UNITED ONLINE INC - FORM 10-Q

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TABLE OF CONTENTS

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 March 31, 2011
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 website, 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 o		Accelerated filer ý		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 88,638,360 shares of the Registrant's common stock outstanding at April 29, 2011.

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UNITED ONLINE, INC.

INDEX TO FORM 10-Q

For the Quarter Ended March 31, 2011

			Page

PART I.		FINANCIAL INFORMATION	4
	Item 1.	Financial Statements:	4
		Unaudited Condensed Consolidated Balance Sheets at March 31, 2011 and December 31, 2010	4
		Unaudited Condensed Consolidated Statements of Operations for the Quarters Ended March 31, 2011 and 2010	5
		Unaudited Condensed Consolidated Statements of Comprehensive Income for the Quarters Ended March 31, 2011 and 2010	6
		Unaudited Condensed Consolidated Statement of Stockholders' Equity for the Quarter Ended March 31, 2011	7
		Unaudited Condensed Consolidated Statements of Cash Flows for the Quarters Ended March 31, 2011 and 2010	8
		Notes to Unaudited Condensed Consolidated Financial Statements	9
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
	Item 4.	Controls and Procedures	45
PART II.		OTHER INFORMATION	46
	Item 1.	Legal Proceedings	46
	Item 1A.	Risk Factors	47
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64
	Item 6.	Exhibits	66
SIGNATURES			67

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

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competition; strategies; and new business initiatives, products, services, features, and functionality. 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)

			March 31, 2011			December 31, 2010

Assets
Current assets:
	Cash and cash equivalents		$	106,370		$	100,264
	Accounts receivable, net of allowance for doubtful accounts			46,249			49,797
	Deferred tax assets, net			14,064			14,200
	Other current assets			23,027			28,494

		Total current assets		189,710			192,755
Property and equipment, net				65,074			63,893
Goodwill				462,945			459,409
Intangible assets, net				257,667			262,775
Other assets				12,896			13,326

		Total assets	$	988,292		$	992,158

Liabilities and Stockholders' Equity
Current liabilities:
	Accounts payable		$	53,463		$	71,659
	Accrued liabilities			42,938			48,881
	Member redemption liability			19,503			19,899
	Deferred revenue			83,007			71,673
	Current portion of long-term debt			2,229			—

		Total current liabilities		201,140			212,112
Member redemption liability				4,872			4,967
Deferred revenue				2,727			3,021
Long-term debt, net of discounts				256,330			258,084
Deferred tax liabilities, net				45,472			42,677
Other liabilities				16,377			16,816

		Total liabilities		526,918			537,677

Commitments and contingencies
Stockholders' equity:
	Common stock			9			9
	Additional paid-in capital			482,954			493,387
	Accumulated other comprehensive loss			(28,483	)		(33,628	)
	Retained earnings (accumulated deficit)			6,894			(5,287	)

		Total stockholders' equity		461,374			454,481

		Total liabilities and stockholders' equity	$	988,292		$	992,158

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 March 31,

			2011			2010
Revenues:
	Services		$	112,419		$	127,238
	Products			129,086			124,487

		Total revenues		241,505			251,725
Operating expenses:
	Cost of revenues—services			24,671			26,013
	Cost of revenues—products			96,155			95,185
	Sales and marketing			48,135			50,130
	Technology and development			12,775			14,349
	General and administrative			28,874			30,984
	Amortization of intangible assets			7,745			8,163
	Restructuring charges			534			1,069

		Total operating expenses		218,889			225,893

Operating income				22,616			25,832
Interest income				549			465
Interest expense				(5,041	)		(7,149	)
Other income, net				1,539			82

Income before income taxes				19,663			19,230
Provision for income taxes				7,482			8,009

Net income			$	12,181		$	11,221

	Income allocated to participating securities			(555	)		(727	)

Net income attributable to common stockholders			$	11,626		$	10,494

Basic net income per common share			$	0.13		$	0.12

Shares used to calculate basic net income per common share				87,417			85,759

Diluted net income per common share			$	0.13		$	0.12

Shares used to calculate diluted net income per common share				87,820			86,545

Dividends paid per common share			$	0.10		$	0.10

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 March 31,

		2011		2010
Net income		$	12,181	$	11,221
	Foreign currency translation		5,072		(11,159	)
	Change in unrealized gain on derivative securities, net of tax of $47 for the quarter ended March 31, 2011		73		—

Comprehensive income		$	17,326	$	62

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			Retained Earnings (Accumulated Deficit)

		Common Stock				Additional Paid-In Capital									Total Stockholders' Equity
		Shares		Amount		Additional Paid-In Capital									Total Stockholders' Equity
Balance at January 1, 2011			86,745	$	9	$	493,387		$	(33,628	)	$	(5,287	)	$	454,481
	Exercises of stock options		8		—		17			—			—			17
	Vesting of restricted stock units		1,365		—		—			—			—			—
	Repurchases of common stock		—		—		(6,163	)		—			—			(6,163	)
	Dividends and dividend equivalents paid on shares outstanding and restricted stock units		—		—		(9,141	)		—			—			(9,141	)
	Change in dividend equivalents payable on restricted stock units		—		—		174			—			—			174
	Stock-based compensation		—		—		4,726			—			—			4,726
	Change in unrealized gain on derivative securities, net of tax		—		—		—			73			—			73
	Foreign currency translation		—		—		—			5,072			—			5,072
	Tax shortfalls from equity awards		—		—		(46	)		—			—			(46	)
	Net income		—		—		—			—			12,181			12,181

Balance at March 31, 2011			88,118	$	9	$	482,954		$	(28,483	)	$	6,894		$	461,374

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)

				Quarter Ended March 31,

				2011			2010
Cash flows from operating activities:
	Net income			$	12,181		$	11,221
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization			14,052			14,830
		Stock-based compensation			4,726			7,860
		Provision for doubtful accounts receivable			705			1,235
		Accretion of discounts and amortization of debt issue costs			572			1,427
		Deferred taxes, net			2,384			(525	)
		Tax benefits (shortfalls) from equity awards			41			(109	)
		Excess tax benefits from equity awards			(251	)		(326	)
		Other			23			201
	Changes in operating assets and liabilities:
		Accounts receivable, net			3,079			5,909
		Other assets			6,029			6,045
		Accounts payable and accrued liabilities			(24,719	)		2,931
		Member redemption liability			(490	)		(1,026	)
		Deferred revenue			9,896			1,364
		Other liabilities			(489	)		450

			Net cash provided by operating activities		27,739			51,487

Cash flows from investing activities:
	Purchases of property and equipment				(7,079	)		(5,162	)
	Purchases of rights, content and intellectual property				(1,222	)		—

			Net cash used for investing activities		(8,301	)		(5,162	)

Cash flows from financing activities:
	Payments on term loans				—			(25,082	)
	Proceeds from exercises of stock options				17			4
	Repurchases of common stock				(6,163	)		(6,047	)
	Dividends and dividend equivalents paid on outstanding shares and restricted stock units				(9,421	)		(9,108	)
	Excess tax benefits from equity awards				251			326

			Net cash used for financing activities		(15,316	)		(39,907	)

Effect of foreign currency exchange rate changes on cash and cash equivalents					1,984			(1,004	)
Change in cash and cash equivalents					6,106			5,414
Cash and cash equivalents, beginning of period					100,264			115,509

Cash and cash equivalents, end of period				$	106,370		$	120,923

Supplemental disclosure of non-cash investing and financing activities:
	Decrease in dividend equivalents payable on restricted stock units			$	(174	)	$	(243	)

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, Memory Lane, Classmates, StayFriends, NetZero, and MyPoints. On August 26, 2008, the Company completed its acquisition of 100% of the capital stock of FTD Group, Inc. (together with its subsidiaries, "FTD"). The Company reports its business in three reportable segments: FTD, Content & 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 Content & Media services are online nostalgia services and online loyalty marketing. The Company's primary Communications service is Internet access. 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 ended March 31, 2011 and 2010 have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), including those for interim financial information, and with the instructions for Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (the "SEC"). Accordingly, such financial statements 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, 2010 is derived from the Company's audited consolidated financial statements, filed on February 28, 2011 with the SEC in the Company's Annual Report on Form 10-K for the year ended December 31, 2010, 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, 2010 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.

The Company believes that its existing cash and cash equivalents and cash generated from operations will be sufficient to service its debt obligations and fund its working capital requirements, capital expenditures, dividend payments, and other obligations through at least the next twelve months.

