agreement. The degree to which our assets are leveraged and the terms of our debt could materially and adversely affect our ability to obtain additional capital as well as the terms at which such capital might be offered to us. With respect to the UOL Credit Agreement, in April 2010, we paid $14.7 million to retire such credit facility. We currently expect to have sufficient liquidity to fulfill our debt service obligations, at least in the next twelve months.

If we need to raise additional capital through public or private debt or equity financings, strategic relationships or other arrangements, this capital 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 severely constrain or prevent us from, among other factors, developing new or enhancing existing services or products, repurchasing our common stock, acquiring other services, businesses or technologies or funding significant capital expenditures and/or purchases of intangible assets, and have a material adverse effect on our business, financial position, results of operations, and cash flows as well as impair our ability to pay future dividends and our ability to service our debt obligations. If additional funds were raised through the issuance of equity or convertible debt securities, the percentage of stock owned by the then-current stockholders could be reduced. Furthermore, such equity or any debt securities that we issue might have rights, preferences or privileges senior to holders of our common stock. In addition, trends in the securities and credit markets may restrict our ability to raise any such additional funds, at least in the near term.

Contractual Obligations

Contractual obligations at September 30, 2010 were as follows (in thousands):

		Total		Less than 1 Year		1 Year to Less than 3 Years		3 Years to Less than 5 Years		More than 5 Years

Debt, including interest		$	360,783	$	23,615	$	96,807	$	240,361	$	—
Member redemption liability			24,074		19,278		4,796		—		—
Operating leases			42,147		12,350		15,342		8,854		5,601
Services and promotional contracts			5,420		3,986		1,434		—		—
Telecommunications purchases			10,883		5,837		5,046		—		—
Media purchases			48		48		—		—		—
Floral-related purchases			5,578		4,828		750		—		—
Other long-term liabilities			2,903		1,977		263		253		410

	Total	$	451,836	$	71,919	$	124,438	$	249,468	$	6,011

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Commitments under letters of credit at September 30, 2010 were scheduled to expire as follows (in thousands):

Letters of credit are maintained pursuant to certain of our lease arrangements. The letters of credit remain in effect at declining levels through the terms of the related leases. In addition, standby letters of credit are maintained by FTD to secure credit card processing activity.

In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, business partners, and other parties with respect to certain matters, including, but not limited to, losses arising out of our breach of such agreements, services to be provided by us, or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with our directors and certain of our officers and employees that will require us, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors, officers or employees. We have also agreed to indemnify certain former officers, directors and employees of acquired companies in connection with the acquisition of such companies. We maintain director and officer insurance, which may cover certain liabilities arising from our obligation to indemnify our directors and certain of our officers and employees, and former officers, directors and employees of acquired companies, in certain circumstances.

It is not possible to determine the maximum potential amount of exposure under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Such indemnification agreements may not be subject to maximum loss clauses.

At September 30, 2010, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.

Credit Quality of Financing Receivables and the Allowance for Credit Losses—In July 2010, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, as codified in Accounting Standards Codification ("ASC") 310. This update enhances the disclosures about the credit quality of financing receivables and the allowance for credit losses, including required disclosures related to credit quality indicators, past due information and modifications of financing receivables. This update will be effective in the quarter ending December 31, 2010 and will affect the disclosures in our Annual Report on Form 10-K for the year ending December 31, 2010.

We are exposed to certain market risks arising from transactions in the normal course of business, principally risk associated with interest rate and foreign currency exchange rate fluctuations.

We are exposed to interest rate risk on our cash, cash equivalents, and the outstanding balance of the FTD Credit Agreement. The interest rate set forth in the FTD Credit Agreement for loans made under the revolving credit facility and term loan A facility is either LIBOR plus 3.50% per annum (with a LIBOR floor of 3.00%) or the prime rate plus 2.50% per annum, in each case, with step-downs in the interest rate depending on FTD's leverage ratio. The interest rate set forth in the FTD Credit Agreement for loans made under the term loan B facility is either LIBOR plus 4.50% per annum (with a LIBOR floor of 3.00%) or the prime rate plus 3.50% per annum, in each case, with step-downs in the interest rate depending on FTD's leverage ratio. The FTD Credit Agreement also requires that FTD Group, Inc. maintain one or more interest rate swap agreements, interest rate cap agreements, interest rate collar agreements, or other similar arrangements to manage risks associated with interest rate fluctuations and exposures on its credit facilities with Wells Fargo Bank, National Association. Accordingly, in November 2008, FTD Group, Inc. entered into a three-year interest rate cap instrument based on LIBOR and a $150 million notional amount of our FTD Credit Agreement. At inception and at December 31, 2008, the interest rate cap instrument was designated as a cash flow hedge against expected future cash flows attributable to future LIBOR interest payments on the outstanding borrowings under the FTD Credit Agreement. However, in January 2009, as economic and capital market conditions continued to deteriorate, we determined that prime rate-based borrowings were more attractive than LIBOR-based borrowings. Therefore, in January 2009, the cash flow hedge was, and continues to be, de-designated and accordingly does not currently qualify for hedge accounting treatment. As a result, subsequent fluctuations in the market value of the interest rate cap are recorded in our results of operations. For the nine months ended September 30, 2010, the amount recorded in our results of operations was immaterial. A 100 basis point increase in interest rates would result in an estimated annual increase in our interest expense related to the outstanding debt under the FTD Credit Agreement of approximately $2.7 million.

While we do not currently maintain any short-term investments, we still maintain deposits which are classified as cash equivalents. Therefore, our interest income is sensitive to changes in the general level of U.S. and certain foreign interest rates.

We transact business in foreign currencies and are exposed to risk resulting from fluctuations in foreign currency exchange rates, particularly the British Pound ("GBP") and the Euro ("EUR") and, to a much lesser extent, the Indian Rupee ("INR") and the Canadian Dollar ("CAD"), which may result in gains or losses reported in our results of operations. The volatilities in GBP, EUR, INR, and CAD (and all other applicable foreign currencies) are monitored by us throughout the year. We face two risks related to foreign currency exchange rates—translation risk and transaction risk. Amounts invested in our foreign operations are translated into U.S. Dollars using period-end exchange rates. The resulting translation adjustments are recorded as a component of accumulated other comprehensive income (loss) in stockholders' equity. Revenues and expenses in foreign currencies translate into higher or lower revenues and expenses in U.S. Dollars as the U.S. Dollar weakens or strengthens against other currencies. Substantially all of the revenues of our foreign subsidiaries are received, and substantially all expenses are incurred, in currencies other than the U.S. Dollar, which increases or decreases the related U.S. Dollar-reported revenues and expenses depending on the trend in currencies. Therefore, changes in foreign currency exchange rates may negatively affect our consolidated revenues and net income. A 1% adverse change in overall foreign currency exchange rates over an entire year would not

have a material impact on estimated annual revenues and estimated annual income before income taxes. These estimates assume an adverse shift in all foreign currency exchange rates against the U.S. Dollar, which do not always move in the same direction or in the same degrees, and actual results may differ materially. Net foreign currency transaction gains or losses arising from transactions denominated in currencies other than the local functional currency are included in other income (expense), net in the unaudited condensed consolidated statements of operations.

In the second quarter of 2009, we entered into foreign currency forward contracts to partially offset the economic effect of fluctuations in the U.S. Dollar against the GBP. These derivatives were intended to minimize the foreign currency exchange rate impact of intercompany dividend payments in British Pounds. Changes in the fair value of these derivatives were recognized in earnings in the period of change. We may in the future also use other hedging programs, including derivative financial instruments commonly utilized, if it is determined that such hedging activities are appropriate to reduce risk. At September 30, 2010, we had no foreign currency forward contracts outstanding.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing, and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

In April 2001 and in May 2001, lawsuits were filed in the United States District Court for the Southern District of New York against NetZero, Inc. ("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. A consolidated amended complaint was filed in April 2002. 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. The case against NetZero was coordinated 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 parties in the approximately 300 coordinated class actions, including NetZero, the underwriter defendants in the NetZero class action, and the plaintiff class in the NetZero action, have reached an agreement in principle under which the insurers for the issuer defendants in the coordinated cases will make a settlement payment on behalf of the issuers, including NetZero. On October 5, 2009, the district court issued an order granting final approval of the settlement and certifying the settlement class. Certain individuals have appealed the October 5, 2009 order and one objector has filed a brief in support of his appeal of the judgment approving the settlement. The schedule for filing an opposition to the appeal has not yet been determined.

In 2009, a committee of the United States Senate commenced an investigation of post-transaction sales practices and the companies that have engaged in such practices. As part of such investigation, we received a request for information from the committee and have cooperated with, and responded to, such request. In addition, Classmates Online, Inc. received a civil investigative demand from the Attorney General for the State of Washington, and Classmates Online, Inc. and FTD, Inc. received subpoenas from the Attorney General for the State of New York, regarding their respective investigations into such practices and the companies that have engaged in them, including these subsidiaries. We have been cooperating with the investigations and in August 2010, each of Classmates Online, Inc. and FTD, Inc. entered into an Assurance of Discontinuance with the Attorney General for the State of New York to resolve its investigation. As part of such resolution, Classmates Online, Inc. and FTD, Inc. paid $960,000 and $640,000, respectively, to a fund that will pay for consumer education, refunds and the costs of the investigation of the Attorney General for the State of New York. FTD.com Inc. and Classmates Online, Inc. have also received subpoenas from the Attorney General for the State of Kansas and the Attorney General for the State of Maryland, respectively. These subpoenas were issued on behalf of a Multistate Work Group that consists of the Attorneys General for the following states: Delaware, Florida, Idaho, Illinois, Kansas, Maine, Maryland, Michigan, New Mexico, New Jersey, North Dakota, Ohio, Oregon, Pennsylvania, Texas, and Vermont. Based on the subpoenas, we believe the primary focus of the inquiries concerns certain post-transaction sales practices in which these subsidiaries previously engaged with certain third-party vendors. In addition, Classmates Online, Inc. has received a subpoena from the Attorney General for the District of Columbia regarding its marketing, billing, and renewal practices, including, without limitation, its post-transaction sales practices. We are cooperating with these investigations. However, we cannot predict the outcome of these or any other governmental investigations or other legal actions or their potential implications for our business. There are no assurances that additional governmental investigations or other legal actions will not be instituted in connection with our former post-transaction sales practices or other current or former business practices.

We are subject to various legal proceedings, investigations, claims, and litigation that can involve complex questions of fact and law and may require the expenditure of significant funds and the diversion of other resources to defend. There can be no assurance, however, that such legal proceedings, investigations, claims, and litigation, which are inherently uncertain, will not materially and adversely affect our business, financial condition, results of operations, or cash flows. At September 30, 2010, we had a reserve of $2.3 million for a pending legal settlement.

The risk factors set forth below are substantially the same as those included in our Annual Report on Form 10-K for the year ended December 31, 2009, as updated in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, with the exception of (i) under "Risks Relating to our Business Generally," the addition of a risk factor regarding new business initiatives, products, services, or features, and (ii) under "Risks Relating to our Classmates Media Segment," modifications made to the risk factor regarding declines in the number of pay accounts.

Current or future economic conditions may have a material and adverse impact on our business, financial condition, results of operations, and cash flows.

Economic conditions in the U.S. and the European Union have been depressed and may remain depressed for the foreseeable future. Our products and services are discretionary and dependent upon levels of consumer spending. Consumer spending patterns are difficult to predict and are sensitive to, among other factors, the general economic climate, the consumers' level of disposable income, consumer debt, and overall consumer confidence. The current economic conditions have adversely impacted certain aspects of our businesses in a number of ways including reduced demand, more aggressive pricing for similar products and services by our competitors, decreased spending by advertisers, increased credit risks, increased credit card failures, a loss of customers, and increased use of discounted pricing plans for certain of our products and services. It is likely that these and other factors will continue to adversely impact our businesses, at least in the near term. The current economic conditions may adversely impact our key vendors. The depressed economic conditions and decreased consumer spending have, in certain cases, resulted in, and may in the future result in, a variety of negative effects such as a reduction in revenues, increased costs, lower gross margin and operating margin percentages, increased allowances for doubtful accounts and write-offs of accounts receivable, and recognition of impairments of assets, including goodwill and other intangible and long-lived assets. Any of the above factors could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our results of operations and changes in our key business metrics from period to period have varied in the past and may fluctuate significantly in the future due to a variety of factors, many of which are outside of our control and difficult to predict. Each of the risk factors discussed in this Item 1A and the other factors described elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the SEC may affect us from period to period and may affect our long-term performance. As a result, you should not rely on period-to-period comparisons as an indication of our future performance. In addition, these factors and the depressed economic conditions create difficulties with respect to our ability to forecast our financial performance and business 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 business metrics. We cannot assure you that we will achieve the expectations of, or projections made by, our management or the financial

analysts. In the event we do not achieve such expectations or projections, our financial results and the price of our common stock could be adversely affected.

New business initiatives, products, services, or features, such as those related to our planned transition of the Classmates.com business, may not be successful, which could adversely impact our key metrics and financial results.

We have expended, and will continue to expend, significant resources in developing and implementing new business initiatives, products, services and features, such as those related to our planned transition of Classmates.com to become a premier provider of nostalgic content on the Internet offering new products, services, and features in addition to the social networking services currently being offered. Such development and implementation involves a number of uncertainties, including unanticipated delays and expenses and technological problems. The new business initiatives, products, services, and features also may not be accepted by users or commercially successful. We cannot assure you that we will be successful in such development and implementation efforts, including the planned transition of the Classmates.com website, or that any new business initiatives, products, services, or features will be accepted by users or commercially successful. If our development and implementation efforts are not successful, or such new initiatives, products, services, or features are not accepted by users or commercially successful, our key metrics and financial results could be materially and adversely impacted.

We may be unable to maintain or grow our advertising revenues. Reduced advertising revenues may reduce our profits.

Advertising revenues are a key component of our revenues and profitability. Factors that have caused, or may cause in the future, our advertising revenues to fluctuate include, without limitation, the effect of, changes to, or terminations of key advertising relationships, changes in applicable laws, regulations or business practices, changes in the online advertising market, changes in the economy, advertisers' budgeting and buying patterns, competition, changes in the number of consumers purchasing our products and services, changes in our business models, changes in our advertising inventory, and changes in usage of our services. Decreases in our advertising revenues are likely to adversely impact our profitability.