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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)

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.

Accounting Policies

Segments—The operating segments identified in Note 2 below are the segments of the Company for which separate financial information is available and for which segment results are regularly reviewed by the Company's chief operating decision maker in deciding how to allocate resources and assess performance. Effective in the first quarter of 2011, the Company modified how it reports segment information to the chief operating decision maker. The Company's segment reporting now separately reports unallocated corporate expenses. Historically, such expenses were fully allocated to the Company's reportable segments. The Company has revised prior period results to conform to the current year presentation.

Derivative instruments—From time to time, the Company utilizes forward foreign currency exchange contracts to protect the value of its net investments in certain foreign subsidiaries. For derivative instruments that are designated and qualify as a hedge of a net investment in a foreign currency, the gain or loss is reported in accumulated other comprehensive income in the condensed consolidated statement of stockholders' equity to the extent it is effective, with the related amounts due to or from counterparties included in other liabilities or other assets. The Company utilizes the forward-rate method of assessing hedge effectiveness. Gains or losses related to any ineffective portions of net investment hedges are recognized in the consolidated statements of operations. There was no ineffectiveness related to the Company's foreign currency net investment hedges for the quarter ended March 31, 2011. These forward foreign currency exchange contracts do not contain any credit risk-related contingent features as defined by Accounting Standards Codification ("ASC") 815, Derivatives and Hedging.

Recent Accounting Pronouncements

Receivables—In April 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-02, A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring, as codified in ASC 310. The amendments in this update provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The amendments in this update are effective for the period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The Company is currently evaluating the impact, if any, of this update on its consolidated financial statements.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION

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

		Quarter Ended March 31, 2011

		FTD		Content & Media		Communications		Total
Services		$	29,791	$	32,529	$	27,879	$	90,199
Products			129,086		—		—		129,086
Advertising			22		15,784		6,819		22,625

	Total segment revenues	$	158,899	$	48,313	$	34,698	$	241,910

Segment income from operations		$	18,573	$	10,123	$	16,625	$	45,321

		Quarter Ended March 31, 2010

		FTD		Content & Media		Communications		Total
Services		$	31,731	$	33,952	$	37,018	$	102,701
Products			124,487		—		—		124,487
Advertising			469		16,550		8,223		25,242

	Total segment revenues	$	156,687	$	50,502	$	45,241	$	252,430

Segment income from operations		$	17,425	$	13,531	$	20,595	$	51,551

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

		Quarter Ended March 31,

		2011			2010
Segment revenues:
	FTD	$	158,899		$	156,687
	Content & Media		48,313			50,502
	Communications		34,698			45,241

Total segment revenues			241,910			252,430
	Intersegment eliminations		(405	)		(705	)

Consolidated revenues		$	241,505		$	251,725

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

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 March 31,

		2011			2010
Segment operating expenses:
	FTD	$	140,326		$	139,262
	Content & Media		38,190			36,971
	Communications		18,073			24,646

Total segment operating expenses			196,589			200,879
	Depreciation		6,145			6,667
	Amortization of intangible assets		7,907			8,163
	Unallocated corporate expenses		8,653			10,889
	Intersegment eliminations		(405	)		(705	)

Consolidated operating expenses		$	218,889		$	225,893

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 March 31,

		2011			2010
Segment income from operations:
	FTD	$	18,573		$	17,425
	Content & Media		10,123			13,531
	Communications		16,625			20,595

Total segment income from operations			45,321			51,551
	Depreciation		(6,145	)		(6,667	)
	Amortization of intangible assets		(7,907	)		(8,163	)
	Unallocated corporate expenses		(8,653	)		(10,889	)

Consolidated operating income		$	22,616		$	25,832

International revenues are generated by the Company's operations in Europe. International revenues totaled $49.8 million and $56.9 million for the quarters ended March 31, 2011 and 2010, respectively.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. SEGMENT INFORMATION (Continued)

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

		March 31, 2011		December 31, 2010

United States		$	68,146	$	68,222
Europe			9,824		8,997

	Total long-lived assets	$	77,970	$	77,219

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

Financing Receivables

Credit quality of financing receivables was as follows (in thousands):

		March 31, 2011		December 31, 2010

Current		$	15,355	$	16,625
Past due			3,937		3,705

	Total	$	19,292	$	20,330

A significant majority of the past due financing receivables at March 31, 2011 and December 31, 2010 were 120 days or more past due. Financing receivables on nonaccrual status at March 31, 2011 and December 31, 2010 totaled $3.9 million and $4.0 million, respectively.

The changes in allowance for credit losses related to financing receivables for the quarter ended March 31, 2011 were as follows (in thousands):


Balance at January 1, 2011:		$	3,597
	Current period provision		267
	Write-offs charged against allowance		(168	)

Balance at March 31, 2011		$	3,696

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. BALANCE SHEET COMPONENTS (Continued)

Other Current Assets

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

		March 31, 2011		December 31, 2010

Prepaid expenses—other		$	9,739	$	9,185
Floral-related inventories			3,144		5,321
Income taxes receivable			975		3,962
Gift cards related to member redemption liability			2,955		2,973
Prepaid advertising and promotions			1,537		1,855
Prepaid floral catalog expenses			1,644		1,305
Prepaid insurance			582		1,248
Other			2,451		2,645

	Total	$	23,027	$	28,494

Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

		March 31, 2011		December 31, 2010

Employee compensation and related expenses		$	19,202	$	23,411
Income taxes payable			5,070		5,987
Non-income taxes payable			4,952		5,527
Customer deposits			2,182		2,608
Reserve for pending lawsuit			4,420		2,161
Other			7,112		9,187

	Total	$	42,938	$	48,881

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

Goodwill

The changes in goodwill by reportable segment for the quarter ended March 31, 2011 were as follows (in thousands):

			FTD			Content & Media		Communications			Total

Balance at January 1, 2011:
	Goodwill (excluding impairment charges)		$	441,202		$	124,718	$	13,227		$	579,147
	Accumulated impairment charges			(114,000	)		—		(5,738	)		(119,738	)

		Goodwill at January 1, 2011		327,202			124,718		7,489			459,409
	Foreign currency translation			3,525			11		—			3,536

Balance at March 31, 2011:
	Goodwill (excluding impairment charges)			444,727			124,729		13,227			582,683
	Accumulated impairment charges			(114,000	)		—		(5,738	)		(119,738	)

		Goodwill at March 31, 2011	$	330,727		$	124,729	$	7,489		$	462,945

Intangible Assets

Intangible assets consisted of the following (in thousands):

		March 31, 2011

		Gross Value		Accumulated Amortization			Net
Pay accounts and free accounts		$	100,917	$	(91,883	)	$	9,034
Customer contracts and relationships			112,407		(54,818	)		57,589
Trademarks and trade names			183,624		(18,274	)		165,350
Software and technology			46,685		(26,692	)		19,993
Rights, content and intellectual property			8,967		(3,266	)		5,701

	Total	$	452,600	$	(194,933	)	$	257,667

		December 31, 2010

		Gross Value		Accumulated Amortization			Net
Pay accounts and free accounts		$	100,873	$	(91,278	)	$	9,595
Customer contracts and relationships			111,913		(50,273	)		61,640
Trademarks and trade names			182,463		(17,603	)		164,860
Software and technology			46,513		(24,527	)		21,986
Rights, content and intellectual property			7,735		(3,041	)		4,694

	Total	$	449,497	$	(186,722	)	$	262,775

The Company's acquired trademarks and trade names related to the acquisition by the Company of FTD in August 2008, prior to impairment charges, are indefinite-lived and, accordingly, there is no associated amortization expense or accumulated amortization. At March 31, 2011 and December 31,

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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)

2010, the FTD trademarks and trade names after impairment and foreign currency translation adjustments totaled $157.8 million and $156.7 million, respectively.

5. 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 $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 quarter ended March 31, 2011 were as follows (in thousands):

		Balance at January 1, 2011		Repayments of Debt		Accretion of Discounts		Balance at March 31, 2011

FTD Credit Agreement, term loan A		$	49,446	$	—	$	81	$	49,527
FTD Credit Agreement, term loan B			208,638		—		394		209,032
FTD Credit Agreement, revolving credit facility			—		—		—		—

	Total	$	258,084	$	—	$	475	$	258,559

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 March 31, 2011 (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		$	50,258	$	—	$	7,120	$	43,138	$	—
FTD Credit Agreement, term loan B			214,367		—		2,216		2,216		209,935

	Total	$	264,625	$	—	$	9,336	$	45,354	$	209,935

At March 31, 2011, the borrowing capacity under the FTD revolving credit facility, which was reduced by $1.0 million in outstanding letters of credit, was $49.0 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. FTD Group, Inc. is not required to make excess cash flow debt prepayments under the FTD Credit Agreement in the next twelve months.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. DERIVATIVE INSTRUMENTS

The following table presents the notional and fair values of derivative instruments in the condensed consolidated balance sheet at March 31, 2011 (in thousands):

Derivative Instruments		Balance Sheet Location		Notional Value			Fair Value

Forward foreign currency exchange contracts		Other current assets		$	10,193		$	105

There were no open forward foreign currency exchange contracts at December 31, 2010.

The following table presents the effect of changes in fair value of derivative instruments for the quarter ended March 31, 2011 (in thousands):

Derivative Instruments		Location of Unrealized Gain		Amount of Unrealized Gain

Forward foreign currency exchange contracts		Other comprehensive loss		$	120

7. FAIR VALUE MEASUREMENTS

The following table presents information about assets at March 31, 2011 that are required to be measured at fair value on a recurring basis (in thousands):

Description	Total Fair Value		Level 1 Fair Value		Level 2 Fair Value

Money market funds	$	78,456	$	78,456	$	—
Derivative assets		105		—		105

	$	78,561	$	78,456	$	105

The following table presents information about assets at December 31, 2010 that are required to be measured at fair value on a recurring basis (in thousands):

Description		Total Fair Value			Level 1 Fair Value

Money market funds		$	67,150		$	67,150

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 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 5%. The table below summarizes the fair value estimates for long-term debt, net of discounts, including the current portion, at March 31, 2011, 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		$	258,559		$	278,951

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. 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. From August 2001 through December 31, 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. In February 2011, the Board of Directors extended the Program through December 31, 2011 and increased the amount authorized to $80.0 million. There were no repurchases under the Program in the quarter ended March 31, 2011.

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 quarters ended March 31, 2011 and 2010 were $6.2 million and $6.0 million, respectively, for which the Company withheld 0.9 million and 1.0 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 March 31, 2011, 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 nonvested restricted stock units as of the record date.

In January 2011, the Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock. The dividend was paid on February 28, 2011 and totaled $9.4 million, including dividend equivalents paid on nonvested restricted stock units.

In April 2011, the Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock. The record date for the dividend is May 12, 2011 and the dividend will be paid on May 31, 2011.

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.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. 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 March 31,

		2011		2010
Operating expenses:
Cost of revenues-services		$	82	$	181
Cost of revenues-products			8		19
Sales and marketing			470		1,217
Technology and development			553		973
General and administrative			3,613		5,470

	Total stock-based compensation	$	4,726	$	7,860

Recent Awards

Effective February 15, 2011, the Secondary Compensation Committee of the Board of Directors of United Online, Inc. approved grants of 1.3 million restricted stock units with a grant-date fair value equal to $9.3 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 units awarded annually over a four-year period beginning February 15, 2011.

Effective February 15, 2011, the Compensation Committee of the Board of Directors of United Online, Inc. approved grants of 2.4 million stock options with a grant-date fair value equal to $4.7 million to certain members of the Company's senior management. Each stock option entitles the recipient to receive one share of United Online, Inc.'s common stock upon exercise of the vested award. The stock options will vest as to one-third of the total number of options awarded annually over a three-year period beginning February 15, 2011.

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. NET INCOME PER COMMON SHARE

The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share amounts):

		Quarter Ended March 31,

		2011			2010
Numerator:
Net income		$	12,181		$	11,221
	Income allocated to participating securities		(555	)		(727	)

Net income attributable to common stockholders		$	11,626		$	10,494

Denominator:
Weighted-average common shares			87,417			85,759

Shares used to calculate basic net income per common share			87,417			85,759

	Add: Dilutive effect of non-participating securities		403			786

Shares used to calculate diluted net income per common share			87,820			86,545

Basic net income per common share		$	0.13		$	0.12

Diluted net income per common share		$	0.13		$	0.12

The diluted net income per common share computations exclude restricted stock units and stock options that were antidilutive. Weighted-average antidilutive shares for the quarters ended March 31, 2011 and 2010 were 3.2 million and 2.8 million, respectively.

11. RESTRUCTURING CHARGES

For the quarter ended March 31, 2011, the Company recorded restructuring charges related to its Communications segment totaling $0.5 million related to employee termination benefits. For the quarter ended March 31, 2010, the Company recorded restructuring charges totaling $1.1 million 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.

12. LEGAL CONTINGENCIES

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. LEGAL CONTINGENCIES (Continued)

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. Two individuals have appealed the October 5, 2009 order and plaintiffs have filed a motion to dismiss the appeals. The appellate court has not ruled on either the appeals or the motions to dismiss.

On October 30, 2008, Anthony Michaels filed a purported class action complaint against Classmates Online, Inc., now known as Memory Lane, Inc., Classmates Media Corporation and United Online, Inc. in Superior Court of the State of California, County of Los Angeles, alleging causes of action for intentional misrepresentation, negligent misrepresentation, negligence, fraudulent concealment, and for violations of California Business and Professions Code sections 17200 and 17500 et seq. On December 19, 2008, Xavier Vasquez filed a purported class action complaint against Classmates Online, Inc., Classmates Media Corporation and United Online, Inc. in Superior Court of Washington, Kings County, alleging causes of action for violation of the Washington Consumer Protection Act, violation of California's Unfair Competition Law, violation of California's Consumer Legal Remedies Act, unjust enrichment and violation of California Civil Code section 1694, dealing with dating services contracts. In both actions, the plaintiffs are seeking injunctive relief and damages. On April 30, 2009, the United States District Court of the Western District of Washington consolidated the Michaels and the Vasquez actions and designated the Michaels action as the lead case. On March 12, 2010, the parties entered into a comprehensive class action settlement agreement. On December 16, 2010, the court conducted a final approval hearing on the settlement. On February 22, 2011, the court issued an Order formally denying final approval of the settlement. On March 24, 2011, the parties entered into a revised settlement agreement, and on March 25, 2011, plaintiffs filed a motion for preliminary approval of the revised settlement. The court has not yet ruled on the motion.

In 2009, Classmates Online, Inc., now known as Memory Lane, Inc. received a civil investigative demand from the Attorney General for the State of Washington. In 2010, FTD.com Inc. and Classmates Online, Inc. 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 demand and the subpoenas, the Company believes that 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, in 2010, Classmates Online, Inc. 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 has been cooperating with these investigations. However, the Company cannot predict the outcome of these or any other governmental investigations or other

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UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. LEGAL CONTINGENCIES (Continued)

legal actions or their potential implications for its 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.

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 March 31, 2011, the Company had a reserve of $4.4 million for a pending lawsuit.

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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; 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 and revenue streams; competition; strategies; and new business initiatives, products, services, features, and functionality. 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, Memory Lane, Classmates, 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 Content & Media segment services are online nostalgia services and online loyalty marketing. Our primary Communications segment service is Internet access. 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
Content & Media		Online nostalgia services 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 floral mass 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, with the remaining orders delivered via direct shipment. FTD does not own or operate any retail locations.

Consumer Business. FTD is a leading marketer of flowers and gift items to consumers. FTD operates in the U.S. and Canada, primarily through the www.ftd.com website and 1-800-SEND-FTD 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 gift items including: special occasion gifts, bath and beauty products, jewelry, wine, fruit and other 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 networks of floral network members provide 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 the Republic of Ireland.

Content & Media

Our Content & Media services include online nostalgia services under the Memory Lane, Classmates, StayFriends, and Trombi brands. Our Content & Media services also include online loyalty marketing under the MyPoints brand.

Online Nostalgia Services. We have historically operated our nostalgia services as a platform to enable users to locate and interact with acquaintances from their past, with high school affiliations as the primary focus. Led by our Classmates.com website that serves the U.S. and Canada, our nostalgia services comprise a large and diverse population of users.