Our advertising revenues have in the past declined, and may in the future decline, when compared to prior periods. For 2010, we expect that our advertising revenues will decrease as compared to 2009. We anticipate advertising revenues generated by our Communications segment to continue to decline primarily as a result of the decrease in our dial-up Internet access pay accounts. In addition, our Communications segment has derived significant advertising revenues from search, and we recently changed Internet search providers. Changes to the terms of our search agreement or the inability of the new search provider's service to monetize as well as the prior service, could have a material adverse effect on our Communications segment's advertising revenues. Also, all of our revenues from our online loyalty marketing service are derived from advertising, and we have experienced from time to time, and may continue to experience, significant declines in revenues from this service. In addition, prior to 2010, our Classmates Media and FTD segments have collectively derived significant advertising revenues from domestic post-transaction sales agreements. Post-transaction sales involve the online presentation of a third-party offer immediately following the point where a consumer has purchased our subscription services or floral products, as applicable. In January 2010, we terminated our then-existing domestic post-transaction sales agreements. As discussed in greater detail in the risk factor related to changes in laws and regulations, certain governmental agencies have been investigating post-transaction sales practices and the companies that have engaged in such practices, including us. Although we expect to continue to offer our members and customers services or products at the end of our registration or sale processes, including third-party offers as well as our own offers, there are no assurances that any post-transaction offers will be well received by our members or customers. We

anticipate that the revenues generated from post-transaction sales will be significantly less than the post-transaction sales revenues generated in 2009. Any or all of the above factors have caused, and could continue to cause, our advertising revenues and profits to significantly decline in the future.

Changes in exchange rates could adversely affect comparisons of our operating results.

We transact business in different foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates, including the British Pound, the Euro, the Indian Rupee, and the Canadian Dollar. Revenues and expenses in foreign currencies translate into higher or lower revenues and expenses in U.S. Dollars as the U.S. Dollar weakens or strengthens against such other currencies. Substantially all of the revenues of our foreign subsidiaries are received, and substantially all expenses are incurred, in currencies other than the U.S. Dollar, which increases or decreases the related U.S. Dollar-reported revenues and expenses depending on the trend in currency exchange rates. Certain of our key business metrics, such as the FTD segment's average order value, are similarly affected by such currency fluctuations. Changes in global economic conditions, market factors, and governmental actions, among other factors, can affect the value of these currencies in relation to the U.S. Dollar. A strengthening of the U.S. Dollar compared to these currencies and, in particular, to the British Pound and the Euro, has had, and in future periods could have, an adverse effect on the comparisons of our revenues and operating income against prior periods. We cannot accurately predict the impact of future foreign currency exchange rate fluctuations on our operating results, and such fluctuations could negatively impact the comparisons of such results against prior periods.

Our marketing efforts may not be successful, which could increase our costs and adversely impact our key metrics and financial results.

We spend significant resources marketing our brands, products and services. We rely on relationships with a wide variety of third parties, including Internet search providers, Internet advertising networks, co-registration partners, retailers, distributers and direct marketers, to promote or distribute our products and services. In addition, one of our strategies is to cross market our various products and services to our existing customer base. If our marketing, including cross marketing, activities are inefficient or unsuccessful, or if important third-party relationships become more expensive or unavailable, our key metrics and financial results could be materially and adversely impacted.

Significant problems with our key systems or those of our third-party vendors could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

The systems underlying the operations of each of our business segments are complex and diverse, and must efficiently integrate with third-party systems, such as credit card processors. Key systems include, without limitation, order transmission, fulfillment and processing including the system for transmitting orders through the floral network; billing; website and database management; customer support; telecommunications network management; advertisement serving and management systems; and internal financial systems. Some of these systems, such as customer support, are outsourced to third parties, and other systems, such as FTD's order transmission and fulfillment system and the platform for our international social networking websites, are not redundant. We have experienced systems problems in the past, and we or these third parties may experience problems in the future. In addition, if these third parties face financial or other difficulties, our business could be adversely impacted. Any significant errors, failures, interruptions, delays, or other problems with our systems or our third-party vendors or their systems could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

In addition, our Classmates Media and Communications businesses outsource a majority of their live technical and billing support functions. These businesses rely on one customer support vendor, and

we maintain only a small number of internal customer support personnel for these businesses. Our internal customer support personnel are not equipped to provide the necessary range of customer support functions in the event that this vendor unexpectedly becomes unable or unwilling to provide these services to us.

Our failure to enforce and protect our proprietary rights could harm our business.

Our trade names, trademarks, service marks, patents, copyrights, domain names, and trade secrets are important to the success of our businesses. In particular, we view our primary trademarks as critical to our success. We rely upon patent, trademark, copyright, trade secret, and domain name laws in the U.S. and similar laws in other countries, as well as licenses and other agreements with our employees, members, consumers, suppliers and other parties, to establish and maintain our proprietary rights in the technology, products, services and content used in our operations. These laws and agreements may not guarantee that our proprietary rights will be protected and our proprietary rights could be challenged or invalidated. We also license some of our intellectual property rights, including the Mercury Man logo, to third parties. The steps we and such third parties have taken to protect our proprietary rights may not be adequate, and other third parties may infringe or misappropriate our proprietary rights. The protection of our proprietary rights may require the expenditure of significant financial and internal resources. We cannot assure you that we have taken adequate steps to prevent misappropriation of our proprietary rights. Our failure to adequately protect our proprietary rights could adversely affect our brands and could harm our business.

A security breach or inappropriate access to, or use of, our networks, computer systems or services or those of third-party vendors could expose us to liability, claims and a loss of revenue.

The success of our business depends on the security of our networks and, in part, on the security of the network infrastructures of our third-party vendors. Unauthorized or inappropriate access to, or use of, our networks, computer systems or services, whether intentional, unintentional or as a result of criminal activity, could potentially jeopardize the security of confidential information, including credit card information, of our customers and of third parties. We cannot assure you that the security measures we take will be effective in preventing these types of 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 or our revenues and may interfere with our ability to provide our products and services, all of which could adversely impact our business.

Changes in laws and regulations and new laws and regulations may adversely affect our business, financial condition, results of operations, and cash flows.

We are subject to a variety of international, federal, state, and local laws and regulations, including, without limitation, those relating to taxation, bulk email or "spam," advertising, including, without limitation, targeted or behavioral advertising, user privacy and data protection, consumer protection, antitrust, and unclaimed property. Compliance with the various laws and regulations, which in many instances are unclear or unsettled, is complex. New laws and regulations, such as those being considered or recently enacted by certain states related to automatic-renewal practices, will impact certain of our business practices. Any changes in the laws and regulations applicable to us, the enactment of any additional laws or regulations, or the failure to comply with, or increased enforcement activity of, such laws and regulations, could significantly impact our products and services, 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.