In February 2011, we re-branded the Classmates.com website as Memory Lane to reflect the significant broadening of the website's value proposition to increasingly feature nostalgic content. Our objective is to be the premier U.S. online website for accessing, acquiring, interacting, and sharing nostalgic content, supported by ongoing efforts to augment the existing content and to add new forms of nostalgic content and social interaction features to the website. We now feature nostalgic content including digitized versions of high school yearbooks, photographic images, premium video content, historic newsreels, vintage music samples, classic movie trailers, and iconic magazines. Visitors to the website can engage with a significantly broader range of available content, which can facilitate new forms of social interaction, such as sharing memorable content with friends and acquaintances or posting comments on the website after viewing the nostalgic content. We plan to add other forms of new content to the website.

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In addition to our Memory Lane website that includes the Classmates service, we operate five international websites that offer nostalgia services, primarily as a social networking platform to reconnect friends and acquaintances from high school. We operate StayFriends in Sweden, Germany, Austria, and Switzerland (www.stayfriends.se, www.stayfriends.de, www.stayfriends.at, and www.stayfriends.ch, respectively), and Trombi in France (www.trombi.com). Similar to the Memory Lane website, each international website includes free and pay memberships, although the features of our international pay services differ from those of the Memory Lane pay services.

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 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.

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 12,000 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. The number of consumer orders is not adjusted for non-delivered orders that are refunded after the scheduled delivery. 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

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designed to attract new and retain existing customers; changes in pricing for our floral, plant and gift products or competitive offerings; new or terminated partnerships; 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 discounts and 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 refunds issued; and discounts, among other factors.

Content & 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 paid for a subscription to a Content & Media or Communications service, and whose subscription has not terminated or expired. A subscription provides the member with access to our service for a specific term (for example, a month or a year) and may be renewed upon the expiration of each term. One-time purchases of our services, such as Memory Lane's one-day All-Access Pass, are not considered subscriptions and thus, are not included in the pay accounts metric. 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 Content & 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.

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Active Accounts. We monitor the number of active accounts among our membership base. Content & Media segment active accounts are defined as the sum of all pay accounts as of the date presented; the monthly average for the period of all free accounts who have visited our domestic or international online nostalgia 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 unless the account uses the same member identifier. As a result, total active accounts may not represent total unique users.

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.

The pay accounts and ARPU metrics for our Content & Media segment may fluctuate significantly from period to period due to various factors including, but not limited to, the extent to which discounted pricing is offered in prior and current periods, the percentage of pay accounts being

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represented by international pay accounts which, on average, have lower-priced subscription plans compared to U.S. pay accounts, and the churn rate.

				Quarter Ended

				March 31, 2011			December 31, 2010			September 30, 2010			June 30, 2010			March 31, 2010
Consolidated:
	Revenues (in thousands)			$	241,505		$	232,601		$	193,541		$	242,686		$	251,725
FTD:
	Segment revenues (in thousands)			$	158,899		$	140,174		$	105,046		$	152,669		$	156,687
		% of consolidated revenues			66	%		60	%		54	%		63	%		62	%
	Consumer orders (in thousands)				1,742			1,612			1,085			1,851			1,813
	Average order value			$	63.28		$	60.43		$	60.77		$	58.76		$	59.42
	Average currency exchange rate: GBP to USD				1.61			1.58			1.55			1.49			1.54
Content & Media:
	Segment revenues (in thousands)			$	48,313		$	53,253		$	49,105		$	48,784		$	50,502
		% of consolidated revenues			20	%		23	%		25	%		20	%		20	%
	Pay accounts (in thousands)				4,260			4,499			4,795			4,982			4,988
	Segment churn				3.9	%		4.1	%		3.5	%		3.1	%		3.2	%
	ARPU			$	2.47		$	2.42		$	2.26		$	2.22		$	2.29
	Segment active accounts (in millions)				13.6			13.7			15.0			16.1			17.5
Communications:
	Segment revenues (in thousands)			$	34,698		$	39,708		$	40,165		$	42,039		$	45,241
		% of consolidated revenues			14	%		17	%		21	%		17	%		18	%
	Pay accounts (in thousands):
		Access			675			732			801			880			967
		Other			279			288			295			300			306

			Total pay accounts		954			1,020			1,096			1,180			1,273
	Segment churn				3.8	%		3.8	%		4.0	%		4.2	%		4.3	%
	ARPU			$	9.33		$	9.46		$	9.58		$	9.57		$	9.41
	Segment active accounts (in millions)				1.7			1.8			1.9			2.0			2.1

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 website services, online advertising tools, telephone answering, order taking, order transmission, and clearing-house services.

Content & Media and Communications

Content & Media services revenues consist of amounts charged to pay accounts for online nostalgia 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 Content & Media and Communications services revenues are primarily dependent on two factors: the average number of pay accounts for a period and the

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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. Communications services revenues also include revenues generated from the resale of telecommunications to third parties.

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 Communications segment and we do not currently generate products revenues from our Content & Media 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 has historically generated advertising revenues primarily from post-transaction sales generated when FTD and Interflora consumers were presented with third-party offers immediately after completing a purchase on the www.ftd.com and www.interflora.co.uk websites. FTD has not had a domestic post-transaction sales agreement since January 2010 and terminated its U.K. post-transaction sales agreement in January 2011.

Content & Media

Our online nostalgia services generate advertising revenues primarily from display advertisements. Advertising inventory on our online nostalgia websites includes text and graphic placements on the user home page, profile page, class list page, and most other pages on our websites.

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 online 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 associated with our Internet access and email services. Advertising revenues also include intercompany commissions from our Content & 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; depreciation of network computers and equipment; license fees; costs related to customer billing and billing support for floral network

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members; fees associated with the storage and processing of customer credit cards and associated bank fees; and domain name registration fees.

Content & Media

Content & 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; amortization of content purchases; 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.

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, 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, technology and websites, 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 to five years.

General and Administrative

General and administrative expenses, which include unallocated corporate expenses, consist of personnel-related expenses for executive, finance, legal, human resources, facilities, internal audit, investor relations, internal customer support personnel and personnel associated with operating our corporate network systems. In addition, general and administrative expenses include, among other costs, professional fees for legal, accounting and financial services; insurance; occupancy and other overhead-

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related costs; office relocation costs; non-income taxes; gains and losses on the sale of assets; and expenses incurred as a result of settlements, judgments, fines, penalties, assessment, 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 potential 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.

Interest Income

Interest income consists primarily 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 capital leases and 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, 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 other 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.

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

			Quarter Ended March 31,

			2011			2010
Revenues			$	241,505		$	251,725
Operating expenses:
	Cost of revenues			120,826			121,198
	Sales and marketing			48,135			50,130
	Technology and development			12,775			14,349
	General and administrative			28,874			30,984
	Amortization of intangible assets			7,745			8,163
	Restructuring charges			534			1,069

		Total operating expenses		218,889			225,893

Operating income				22,616			25,832
Interest income				549			465
Interest expense				(5,041	)		(7,149	)
Other income, net				1,539			82

Income before income taxes				19,663			19,230
Provision for income taxes				7,482			8,009

Net income			$	12,181		$	11,221

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

			FTD				Content & Media				Communications

			Quarter Ended March 31,				Quarter Ended March 31,				Quarter Ended March 31,
			2011		2010		2011		2010		2011		2010
Revenues			$	158,899	$	156,687	$	48,313	$	50,502	$	34,698	$	45,241
Operating expenses:
	Cost of revenues			100,370		99,613		8,806		8,289		9,172		10,645
	Sales and marketing			29,352		26,584		15,406		17,217		3,333		6,403
	Technology and development			2,889		3,226		5,825		5,488		1,843		3,346
	General and administrative			7,715		8,770		8,153		5,977		3,191		4,252
	Restructuring charges			—		1,069		—		—		534		—

		Total operating expenses		140,326		139,262		38,190		36,971		18,073		24,646

Segment income from operations			$	18,573	$	17,425	$	10,123	$	13,531	$	16,625	$	20,595

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

		Quarter Ended March 31,

		2011			2010
Segment revenues:
	FTD	$	158,899		$	156,687
	Content & Media		48,313			50,502
	Communications		34,698			45,241
	Intersegment eliminations		(405	)		(705	)

Consolidated revenues		$	241,505		$	251,725

		Quarter Ended March 31,

		2011			2010
Segment operating expenses:
	FTD	$	140,326		$	139,262
	Content & Media		38,190			36,971
	Communications		18,073			24,646

Total segment operating expenses			196,589			200,879
	Depreciation		6,145			6,667
	Amortization of intangible assets		7,907			8,163
	Unallocated corporate expenses		8,653			10,889
	Intersegment eliminations		(405	)		(705	)

Consolidated operating expenses		$	218,889		$	225,893

		Quarter Ended March 31,

		2011			2010
Segment income from operations:
	FTD	$	18,573		$	17,425
	Content & Media		10,123			13,531
	Communications		16,625			20,595

Total segment income from operations			45,321			51,551
	Depreciation		(6,145	)		(6,667	)
	Amortization of intangible assets		(7,907	)		(8,163	)
	Unallocated corporate expenses		(8,653	)		(10,889	)

Consolidated operating income		$	22,616		$	25,832

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Quarter Ended March 31, 2011 compared to Quarter Ended March 31, 2010

The following table presents our consolidated operating results as a percentage of consolidated revenues for the quarters ended March 31, 2011 and 2010.

			Quarter Ended March 31,

			2011			2010
Revenues				100.0	%		100.0	%
Operating expenses:
	Cost of revenues			50.0			48.1
	Sales and marketing			19.9			19.9
	Technology and development			5.3			5.7
	General and administrative			12.0			12.3
	Amortization of intangible assets			3.2			3.2
	Restructuring charges			0.2			0.4

		Total operating expenses		90.6			89.7

Operating income				9.4			10.3
Interest income				0.2			0.2
Interest expense				(2.1	)		(2.8	)
Other income, net				0.6			—

Income before income taxes				8.1			7.6
Provision for income taxes				3.1			3.2

Net income				5.0	%		4.5	%

Consolidated Results

Revenues. Consolidated revenues decreased by $10.2 million, or 4%, to $241.5 million for the quarter ended March 31, 2011, compared to $251.7 million for the quarter ended March 31, 2010. The decrease in consolidated revenues was primarily due to a $10.5 million decrease in revenues from our Communications segment and a $2.2 million decrease in revenues from our Content & Media segment, partially offset by a $2.2 million increase in revenues from our FTD segment. Consolidated revenues related to our FTD, Content & Media and Communications segments constituted 65.7%, 20.0% and 14.3%, respectively, of our total segment revenues for the quarter ended March 31, 2011, compared to 62.1%, 20.0% and 17.9%, respectively, for the quarter ended March 31, 2010.

Cost of Revenues. Consolidated cost of revenues decreased by $0.4 million, or less than 1%, to $120.8 million for the quarter ended March 31, 2011, compared to $121.2 million for the quarter ended March 31, 2010. Consolidated cost of revenues as a percentage of consolidated revenues increased to 50.0% for the quarter ended March 31, 2011, compared to 48.1% for the prior-year period. The decrease of $0.4 million was primarily due to a $1.5 million decrease in cost of revenues associated with our Communications segment and a $0.2 million decrease in depreciation expense. The decrease was partially offset by a $0.8 million increase in cost of revenues associated with our FTD segment and a $0.5 million increase associated with our Content & Media segment. Cost of revenues related to our FTD, Content & Media and Communications segments constituted 84.8%, 7.4% and 7.8%, respectively, of our total segment cost of revenues for the quarter ended March 31, 2011, compared to 84.0%, 7.0% and 9.0%, respectively, for the quarter ended March 31, 2010.

Sales and Marketing Expenses. Consolidated sales and marketing expenses decreased by $2.0 million, or 4%, to $48.1 million for the quarter ended March 31, 2011, compared to $50.1 million for the quarter ended March 31, 2010. Consolidated sales and marketing expenses as a percentage of

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consolidated revenues remained flat at 19.9% for the quarter ended March 31, 2011, compared to the prior-year period. The decrease of $2.0 million was primarily due to a $3.1 million decrease in sales and marketing expenses associated with our Communications segment, a $1.8 million decrease associated with our Content & Media segment and a $0.3 million decrease in depreciation expense. The decrease was partially offset by a $2.8 million increase in sales and marketing expenses associated with our FTD segment. Sales and marketing expenses related to our FTD, Content & Media and Communications segments constituted 61.0%, 32.0% and 6.9%, respectively, of total segment sales and marketing expenses for the quarter ended March 31, 2011, compared to 53.0%, 34.3% and 12.8%, respectively, for the quarter ended March 31, 2010.

Technology and Development Expenses. Consolidated technology and development expenses decreased by $1.6 million, or 11%, to $12.8 million for the quarter ended March 31, 2011, compared to $14.3 million for the quarter ended March 31, 2010. Consolidated technology and development expenses as a percentage of consolidated revenues decreased to 5.3% for the quarter ended March 31, 2011, compared to 5.7% for the prior-year period. The decrease of $1.6 million was primarily related to a $1.5 million decrease in technology and development expenses associated with our Communications segment and a $0.3 million decrease associated with our FTD segment. The decrease was partially offset by a $0.3 million increase in technology and development expenses associated with our Content & Media segment. Technology and development expenses related to our FTD, Content & Media and Communications segments constituted 27.4%, 55.2% and 17.5%, respectively, of total segment technology and development expenses for the quarter ended March 31, 2011, compared to 26.7%, 45.5% and 27.7%, respectively, for the quarter ended March 31, 2010.

General and Administrative Expenses. Consolidated general and administrative expenses decreased by $2.1 million, or 7%, to $28.9 million for the quarter ended March 31, 2011, compared to $31.0 million for the quarter ended March 31, 2010. Consolidated general and administrative expenses as a percentage of consolidated revenues decreased to 12.0% for the quarter ended March 31, 2011, compared to 12.3% for the prior-year period. The decrease of $2.1 million was primarily due to a $2.2 million decrease in unallocated corporate expenses, a $1.1 million decrease in general and administrative expenses associated with our Communications segment and a $1.1 million decrease associated with our FTD segment. The decrease was partially offset by a $2.2 million increase in general and administrative expenses associated with our Content & Media segment. General and administrative expenses related to our FTD, Content & Media and Communications segments constituted 40.5%, 42.8% and 16.7%, respectively, of total segment general and administrative expenses for the quarter ended March 31, 2011, compared to 46.2%, 31.5% and 22.4%, respectively, for the quarter ended March 31, 2010.

Amortization of Intangible Assets. Consolidated amortization of intangible assets decreased by $0.4 million, or 5%, to $7.7 million for the quarter ended March 31, 2011, compared to $8.2 million for the quarter ended March 31, 2010. The decrease was primarily due to decrease in amortization of intangible assets related to our FTD segment.

Restructuring Charges. Consolidated restructuring charges decreased by $0.5 million, or 50%, to $0.5 million for the quarter ended March 31, 2011, compared to $1.1 million for the quarter ended March 31, 2010. For the quarter ended March 31, 2011, the Communications segment eliminated five positions and the Company recorded restructuring charges related to employee termination benefits. Restructuring charges for the quarter ended March 31, 2010 were related to the closure of certain FTD call center facilities in the U.S. and the U.K. These restructuring charges primarily included lease termination costs and employee termination benefits.

Interest Income. Interest income remained flat at $0.5 million for the quarter ended March 31, 2011, compared to $0.5 million for the quarter ended March 31, 2010.

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Interest Expense. Interest expense decreased by $2.1 million, or 29%, to $5.0 million for the quarter ended March 31, 2011, compared to $7.1 million for the quarter ended March 31, 2010. The decrease was primarily due to declining debt balances as a result of repayments on our credit facilities.

Other Income (Expense), Net. Other income, net increased by $1.5 million to $1.5 million for the quarter ended March 31, 2011, compared to $0.1 million for the quarter ended March 31, 2010. The increase in other income, net for the quarter ended March 31, 2011 was primarily related to a non-income tax refund at our FTD segment.

Provision for Income Taxes. For the quarter ended March 31, 2011, we recorded a provision for income taxes of $7.5 million on pre-tax income of $19.7 million, resulting in a year-to-date effective income tax rate of 38.1%. For the quarter ended March 31, 2010, we recorded a provision for income taxes of $8.0 million on pre-tax income of $19.2 million, resulting in a year-to-date effective income tax rate of 41.6%. The year-over-year effective income tax rate declined primarily due to a decrease in non-deductible stock-based compensation.

FTD Segment Results

The following table presents the FTD segment's operating expenses and income from operations as a percentage of FTD revenues for the quarters ended March 31, 2011 and 2010.