The Federal Trade Commission and certain state agencies have investigated Internet companies, including us, in connection with consumer protection and privacy matters. Federal, state and foreign

governments have also enacted consumer protection laws, including laws protecting the privacy of consumers' nonpublic personal information. In 2009, a committee of the U.S. Senate commenced an investigation of post-transaction sales practices and the companies that have engaged in such practices. As part of such investigation, we received a request for information from the committee, and we have cooperated with, and have responded to, such request. In addition, we have received a civil investigative demand or subpoena, as applicable, from the Attorneys General for the States of Washington and New York, as well as subpoenas from the Attorneys General for the States of Kansas and Maryland issued on behalf of a Multistate Work Group consisting of the Attorneys General for the following states: Delaware, Florida, Idaho, Illinois, Kansas, Maine, Maryland, Michigan, New Mexico, New Jersey, North Dakota, Ohio, Oregon, Pennsylvania, Texas, and Vermont, in each case, primarily regarding their respective investigations into post-transaction sales practices and the companies that have engaged in them, including us. We also received a subpoena from the Attorney General for the District of Columbia regarding its investigation of certain of our marketing, billing and renewal practices, including, without limitation, post-transaction sales practices. We have been cooperating with these investigations and recently resolved the investigation of the Attorney General for New York. However, the outcome of these or any other governmental investigations or their potential implications for our business are uncertain. There are no assurances that additional governmental investigations or other legal actions will not be instituted in connection with our former post-transaction sales practices or other current or former business practices. Enforcement actions or changes in enforcement policies and procedures, the adoption of new laws or regulations, or our failure to comply with existing laws, including those of foreign countries in which we operate, could decrease our revenues and increase the costs of operating our business. To the extent that our services and business practices change as a result of claims or actions by governmental agencies, changes in laws and regulations, or claims or actions by private parties, our business, financial condition, results of operations, and cash flows could be materially and adversely affected.

Legal actions or investigations could subject us to substantial liability, require us to change our business practices, and adversely affect our business, financial condition, results of operations, and cash flows.

We are currently, and have been in the past, party to various legal actions and investigations. These actions may include, without limitation, claims by private parties in connection with consumer protection and other laws, claims that we infringe third-party patents, claims involving unfair competition, claims in connection with employment practices, securities laws claims, breach of contract claims, and other business-related claims. The nature of our business could subject us to additional claims for similar matters, as well as a wide variety of other claims including, without limitation, claims for defamation, right of publicity, negligence, trademark and copyright infringement, and privacy and security matters. Various governmental agencies have in the past, and may in the future, assert claims, institute legal actions, inquiries or investigations, or impose obligations relating to our business practices, such as our marketing, billing, customer retention, renewal, cancelation, refund, or disclosure practices. As discussed in the risk factor related to changes in laws and regulations, certain governmental agencies have been investigating marketing, billing, renewal and other business practices, including post-transaction sales practices, and the companies that engage in such practices, including us. Defending against lawsuits, inquiries and investigations involves significant expense and diversion of management's attention and resources from other matters. We may not prevail in existing or future claims. The failure to successfully defend against certain types of claims, including claims relating to our business practices or alleging infringement of proprietary rights, could result in our incurring significant liabilities related to judgments or settlements or require us to change our business practices. Infringement claims may also result in our being required to obtain licenses from third parties, which licenses may not be available on acceptable terms, if at all. Both the cost of defending claims, as well as the effect of settlements and judgments, could cause our results of operations to fluctuate significantly

from period to period and could materially and adversely affect our business, financial condition, results of operations, and cash flows.

Our online social networking and online loyalty marketing services, as well as our FTD segment's consumer business, rely heavily on email campaigns, and any disruptions or restrictions on the sending of emails or increase in the associated costs could adversely affect our business and results of operations.

Our emails generate the majority of the traffic on our social networking websites and are the most important driver of member activity for our online loyalty marketing service. A significant number of members of our online social networking and online loyalty marketing services elect to opt-out of receiving certain types of emails. Without the ability to email these members, we have very limited means of inducing members to return to our websites and utilize our services. In addition, each month, a significant number of email addresses for members of our online social networking and online loyalty marketing services become invalid. This disrupts our ability to email these members and prevents social networking members from being able to contact these members, which is a key reason why members use our online social networking services.

Our FTD segment generates a significant portion of its consumer orders from the emails we send to customers who have previously ordered products from us. We also engage in a number of third-party email marketing campaigns in which such third parties include our marketing offers in the emails they send.

An increase in the number of members or customers who elect to not receive, or are unable to receive, our emails could adversely affect our business and results of operations. From time to time, Internet service providers block bulk email transmissions or otherwise experience technical difficulties that result in our inability to successfully deliver emails to our members or customers. Third parties may also block, impose restrictions on, or start to charge for, the delivery of emails through their email systems. Due to the importance of email to our businesses, any disruption or restriction on the distribution of emails or increase in the associated costs could materially and adversely affect our revenues and profitability.

We may be unsuccessful at acquiring additional businesses, services or technologies. Even if we complete an acquisition, it may not improve our results of operations and may also adversely impact our business, financial condition and cash flows.

One of our strategic objectives is to acquire businesses, services or technologies that will provide us with an opportunity to diversify the products and services we offer, leverage our assets and core competencies, or expand our geographic reach, or that otherwise may be complementary to our existing businesses. However, acquiring companies is a difficult process with many factors outside of our control. In addition, the FTD Credit Agreement imposes certain restrictions on our ability to complete acquisitions and there is no assurance that we will be successful in completing additional acquisitions.

We have evaluated and expect to continue to evaluate, a wide variety of potential strategic transactions that we believe may complement our current or future business activities. However, we cannot assure you that the anticipated benefits and synergies of an acquisition will materialize or that any integration attempts will be successful. Acquiring a business, service or technology involves many operational and financial risks, including risks relating to:

Any of these risks could harm our business, financial condition, results of operations, and cash flows.

In addition, an acquisition of a foreign business involves risks in addition to those set forth above, including risks associated with foreign currency exchange rates, potentially unfamiliar economic, political and regulatory environments and integration difficulties due to language, cultural and geographic differences.

FTD has a substantial amount of indebtedness which could adversely affect our ability to raise additional capital to fund operations, our flexibility in operating our business and our ability to react to changes in the economy or our industry, and prevent us from satisfying our debt obligations.

FTD has a substantial amount of indebtedness which could have important consequences for our business and financial condition. For example:

Under the terms of the FTD Credit Agreement, we will be permitted to incur additional indebtedness subject to certain conditions, and the risks described above may be increased if we incur additional indebtedness.

The FTD Credit Agreement includes guarantees on a joint and several basis by FTD Group, Inc.'s existing and future, direct and indirect domestic subsidiaries and is secured by first priority security interests in, and mortgages on, substantially all of FTD Group, Inc.'s direct and indirect subsidiaries' tangible and intangible assets and first priority pledges of all the equity interests owned by FTD in its existing and future direct and indirect subsidiaries (except with respect to foreign subsidiaries in which case such pledges are limited to 66% of the outstanding capital stock). The occurrence of an event of default under the FTD Credit Agreement could permit the lenders to terminate the commitments of such lenders to make further extensions of credit under the FTD Credit Agreement, to call and enforce the guarantees, and to foreclose on the collateral securing such debt.

We may not realize the benefits associated with our assets and may be required to record a significant charge to earnings if we are required to expense certain costs or impair our assets.

We have capitalized goodwill and identifiable intangible assets in connection with our acquisitions. We perform an impairment test of our goodwill and indefinite-lived intangible assets annually during the fourth quarter of our fiscal year or when events occur or circumstances change that would more likely than not indicate that goodwill or any such assets might be permanently impaired. If our acquisitions are not commercially successful or, if due to economic or other conditions, our assumptions regarding the performance of the acquired businesses are not achieved, we would likely be required to record impairment charges which would negatively impact our financial condition and results of operations. We have experienced impairment charges in the past, and in the fourth quarter of 2008, we recorded material impairment charges related to our FTD segment's goodwill and indefinite-lived intangible assets. Given the current economic environment and the uncertainties regarding the impact on our businesses, there can be no assurance that our estimates and assumptions regarding the duration of the depressed economic conditions, or the period or strength of recovery, made for purposes of our goodwill and identifiable intangible assets impairment testing will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or growth rates of certain reporting units or other factors are not achieved or are revised downward, we may be required to record additional impairment charges in future periods. In addition, from time to time, we record tangible or intangible assets on our balance sheet that, due to changes in value or in our strategy, may

have to be expensed in future periods. Write-downs or impairments of assets, whether tangible or intangible, could adversely and materially impact our 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 R. Goldston, our chairman, president and chief executive officer, and other key personnel. Any of our officers or employees can terminate his or her employment relationship at any time. The loss of any 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-person life insurance on any of our employees.

Foreign, state and local governments may attempt to impose additional income taxes, sales and use taxes, value-added taxes or other taxes on our business activities and Internet-based transactions, including our past sales, which could decrease our ability to compete, reduce our sales, or have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We are subject to income and various other taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our worldwide provision for income taxes. During the ordinary course of business, there are many transactions for which the ultimate tax determination is uncertain. In addition, our effective income tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory rates and higher (or determined to be higher by a particular taxing jurisdiction) than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities or by, among other factors, changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. We are subject to audit in various jurisdictions, and such jurisdictions may assess additional income and other taxes against us. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions, and our historical recognition of other tax matters. The results of an audit or litigation could have a material effect on our business, financial condition, results of operations, and cash flows.

In connection with our Internet-based transactions, a number of states have been considering or adopting legislation or instituting policy initiatives, including those that would facilitate a finding of nexus to exist between Internet companies with the states, aimed at expanding the reach of sales and use taxes or imposing state income or other taxes on various innovative theories, including agency attribution from independent third-party service providers. Such legislation or initiatives could result in the imposition of additional sales and use taxes, or the payment of state income or other taxes, on certain transactions conducted over the Internet. If such legislation is enacted, or such initiatives are instituted, and upheld by the courts, the legislation or initiatives could subject us to substantially increased tax liabilities for past and future sales or state income or other taxes, require us to collect additional sales and use taxes, cause our future sales to decrease, otherwise negatively impact our businesses, and thus have a material adverse affect on us.

We face risks relating to operating and doing business internationally that could adversely affect our businesses and results of operations.

Our businesses operate in a number of countries outside the U.S. Conducting international operations involves risks and uncertainties, including:

The occurrence of any one of these risks could negatively affect our international operations, our key business metrics, and our financial results.

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

Our businesses could be materially and adversely affected by a catastrophic event. A disaster such as a fire, earthquake, flood, power loss, terrorism, or other similar event, affecting any of our facilities, data centers or computer systems, or those of our third-party vendors, or a system interruption or delay that slows down the Internet or makes the Internet or our websites temporarily unavailable, could result in a significant and extended disruption of our operations and services. Any prolonged disruption of our services due to these or other events would severely impact our businesses. We do not carry flood insurance for certain of our facilities, and the property, business interruption and other insurance we do carry may not be sufficient to cover, if at all, losses that may occur as a result of any events which cause interruptions in our services.

We cannot predict our future capital needs and we may not be able to secure additional financing which could adversely impact us.

We may need to raise additional funds in the future to fund our operations, for acquisitions of businesses, services or technologies or for other purposes. Additional financing may not be available in a timely manner, on terms favorable to us, or at all. We incurred substantial indebtedness in connection with the acquisition of FTD. The terms of such indebtedness in addition to the degree to which we are leveraged, will adversely affect our ability to obtain additional financing. In addition, the current extreme volatility of, and disruption in, the securities and credit markets may restrict our ability to raise any such additional funds. If adequate funds are not available or not available when required and in sufficient amounts or on acceptable terms, our businesses and future prospects may suffer.

We may stop paying, or reduce, quarterly cash dividends on our common stock.

The payment of future dividends is discretionary and is subject to determination by our Board of Directors each quarter following its review of our financial condition, results of operations and cash flows and such other factors as are deemed relevant by our Board of Directors. Commencing with the

third quarter of 2008, we have decreased our quarterly cash dividend from $0.20 per share of common stock to $0.10 per share of common stock. Changes in our business needs, including working capital and funding for acquisitions, or a change in tax laws relating to dividends, among other factors, could cause our Board of Directors to decide to cease the payment of, or further reduce, dividends in the future. We cannot assure you that we will not decrease or discontinue quarterly cash dividends, and if we do, our stock price could be negatively impacted.

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. Our Board of Directors adopted a stockholder rights plan, which is an anti-takeover measure that will cause substantial dilution to a third party who attempts to acquire our Company on terms not approved by our Board of Directors.

The market price of our common stock has fluctuated significantly and it may continue to be volatile with extreme trading volume fluctuations. In addition, The Nasdaq Global Select Market has experienced substantial price and trading volume fluctuations. The broad market and industry factors that influence or affect such fluctuations may harm the market price of our common stock, regardless of our actual operating performance. As a result of these or other reasons, we have experienced and may continue to experience significant volatility in the market price of our common stock.

Competition could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We compete in the market for flowers and, to a lesser degree, specialty gifts. In the consumer market, consumers are our customers for direct sales of floral and specialty gifts through our websites and various telephone numbers. In the floral network services market, retail florists and supermarkets are our principal customers for memberships and subscriptions to our various floral network services including, among other things, access to the FTD and Interflora brands and the Mercury Man logo, access to the floral network, credit card processing services, e-commerce websites, online advertising tools, and telephone answering, order-taking, transmission and clearing-house services.

The consumer market for flowers and specialty gifts is highly competitive, and consumers can purchase the products we offer from numerous sources, including traditional local retail florists, supermarkets, mass merchants, specialty gift retailers, and nationwide floral marketers, such as those that use websites, toll-free telephone numbers and catalogs. The floral network services market is highly competitive as well, and retail florists and supermarkets may choose from a few floral network service providers that offer similar products and services. In the U.S., our key competitors in the consumer market include 1-800-FLOWERS.COM, Inc., Proflowers.com and Teleflora, and our key competitors in the floral network services market include Teleflora and BloomNet Wire Service, a subsidiary of 1-800-FLOWERS.COM. International key competitors include Marks & Spencer, NEXT, Flying Flowers, John Lewis, eFlorist (also known as Teleflorist), and Flowers Direct.

We believe competition in the consumer market will likely intensify. Supermarkets and nationwide floral marketers have been gaining market share over retail florists as consumers continue to shift more of their floral purchases to these channels. We expect the sales volumes at supermarkets and other mass merchants to continue to increase, and that nationwide floral marketers will continue to increase their competition with us. In particular, the nature of the Internet as a marketplace facilitates competitive entry and comparative shopping, and we have experienced increased competition based on

price. Some of our competitors may have significant competitive advantages over us, may devote significantly greater resources to marketing campaigns or other aspects of their business or may respond more quickly and effectively than we can to new or changing opportunities or customer requirements.