			Quarter Ended March 31,

			2011			2010
Revenues				100.0	%		100.0	%
Operating expenses:
	Cost of revenues			63.2			63.6
	Sales and marketing			18.5			17.0
	Technology and development			1.8			2.1
	General and administrative			4.9			5.6
	Restructuring charges			—			0.7

		Total operating expenses		88.3			88.9

Segment income from operations				11.7	%		11.1	%

FTD Revenues. FTD revenues increased by $2.2 million, or 1%, to $158.9 million for the quarter ended March 31, 2011, compared to $156.7 million for the quarter ended March 31, 2010. Excluding the impact of foreign currency exchange rates of $1.1 million due to a stronger British Pound versus the U.S. Dollar, revenues increased by $1.1 million, or 1%, compared to the prior-year period. Revenues increased in the period primarily due to increased consumer order volumes in the U.S. and the U.K. for the Valentine's Day holiday, higher non-holiday consumer order volume in the U.S. and higher average order values. These increases were partially offset by a decrease in order volume in the U.K. related to the shift in timing of the Mother's Day holiday to the second quarter of 2011 rather than the first quarter, which shifted approximately $14 million in revenues into the second quarter, and a decrease in advertising revenues due to the termination of the U.K. post-transaction sales agreement in January 2011.

FTD Cost of Revenues. FTD cost of revenues increased by $0.8 million, or 1%, to $100.4 million for the quarter ended March 31, 2011, compared to $99.6 million for the quarter ended March 31, 2010. Excluding the impact of foreign currency exchange rates of $0.8 million, cost of revenues was flat compared to the prior-year period. FTD cost of revenues as a percentage of revenues decreased to 63.2% for the quarter ended March 31, 2011, compared to 63.6% for the prior-year period. Cost of revenues as a percentage of revenues was positively impacted by a shift in the mix of products and

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services sold. This was partially offset by increased shipping costs and a decrease in post-transaction sales, which have minimal cost of revenues.

FTD Sales and Marketing Expenses. FTD sales and marketing expenses increased by $2.8 million, or 10%, to $29.4 million for the quarter ended March 31, 2011, compared to $26.6 million for the quarter ended March 31, 2010. FTD sales and marketing expenses as a percentage of revenues increased to 18.5% for the quarter ended March 31, 2011, compared to 17.0% for the prior-year period. Excluding the impact of foreign currency exchange rates of $0.3 million, sales and marketing expenses increased by $2.5 million, or 9%, compared to the prior-year period. The increase was primarily due to higher marketing expenditures related to television advertising in the U.K. leading up to the 2011 Mother's Day holiday and higher direct marketing costs.

FTD Technology and Development Expenses. FTD technology and development expenses decreased by $0.3 million, or 10%, to $2.9 million for the quarter ended March 31, 2011, compared to $3.2 million for the quarter ended March 31, 2010. FTD technology and development expenses as a percentage of revenues decreased to 1.8% for the quarter ended March 31, 2011, compared to 2.1% for the prior-year period. The decrease was primarily due to lower web hosting costs.

FTD General and Administrative Expenses. FTD general and administrative expenses decreased by $1.1 million, or 12%, to $7.7 million for the quarter ended March 31, 2011, compared to $8.8 million for the quarter ended March 31, 2010. FTD general and administrative expenses as a percentage of revenues decreased to 4.9% for the quarter ended March 31, 2011, compared to 5.6% for the prior-year period. The decrease in general and administrative expenses was largely attributable to decreases in bad debt and legal expenses.

FTD Restructuring Charges. The FTD segment recorded restructuring charges of $1.1 million for the quarter ended March 31, 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 FTD segment for the quarter ended March 31, 2011.

Content & Media Segment Results

The following table presents the Content & Media segment's operating expenses and income from operations as a percentage of Content & Media revenues for the quarters ended March 31, 2011 and 2010.

			Quarter Ended March 31,

			2011			2010
Revenues				100.0	%		100.0	%
Operating expenses:
	Cost of revenues			18.2			16.4
	Sales and marketing			31.9			34.1
	Technology and development			12.1			10.9
	General and administrative			16.9			11.8

		Total operating expenses		79.0			73.2

Segment income from operations				21.0	%		26.8	%

Content & Media Revenues. Content & Media revenues decreased by $2.2 million, or 4%, to $48.3 million for the quarter ended March 31, 2011, compared to $50.5 million for the quarter ended March 31, 2010. The decrease was partially due to a $1.4 million decrease in services revenues. Services revenues decreased primarily as a result of an 11% decrease in our average number of pay accounts

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from 4.9 million for the quarter ended March 31, 2010 to 4.4 million for the quarter ended March 31, 2011, partially offset by an 8% increase in ARPU from $2.29 for the quarter ended March 31, 2010 to $2.47 for the quarter ended March 31, 2011. The increase in ARPU was primarily attributable to a lower percentage of domestic pay accounts on discounted pricing plans, partially offset by a higher percentage of lower-priced international subscription plans. At March 31, 2011, the number of pay accounts decreased by 239,000 when compared to December 31, 2010. In addition, Content & Media advertising revenues decreased by $0.8 million for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010, 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. We expect that Content & Media pay accounts will continue to decline, at least in the near term.

Content & Media Cost of Revenues. Content & Media cost of revenues increased by $0.5 million, or 6%, to $8.8 million for the quarter ended March 31, 2011, compared to $8.3 million for the quarter ended March 31, 2010. Content & Media cost of revenues as a percentage of Content & Media revenues increased to 18.2% for the quarter ended March 31, 2011, compared to 16.4% for the prior-year period. The increase of $0.5 million was primarily due to a $0.6 million increase in the cost of points earned by members of our online loyalty marketing service.

Content & Media Sales and Marketing Expenses. Content & Media sales and marketing expenses decreased by $1.8 million, or 11%, to $15.4 million for the quarter ended March 31, 2011, compared to $17.2 million for the quarter ended March 31, 2010. Content & Media sales and marketing expenses as a percentage of Content & Media revenues decreased to 31.9% for the quarter ended March 31, 2011, compared to 34.1% for the prior-year period. The decrease of $1.8 million was largely the result of a $1.2 million decrease in costs to acquire online loyalty marketing members and other sales and marketing costs, a $0.3 million decrease in marketing costs to acquire new online nostalgia services members and a $0.3 million decrease in personnel- and overhead-related costs as a result of reduced headcount. We expect sales and marketing expenses to increase in the second quarter of 2011 when compared to the first quarter of 2011 due to higher media spend related to Memory Lane.

Content & Media Technology and Development Expenses. Content & Media technology and development expenses increased by $0.3 million, or 6%, to $5.8 million for the quarter ended March 31, 2011, compared to $5.5 million for the quarter ended March 31, 2010. Content & Media technology and development expenses as a percentage of Content & Media revenues increased to 12.1% for the quarter ended March 31, 2011, compared to 10.9% for the prior-year period. The $0.3 million increase was primarily due to an increase in personnel- and overhead-related costs.

Content & Media General and Administrative Expenses. Content & Media general and administrative expenses increased by $2.2 million, or 36%, to $8.2 million for the quarter ended March 31, 2011, compared to $6.0 million for the quarter ended March 31, 2010. Content & Media general and administrative expenses as a percentage of Content & Media revenues increased to 16.9% for the quarter ended March 31, 2011, compared to 11.8% for the prior-year period. The increase of $2.2 million was primarily due to a $1.9 million increase in the reserve for a pending lawsuit and a $1.2 million increase in personnel- and overhead-related costs, partially offset by a $1.0 million decrease in professional and consulting fees.

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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 ended March 31, 2011 and 2010.

			Quarter Ended March 31,

			2011			2010
Revenues				100.0	%		100.0	%
Operating expenses:
	Cost of revenues			26.4			23.5
	Sales and marketing			9.6			14.2
	Technology and development			5.3			7.4
	General and administrative			9.2			9.4
	Restructuring charges			1.5			—

		Total operating expenses		52.1			54.5

Segment income from operations				47.9	%		45.5	%

Communications Revenues. Communications revenues decreased by $10.5 million, or 23%, to $34.7 million for the quarter ended March 31, 2011, compared to $45.2 million for the quarter ended March 31, 2010. The decrease was primarily due to a $9.1 million decrease in services revenues primarily as a result of a 30% decrease in our average number of dial-up Internet access pay accounts from 1.0 million for the quarter ended March 31, 2010 to 0.7 million for the quarter ended March 31, 2011, as well as a decrease in ARPU from $9.41 for the quarter ended March 31, 2010 to $9.33 for the quarter ended March 31, 2011. The decrease in Communications revenues was also due to a $1.4 million decrease in advertising revenues resulting from the decrease in pay accounts. We expect that Communications pay accounts and services revenues will continue to decline.

Communications Cost of Revenues. Communications cost of revenues decreased by $1.5 million, or 14%, to $9.2 million for the quarter ended March 31, 2011, compared to $10.6 million for the quarter ended March 31, 2010. Communications cost of revenues as a percentage of Communications revenues increased to 26.4% for the quarter ended March 31, 2011, compared to 23.5% for the prior-year period due to a higher percentage of revenues being generated from our broadband services which have a higher cost of revenues than our dial-up Internet access services. The decrease of $1.5 million was primarily due to a $0.7 million decrease in customer support and billing-related costs due to the decrease in the number of dial-up Internet access pay accounts and a $0.4 million decrease in telecommunications costs associated with our dial-up Internet access services due to the 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 due to a $0.2 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 as a result of a higher percentage of fixed costs compared to variable costs, and a higher percentage of pay accounts being represented by broadband pay accounts, which have higher cost of revenues as compared to dial-up pay accounts.

Communications Sales and Marketing Expenses. Communications sales and marketing expenses decreased by $3.1 million, or 48%, to $3.3 million for the quarter ended March 31, 2011, compared to $6.4 million for the quarter ended March 31, 2010. Communications sales and marketing expenses as a percentage of Communications revenues decreased to 9.6% for the quarter ended March 31, 2011, compared to 14.2% for the prior-year period. The decrease in expenses reflects the Company's decision to reduce sales and marketing expenses. The decrease of $3.1 million was primarily attributable to a

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$1.8 million decline in advertising, promotion and distribution costs related to our dial-up Internet access services, a $0.8 million decrease in personnel-and overhead-related expenses as a result of reduced headcount and a $0.4 million decrease in customer service costs related to our dial-up Internet access services.

Communications Technology and Development Expenses. Communications technology and development expenses decreased by $1.5 million, or 45%, to $1.8 million for the quarter ended March 31, 2011, compared to $3.3 million for the quarter ended March 31, 2010. Communications technology and development expenses as a percentage of Communications revenues decreased to 5.3% for the quarter ended March 31, 2011, compared to 7.4% for the prior-year period. The decrease of $1.5 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 $1.1 million, or 25%, to $3.2 million for the quarter ended March 31, 2011, compared to $4.3 million for the quarter ended March 31, 2010. Communications general and administrative expenses as a percentage of Communications revenues decreased to 9.2% for the quarter ended March 31, 2011, compared to 9.4% for the prior-year period. The decrease of $1.1 million was primarily due to a decrease in personnel- and overhead-related costs as a result of reduced headcount.

Communications Restructuring Charges. Communications restructuring charges related to employee termination benefits were $0.5 million for the quarter ended March 31, 2011. There were no restructuring charges for the quarter ended March 31, 2010.

Unallocated Corporate Expenses

Unallocated corporate expenses decreased by $2.2 million, or 21%, to $8.7 million for the quarter ended March 31, 2011, compared to $10.9 million for the quarter ended March 31, 2010. The decrease was primarily due to $2.0 million of expenses recorded in the first quarter of 2010 related to a potential transaction that failed to consummate.

Liquidity and Capital Resources

Our total cash and cash equivalents balances increased by $6.1 million, or 6%, to $106.4 million at March 31, 2011, compared to $100.3 million at December 31, 2010. Our summary cash flows for the quarters ended March 31, 2011 and 2010 were as follows (in thousands):

	Quarter Ended March 31,

	2011			2010
Net cash provided by operating activities	$	27,739		$	51,487
Net cash used for investing activities	$	(8,301	)	$	(5,162	)
Net cash used for financing activities	$	(15,316	)	$	(39,907	)

Quarter Ended March 31, 2011 compared to Quarter Ended March 31, 2010

Net cash provided by operating activities decreased by $23.7 million, or 46%, for the quarter ended March 31, 2011, compared to the quarter ended March 31, 2010. Net cash provided by operating activities is driven by our net income adjusted for non-cash items and changes in working capital 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. The decrease in net cash provided by operating activities was due to a $22.4 million increase in working capital requirements primarily related to the timing of payments to vendors and the shift in timing of the U.K. Mother's Day from March to April as well as a $1.4 million decrease in net income, adjusted for non-cash items. Changes in working capital can cause variation in our cash flows provided by operating activities due to seasonality, timing and other factors.

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Net cash used for investing activities increased by $3.1 million, or 61%, for the quarter ended March 31, 2011, compared to the quarter ended March 31, 2010. The increase was due to a $1.9 million increase in capital expenditures and $1.2 million in purchases of rights, content and intellectual property related to acquiring new content for our domestic online nostalgia services business. We currently anticipate expending between $4 million to $6 million on purchases of rights, content and intellectual property in 2011, primarily for the purpose of adding new content.

Capital expenditures for the quarter ended March 31, 2011 were $7.1 million. We currently anticipate that our total capital expenditures for 2011 will be in the range of $25 million to $30 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 decreased by $24.6 million, or 62%, for the quarter ended March 31, 2011, compared to the quarter ended March 31, 2010. The decrease in net cash used for financing activities was primarily due to a decrease in debt payments of $25.1 million for the quarter ended March 31, 2011, compared to the prior-year period.

The payment of dividends and dividend equivalents is a cash outflow from financing activities. In January 2011, United Online, Inc.'s Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock. The dividend was paid on February 28, 2011 and totaled $9.4 million, including dividend equivalents paid on nonvested restricted stock units. In April 2011, 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 May 12, 2011 and the dividend will be paid on May 31, 2011. 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 credit agreement between FTD Group, Inc. and Wells Fargo Bank, National Association (the "FTD Credit Agreement"), cash flows generated by 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. From August 2001 through December 31, 2010, we repurchased a total of $150.2 million of our common stock under the Program and at December 31, 2010, the remaining amount available under the Program was $49.8 million. In February 2011, the Board of Directors extended the Program through December 31, 2011 and increased the amount authorized to $80 million. At March 31, 2011, the authorization remaining under the Program was $80.0 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 grant to employees. In general, 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 quarters ended March 31, 2011 and 2010 were $6.2 million and $6.0 million, respectively, for which we withheld 0.9 million shares and 1.0 million shares of common stock, respectively, that were underlying

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the restricted stock units which vested and stock awards that were issued. The amount we pay in future periods will vary based on our stock price and the number of applicable restricted stock units vesting and stock awards being issued during the period.

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.

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 Content & 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. 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, including rights, content and intellectual property, 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.

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Contractual Obligations

Contractual obligations at March 31, 2011 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		$	327,596	$	20,084	$	89,704	$	217,808	$	—
Member redemption liability			24,375		19,503		4,872		—		—
Operating leases			42,128		13,486		17,085		7,026		4,531
Services and promotional contracts			5,163		3,797		1,366		—		—
Telecommunications purchases			7,779		5,246		2,533		—		—
Media purchases			7,224		7,224		—		—		—
Floral-related purchases			5,342		5,342		—		—		—
Other long-term liabilities			3,374		235		2,158		266		715

	Total	$	422,981	$	74,917	$	117,718	$	225,100	$	5,246

Commitments under letters of credit at March 31, 2011 were scheduled to expire as follows (in thousands):

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

Letters of credit		$	1,541		$	1,299		$	242

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.

Other Commitments

In the ordinary course of business, we may provide indemnifications of varying scope and terms to customers, vendors, lessors, sureties and insurance companies, 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.

Off-Balance Sheet Arrangements

At March 31, 2011, 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.

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Recent Accounting Pronouncements

Receivables—In April 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-02, A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring, as codified in Accounting Standards Codification ("ASC") 310. The amendments in this update provide additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The amendments in this update are effective for the period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. We are currently evaluating the impact, if any, of this update on our consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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.

Interest Rate Risk

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 quarter ended March 31, 2011, 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.

Foreign Currency Risk

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"), the Swedish Krona ("SEK"), the Swiss Franc ("CHF"), and the Canadian Dollar ("CAD"), which may result in gains or losses reported in our results of operations. The volatilities in GBP, EUR, INR, SEK, CHF, and CAD (and all other

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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.

We utilize forward foreign currency exchange contracts to protect the value of our net investments in certain foreign subsidiaries. These contracts are designated as hedges of net investments in foreign entities, and the gains or losses are reported in other comprehensive income to the extent that they are effective. At March 31, 2011, the notional value of open forward foreign currency contracts accounted for as foreign net investment hedges totaled $10.2 million.