We expect competition in the floral network services market to continue to increase as well. We believe we will continue to experience increasing competition from the other floral network services providers. In addition, we expect retail florists likely will continue to lose sales to supermarkets and nationwide floral marketers, which likely will result in a continuing decrease in their revenues and in the number of retail florists. As the number of retail florists and their revenues decrease, competition for the business of the remaining retail florists will intensify.

Increased competition in the consumer market or the floral network services market may result in lower revenues, reduced gross margins, loss of market share, and increased marketing expenditures. We cannot provide assurance that we will be able to compete successfully or that competitive pressures will not have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We are dependent on third parties who fulfill orders and deliver goods and services to our customers and their failure to provide our customers with high-quality products and customer service may harm our brands and could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We believe that our success in promoting and enhancing our brands depends on our ability to provide our customers high-quality products and a high level of customer service. Our business depends, in part, on the ability of our independent floral network members and third-party suppliers who fulfill our orders to do so at high-quality levels. We work with our floral network members and third-party suppliers to develop best practices for quality assurance; however, we generally do not directly control or continuously monitor any floral network member or third-party supplier. The failure of our floral network members or third-party suppliers to fulfill orders to our customers' satisfaction, at an acceptable level of quality and within the required timeframe, could adversely impact our brands and cause us to lose customers, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Additionally, because we depend upon third parties for the delivery of our products to customers, strikes or other service interruptions affecting these shippers could have an adverse effect on our ability to deliver our products on a timely basis. If any of our shippers are unable or unwilling to deliver our products, we would have to engage alternative shippers which could increase our costs. A disruption in any of our shippers' delivery of our products could cause us to lose customers or could increase our costs, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

The success of our business is dependent on our floral network members and on the financial performance of the retail floral industry.

A significant portion of our profitability is dependent on our floral network members. We have lost, and may continue to lose, floral network members as a result of both our members choosing not to do business with us as well as declines in the number of local retail florists as a result of economic factors and competition. If we lose a significant number of floral network members, or if we are not able to maintain or increase revenues from our floral network members, our business, financial condition, results of operations, and cash flows could be materially and adversely affected.

Failure to maintain our standard pricing for products and services could have adverse effects on our financial results.

Due to economic conditions and for competitive and other reasons, in recent quarters, we have chosen to offer broader and greater discounts to the consumer, both on a promotional basis to consumers generally as well as through strategic arrangements with various marketing channels. We also offer discounts on our floral network service fees from time to time on a promotional basis. The increase in the portion of products and services sold at a discount has resulted, or may in the future result, in reduced revenues, an increase in cost of revenues as a percentage of revenues, and a decrease in segment income from operations. We currently intend to continue selling products and services at a discount, including through distribution channels that may have a higher level of discounting, and there are no assurances that the portion of products and services sold at a discount will not continue to increase. The continued use of discounts for our products and services may result in our becoming more reliant upon offering discounts in order to sell our products and services, which could result in our having to reduce our standard pricing, which may adversely impact our financial results.

If the supply of flowers becomes limited, the price of these products could rise or these products may become unavailable, which could result in our not being able to meet consumer demand and could cause an adverse effect on our business, financial condition, results of operations, and cash flows.

Many factors, such as weather conditions, agricultural limitations and restrictions relating to the management of pests and disease, affect the supply of flowers and the price of our floral products. If the supply of flowers available for sale is limited, the wholesale prices of flowers could rise, which would cause us to increase our prices or reduce our profits. An increase in our prices could result in a decline in customer demand for our floral products, which would decrease our revenues.

Alternatively, we may not be able to obtain high-quality flowers in an amount sufficient to meet customer demand. Even if available, flowers from alternative sources may be of lesser quality or more expensive than those currently offered by us. A large portion of our supply of flowers is sourced from Colombia, Ecuador and Holland.

The availability and price of our products could be affected by a number of other factors affecting suppliers, including:

Foreign, state and local governments may attempt to impose additional sales and use taxes, value-added taxes or other taxes on our business activities, including our past sales, which could decrease our ability to compete, reduce our sales, and have a material adverse effect on our business, financial condition, results of operations, and cash flows.

In accordance with current industry practice by domestic floral and specialty gift order gatherers and our interpretation of applicable law, our FTD consumer business collects and remits sales and use taxes on orders that are delivered in states where it has a physical presence or other form of jurisdictional nexus, which is a limited number of states. If states successfully challenge this practice and impose sales and use taxes on orders delivered in states where we do not have physical presence or another form of jurisdictional nexus, we could incur substantial tax liabilities for past sales and lose future sales as a result of the increased tax cost that would be borne by the customer. Also, states may seek to reclassify the status of Internet order gatherers, such as our FTD consumer business, as persons that are deemed to fulfill the underlying order, in which case, a state may seek to impose taxes on the receipts generated by our FTD consumer business for orders fulfilled and delivered by florists outside such state. In addition, future changes in the operation of our online and telephonic sales channels could result in the imposition of additional sales and use tax or other tax obligations.

Additionally, in accordance with current industry practice by international floral and specialty gift direct marketers and our interpretation of applicable law, we collect and remit value-added taxes on certain consumer orders placed through Interflora. Future changes in the operation of our Interflora business could result in the imposition of additional tax obligations. Moreover, if a foreign taxing authority challenges our current practice or implements new legislative initiatives, additional taxes on consumer sales could be due by us. The imposition of additional tax liabilities for past or future sales could decrease our ability to compete with traditional retailers and reduce our sales, which could have a material adverse effect on our business, financial condition, results of operations, and cash flow.

We utilize outsourced staff and temporary employees, who may not be as well trained or committed to our customers as our permanent employees, and their failure to provide our customers with high-quality customer service may cause our customers not to return, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We utilize and rely on a significant number of outsourced staff and temporary employees in addition to our permanent employees, to take orders and respond to customer inquiries. These outsourced staff and temporary employees may not have the same level of commitment to our customers or be as well trained as our permanent employees. In addition, we may not hire enough outsourced staff or temporary employees to adequately handle the increased volume of telephone calls we receive during peak periods. If our customers are dissatisfied with the quality of the customer service they receive, they may not place orders with us again, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We expect to face increasing competition that could result in a loss of members, reduced revenues and decreased profitability.

Our online social networking services compete with a wide variety of social networking websites, including broad social networking websites such as Facebook; a number of specialty niche websites, including LinkedIn and MyLife.com, that offer online social networking services focused on particular affiliations such as school or work communities; and schools, employers and associations that maintain their own Internet-based alumni information services. We also compete with a wide variety of websites that provide users with alternative networks and ways of locating and interacting with acquaintances from various affiliations, including online services designed to locate individuals such as White Pages

and US Search, Internet search engines that have the ability to locate individuals, including by finding individuals through their profiles on social networking websites, and web portals such as Yahoo!, MSN and AOL. We believe that there are currently only a small number of competitive online social networking services that are focused specifically on our niche of the market, which is to help people find and reconnect with enduring relationships and important memories from school. However, as the membership bases of broad social networking websites continue to grow, users may be able to locate individuals from their past, free of charge in certain cases, without having to use a niche website or other online search service. As a result of the growth of the social networking market and minimal barriers to entry, a number of companies have entered or are attempting to enter our market, either directly or indirectly, some of which may become significant competitors in the future. In addition, many existing online social networking services are broadening their service offerings to compete with our services.

The market for online loyalty marketing services is highly competitive, and we expect competition to significantly increase in the future as loyalty marketing programs grow in popularity. Our MyPoints online loyalty marketing service faces competition for members from several other online loyalty marketing programs as well as offline loyalty marketing programs that have a significant online presence, such as those operated by credit card, airline and hotel companies.

Some of our competitors have longer operating histories, greater name and brand recognition, larger user bases, significantly greater financial, technical, sales, and marketing resources, and engage in more extensive research and development than we do. Some of our competitors also have lower customer acquisition costs than we do, offer a wider variety of services, have more compelling websites with more extensive user-generated content or offer their services free to their users. If our competitors are more successful than we are in attracting and retaining members, our ability to maintain a large and growing member base will be adversely affected. If our social networking competitors provide similar services for free, we may not be able to continue to charge for any of our online social networking services. Competition could have a material adverse effect on our subscription revenues from online social networking services, as well as on advertising revenues from our online social networking and online loyalty marketing services. More intense competition could also require us to increase our marketing or other expenditures. As a result of competition, our number of members, revenues, cash flows, and profitability could be adversely affected.

Continued declines in the number of pay accounts for our online social networking services could cause our business and financial results to suffer.

Pay accounts are critical to our business model. Only a small percentage of users initially registering for our online social networking services sign up for a paid subscription at the time of registration. As a result, our ability to generate subscription revenue is highly dependent on our ability to attract users to our websites and register them as free members, to encourage them to return to our websites, and to convince them to become pay accounts in order to access the pay features of our websites. The number of pay accounts has been decreasing, and there are no assurances that such trend will not continue. If we are not able to attract users to our websites and convert a significant portion to pay accounts, the number of pay accounts for our online social networking services will continue to decline and our business and financial results would be adversely affected.

A number of our social networking pay account subscriptions each month are not renewed or are canceled, which, for the Classmates Media segment, we refer to as "churn." The level of churn we experience fluctuates from quarter to quarter due to a variety of factors, including our mix of subscription terms, which affects the timing of subscription expirations, as well as the degree of credit card failures. We must continually add new social networking pay accounts both to replace pay accounts who churn and to grow our business beyond our current pay account base. We expect that our churn rate will continue to fluctuate from period to period. A significant majority of our pay accounts are on

plans that automatically renew at the end of their subscription period and we have received complaints with respect to our renewal policies and practices. As discussed in the risk factor related to changes in laws and regulations, the laws being considered or recently enacted by certain states regarding automatic-renewal practices will impact certain of our business practices. We also experienced an increase in the percentage of credit card failures in 2009. Any change in our renewal policies or practices, or in the degree of credit card failures, could have a material impact on our churn rate. If we experience a higher than expected level of churn, it will make it more difficult for us to increase or maintain the number of pay accounts, which could reduce our revenues and adversely affect our financial results.

Failure to increase or maintain the number of members for our online social networking and online loyalty marketing services or the activity level of these members could cause our business and financial results to suffer.

The success of our online social networking and online loyalty marketing services depends upon our ability to increase or maintain our base of free members and the level of activity of those members. A decline in the number of registered or active free social networking members, or a decline in the activity of those members, could result in decreased pay accounts, decreased content on our websites and decreased advertising revenues. A decline in the number of registered or active online loyalty marketing service members could result in decreased advertising revenues. We have been experiencing a decline in the number of active members, and there are no assurances that this trend will not continue. The failure to increase or maintain our base of free members, or the failure to convince our free members to actively participate in our websites or services, could have a material adverse effect on our business and our financial results.

Failure to maintain our standard pricing could have adverse effects on our financial results.

Due to economic conditions and for competitive and other reasons, we have been offering a greater percentage of discounted pricing plans on a promotional basis than we typically have offered in the past. In general, these discounted pricing plans offer a subscription term at a significant discount compared to the standard pricing for such subscription term. The increase in the percentage of pay accounts under a discounted pricing plan has resulted, and may in the future result, in a decrease in subscription revenues and ARPU, at least in the near term. Although these discounted pricing plans, by their terms, renew at the then-current standard pricing for such subscription term upon the expiration of the initial term, there are no assurances as to the number of pay accounts that will renew at the standard pricing. We intend to continue offering discounted pricing plans in the future, and there are no assurances that the percentage of discounted pricing plans offered during a period will not be higher than anticipated. Our continued use of discounted pricing plans may result in our becoming dependent on offering such plans in order to obtain new pay accounts and retain existing pay accounts and may result in our having to reduce our standard pricing, which would adversely impact our financial results.

We compete with numerous other dial-up Internet access providers as well as providers of broadband services. Our key dial-up Internet access competitors include established online service and content providers, such as AOL and MSN, and independent national Internet service providers, such as EarthLink and its PeoplePC subsidiary. Dial-up Internet access services do not compete favorably with broadband services with respect to connection speed and do not have a significant, if any, price advantage over certain broadband services. Many broadband providers, including cable companies and local exchange carriers, bundle their offerings with telephone, entertainment or other services, which may result in lower prices than standalone services. In addition to competition from broadband

providers, competition among dial-up Internet access service providers is intense and neither our pricing nor our features provides us with a significant competitive advantage, if any, over certain of our dial-up Internet access competitors. We expect that competition, particularly with respect to price, both for broadband as well as dial-up Internet access services, will continue. We also expect that our dial-up Internet access subscriber base will continue to decrease, potentially at an increasing rate, and that our broadband services will not experience significant growth.

In order to compete effectively, we may have to make significant revisions to our services, pricing and marketing strategies, and business model. For example, we may have to lower our introductory rates, offer additional free periods of service, offer additional features at little or no additional cost to the consumer, or reduce the standard pricing of our services. Measures such as these could decrease our revenues and our average revenue per dial-up Internet access pay account. We may also have to allocate more marketing resources toward our dial-up Internet access services than we anticipate. All of the foregoing could adversely affect the profitability of our dial-up Internet access services which could materially and adversely impact our business, financial condition, results of operations, and cash flows.

Revenues and profitability of our Communications segment are expected to decrease.

Most of our Communications revenues and profits come from our dial-up Internet access services. Our dial-up Internet access pay accounts and revenues have been declining and are expected to continue to decline due to the continued maturation of the market for dial-up Internet access. Consumers continue to migrate to broadband access, primarily due to the faster connection and download speeds provided by broadband access. Advanced applications such as online gaming, music downloads and videos require greater bandwidth for optimal performance, which adds to the demand for broadband access. The pricing for basic broadband services has been declining as well, making it a more viable option for consumers. We expect our dial-up Internet access pay accounts to continue to decline. As a result of expected continued decreases in our dial-up Internet access pay accounts and, potentially, the average monthly revenue per pay account, we expect that our Communications services revenues, advertising revenues, and the profitability of this segment will continue to decline over time. The number of dial-up Internet access pay accounts has been adversely impacted by both a decrease in the number of new pay accounts signing up for our services as well as the impact of subscribers canceling their accounts, which we refer to as "churn." Churn has increased from time to time and may increase in the future. The rate of decline in Communications services revenues has accelerated in some periods and may continue to accelerate. Although we have been reducing our expenses in order to manage the profitability of our Communications segment, we will not be able to continue making the same level of expense reductions in the future, which will adversely impact our profitability as our Communications services revenues continue to decline. Continued declines, particularly if such declines accelerate, in Communications revenues will materially and adversely impact the profitability of this segment.

Our Internet access business is dependent on the availability of telecommunications services and compatibility with third-party systems and products.

Our Internet access business substantially depends on the availability, capacity, affordability, reliability, and security of our telecommunications networks. Only a limited number of telecommunications providers offer the network and data services we currently require, and we purchase most of our telecommunications services from a few providers. Some of our telecommunications services are provided pursuant to short-term agreements that the providers can terminate or elect not to renew. In addition, some telecommunications providers may cease to offer network services for certain less populated areas, which would reduce the number of providers from which we may purchase services and may entirely eliminate our ability to purchase services for certain areas. If we are unable to maintain, renew or obtain new agreements with telecommunications

providers, our business, financial condition, results of operations, and cash flows could be materially and adversely affected.

Our dial-up Internet access services also rely on their compatibility with other third-party systems, products and features, including operating systems. Incompatibility with third-party systems and products could adversely affect our ability to deliver our services or a user's ability to access our services and could also adversely impact the distribution channels for our services. Our services are dependent on dial-up modems and an increasing number of computer manufacturers, including certain manufacturers with whom we have distribution relationships, do not pre-load their new computers with dial-up modems, requiring the user to separately acquire a modem to access our services. There can be no assurance that, as the dial-up Internet access market declines and new technologies emerge, we will be able to continue to effectively distribute and deliver our services.

United Online, Inc.'s Board of Directors authorized a common stock repurchase program (the "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 through December 31, 2009. From time to time, the Board of Directors has increased the amount authorized for repurchase under this Program and has extended the Program. In April 2004, the Board of Directors authorized us to purchase up to an additional $100 million of our common stock under the Program, bringing the total amount authorized under the Program to $200 million. In December 2009, the Board of Directors again further extended the Program through December 31, 2010. From August 2001 through September 30, 2010, we repurchased $150.2 million of our common stock under the Program, leaving $49.8 million of authorization remaining under the Program.

Shares withheld upon the vesting of restricted stock units and restricted stock awards and upon the issuance of stock awards to pay applicable required employee withholding taxes are considered common stock repurchases, but are not counted as purchases against the Program. Upon vesting of restricted stock units or issuance of stock awards, we currently do not collect the applicable required employee withholding taxes from employees. Instead, we automatically withhold, from the restricted stock units that vest and from the stock awards that are issued, the portion of those shares with a fair market value equal to the amount of the required employee withholding taxes due, which is accounted for as a repurchase of common stock. We then pay the applicable withholding taxes in cash.

Common stock repurchases during the quarter ended September 30, 2010 were as follows (in thousands, except per share amounts):

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Period		Average Price Paid per Share			Maximum Approximate Dollar Value that May Yet be Purchased Under the Program

August 2010	2,118	$	5.02	1,822	$	51,618
September 2010	340	$	5.28	340	$	49,821

				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		10-K	000-33367	3/1/2007
	3.2	Amended and Restated Bylaws		10-K	000-33367	3/1/2007
	3.3	Certificate of Designation for Series A Junior Participating Preferred Stock (included in Exhibit 4.1 below)		10-K	000-33367	3/1/2007
	4.1	Rights Agreement, dated as of November 15, 2001, between the Company and U.S. Stock Transfer Corporation, which includes the form of Certificate of Designation for the Series A junior participating preferred stock as Exhibit A, and the form of Rights Certificate as Exhibit B		10-K	000-33367	3/1/2007
	4.2	Amendment No. 1 to Rights Agreement, dated as of April 29, 2003, between the Registrant and U.S. Stock Transfer Corporation		10-Q	000-33367	5/1/2003
	10.1	Form of Restricted Stock Unit Issuance Agreement for 2010 Incentive Compensation Plan (non-employee directors – initial grant)	X		000-33367	11/5/2010
	10.2	Form of Restricted Stock Unit Issuance Agreement for 2010 Incentive Compensation Plan (non-employee directors – annual grant)	X		000-33367	11/5/2010
	10.3	Form of Restricted Stock Unit Issuance Agreement for 2010 Incentive Compensation Plan (officers)	X		000-33367	11/5/2010
	10.4	Form of Restricted Stock Unit Issuance Agreement for 2010 Incentive Compensation Plan (employees)	X		000-33367	11/5/2010
	31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X		000-33367	11/5/2010
	31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X		000-33367	11/5/2010
	32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X		000-33367	11/5/2010
	32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X		000-33367	11/5/2010
	101.INS	XBRL Instance Document	X		000-33367	11/5/2010
	101.SCH	XBRL Taxonomy Extension Schema Document	X		000-33367	11/5/2010

				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
	101.CAL	XBRL Taxonomy Calculation Linkbase Document	X		000-33367	11/5/2010
	101.LAB	XBRL Taxonomy Label Linkbase Document	X		000-33367	11/5/2010
	101.PRE	XBRL Taxonomy Presentation Linkbase Document	X		000-33367	11/5/2010
	101.DEF	XBRL Taxonomy Extension Definition Document	X		000-33367	11/5/2010


Date: November 5, 2010	UNITED ONLINE, INC. (Registrant)
	By:	/s/ SCOTT H. RAY Scott H. Ray Executive Vice President and Chief Financial Officer
	By:	/s/ NEIL P. EDWARDS Neil P. Edwards Senior Vice President, Finance, Treasurer and Chief Accounting Officer

				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		10-K	000-33367	3/1/2007
	3.2	Amended and Restated Bylaws		10-K	000-33367	3/1/2007
	3.3	Certificate of Designation for Series A Junior Participating Preferred Stock (included in Exhibit 4.1 below)		10-K	000-33367	3/1/2007
	4.1	Rights Agreement, dated as of November 15, 2001, between the Company and U.S. Stock Transfer Corporation, which includes the form of Certificate of Designation for the Series A junior participating preferred stock as Exhibit A, and the form of Rights Certificate as Exhibit B		10-K	000-33367	3/1/2007
	4.2	Amendment No. 1 to Rights Agreement, dated as of April 29, 2003, between the Registrant and U.S. Stock Transfer Corporation		10-Q	000-33367	5/1/2003
	10.1	Form of Restricted Stock Unit Issuance Agreement for 2010 Incentive Compensation Plan (non-employee directors – initial grant)	X		000-33367	11/5/2010
	10.2	Form of Restricted Stock Unit Issuance Agreement for 2010 Incentive Compensation Plan (non-employee directors – annual grant)	X		000-33367	11/5/2010
	10.3	Form of Restricted Stock Unit Issuance Agreement for 2010 Incentive Compensation Plan (officers)	X		000-33367	11/5/2010
	10.4	Form of Restricted Stock Unit Issuance Agreement for 2010 Incentive Compensation Plan (employees)	X		000-33367	11/5/2010
	31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X		000-33367	11/5/2010
	31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X		000-33367	11/5/2010
	32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X		000-33367	11/5/2010
	32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X		000-33367	11/5/2010
	101.INS	XBRL Instance Document	X		000-33367	11/5/2010
	101.SCH	XBRL Taxonomy Extension Schema Document	X		000-33367	11/5/2010
	101.CAL	XBRL Taxonomy Calculation Linkbase Document	X		000-33367	11/5/2010
	101.LAB	XBRL Taxonomy Label Linkbase Document	X		000-33367	11/5/2010

Attached files

UNITED ONLINE INC Reports

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