Periodically, we enter into forward foreign currency exchange contracts which are not designated as hedging instruments for accounting purposes. We enter into these derivative instruments to partially offset the economic effect of fluctuations in the foreign currency exchange rates. We may in the future also use other derivative financial instruments, if it is determined that such hedging activities are appropriate to reduce risk.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Acting 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 Acting 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 Acting Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

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.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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. Two individuals have appealed the October 5, 2009 order and plaintiffs have filed motions to dismiss the appeals. The appellate court has not ruled on either the appeals or the motions to dismiss.

In 2009, Classmates Online, Inc., now known as Memory Lane, Inc., received a civil investigative demand from the Attorney General for the State of Washington. In 2010, FTD.com Inc. and Classmates Online, Inc. 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,

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Ohio, Oregon, Pennsylvania, Texas, and Vermont. Based on the demand and the subpoenas, we believe that 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, in 2010, Classmates Online, Inc. 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 have been 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 March 31, 2011, we had a reserve of $4.4 million for a pending lawsuit.

ITEM 1A. RISK FACTORS

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, 2010.

RISKS RELATING TO OUR BUSINESS GENERALLY

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 challenging 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 continuing 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 continuing economic conditions may adversely impact our key vendors. Such 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 business is subject to fluctuations.

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 Securities and Exchange Commission (the "SEC") may affect us from period to

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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 challenging 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 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 ongoing transition of Memory Lane to be the premier U.S. website for nostalgic content. Such development and implementation involves a number of uncertainties, including unanticipated delays and expenses and technological problems. New business initiatives, products, services, or features also may not be accepted by consumers or commercially successful. We cannot assure you that we will be successful in such development and implementation efforts, including those related to the Memory Lane business, or that any new business initiatives, products, services, or features will be accepted by consumers or commercially successful. If our development and implementation efforts are not successful, or such new initiatives, products, services, or features are not accepted by consumers 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 to our websites and advertising inventory, changes in applicable laws, regulations or business practices, including those related to behavioral or targeted advertising and user privacy, changes in business models, changes in the online advertising market, changes in the economy, advertisers' budgeting and buying patterns, competition, changes in the number of visitors to our websites, active accounts or consumers purchasing our products and services, 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. Advertising revenues generated by our Communications segment generally have been declining primarily as a result of the decrease in our dial-up Internet access pay accounts. In addition, prior to 2010, our Content & Media and FTD segments 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. Although we expect 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, we do not expect the revenues from such offers to be significant. The layout of the Memory Lane website also has fewer prime advertisement placement locations than the historical Classmates.com website. 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.

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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, the Swedish Krona, the Swiss Franc, 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, in connection with the launch of the Memory Lane website, we have spent, and may continue to spend, a significant amount on its marketing, including through television advertising. If our 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 online nostalgia 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 Content & 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

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support functions in the event that this vendor unexpectedly becomes unable or unwilling to provide these services to us.

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, securities laws claims, claims involving unfair competition, claims in connection with employment practices, 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, misappropriation of intellectual property or proprietary rights, and privacy and security matters. The failure to successfully defend against these and other types of claims, including claims relating to our business practices or alleging infringement of intellectual property or 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.

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. The Federal Trade Commission and certain state agencies have investigated Internet companies, including us, in connection with consumer protection and privacy matters. In addition, we have received civil investigative demands and subpoenas, as applicable, from the Attorneys General of various states, primarily regarding their respective investigations into certain post-transaction sales practices and certain of our marketing, billing and renewal practices. We have been cooperating with these investigations and have resolved one of the investigations. However, the outcome of these or any other governmental investigations or their potential implications for our business are uncertain. We may not prevail in existing or future claims and any judgment against us or settlement or resolution of such claims may involve the payment of significant sums, including damages, fines, penalties, or assessments, or changes to our business practices. Defending against lawsuits, inquiries and investigations involves significant expense and diversion of management's attention and resources from other matters. 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 could result in changes to our business practices as well as significant fines, penalties or assessments, which could decrease our revenues or 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 or private parties, or we are required to pay significant sums, including damages, fines, penalties, or assessments, our business, financial condition, results of operations, and cash flows could be materially and adversely affected.

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

Our trade names, trademarks, service marks, patents, copyrights, domain names, trade secrets, and other intellectual property are important to the success of our businesses. In particular, we view our primary trademarks as critical to our success. We principally 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 intellectual property and 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 intellectual property and 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 intellectual property and proprietary rights may not be adequate, and other third parties may infringe or misappropriate our intellectual property and proprietary rights. The protection of our intellectual property and proprietary rights may require the expenditure of significant financial and internal resources. We cannot assure you that we have taken adequate steps to prevent infringement or misappropriation of our intellectual property and proprietary rights. Our failure to adequately protect our intellectual property and 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, could 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.

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Our online nostalgia 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 have historically generated the majority of the traffic on our online nostalgia websites and are the most important driver of member activity for our online loyalty marketing service. A significant number of members of our online nostalgia 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 nostalgia and online loyalty marketing services become invalid. This disrupts our ability to email these members and also prevents our online nostalgia members from being able to contact these members, which is one of the reasons why members use our online nostalgia 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:

•: disruption of our ongoing business and significant diversion of resources and management time from day-to-day responsibilities;
•: acquisition financings that involve the issuance of potentially dilutive equity or the incurrence of debt;
•: reduction of cash and other resources available for operations and other uses;
•: exposure to risks specific to the acquired business, service or technology to which we are not currently exposed;

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•: risks of entering markets in which we have little or no direct prior experience;
•: unforeseen obligations or liabilities;
•: difficulty assimilating the acquired customer bases, technologies and operations;
•: difficulty assimilating and retaining management and employees of the acquired business;
•: potential impairment of relationships with users, customers or vendors as a result of changes in management of the acquired business or other factors;
•: large write-offs either at the time of the acquisition or in the future, the incurrence of restructuring charges, the amortization of identifiable intangible assets, and the impairment of amounts capitalized as goodwill, intangible assets and other long-lived assets; and
•: lack of, or inadequate, controls, policies and procedures appropriate for a public company, and the time, cost and difficulties related to the implementation of such controls, policies and procedures or the remediation of any deficiencies.

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:

•: if we fail to meet payment obligations or otherwise default under the FTD Credit Agreement, the lenders will have the right to accelerate the indebtedness and exercise other rights and remedies against us;
•: we will be required to dedicate a substantial portion of FTD's cash flow from operations to payments on the debt, thereby reducing funds available for working capital, capital expenditures, dividends, acquisitions, and other purposes;
•: our ability to obtain additional financing to fund future working capital, capital expenditures, additional acquisitions, and other general corporate requirements could be limited;
•: the FTD Credit Agreement imposes operating and financial covenants and restrictions on FTD, including limitations on our ability to use FTD cash flow for the benefit of our subsidiaries other than FTD, and compliance with such covenants and restrictions may adversely affect our ability to adequately finance our operations or capital needs in the future, to pursue attractive business opportunities that may arise in the future, to redeem or repurchase capital stock, to pay dividends, to sell assets, and to make capital expenditures;
•: our failure to comply with the covenants in the FTD Credit Agreement, including failure as a result of events beyond our control, could result in an event of default under the credit agreement, which could cause all amounts outstanding with respect to that debt to become immediately due and payable and could materially and adversely affect our operating results, financial condition and liquidity;

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•: we will experience increased vulnerability to, and limited flexibility in planning for, changes to our businesses and adverse economic and industry conditions;
•: we could be placed at a competitive disadvantage relative to other companies with less indebtedness;
•: our ability to apply excess FTD cash flow or proceeds from certain types of securities offerings, asset sales and other transactions to purposes other than the repayment of debt, as well as servicing of the debt, could be limited;
•: the interest rates under the FTD Credit Agreement will fluctuate and, accordingly, interest expense may increase; and
•: if we make voluntary prepayments on our debt, we will have to accelerate the related discount accretion and debt issuance cost amortization, which would impact interest expense, and certain prepayments may be subject to penalties.

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 Group, Inc. 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 and certain business initiatives such as the content archives on the Memory Lane website. 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 or business initiatives are not commercially successful or, if due to economic or other conditions, our assumptions regarding the performance of such businesses or business initiatives 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. 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 challenging 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.

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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 less than anticipated in countries where we have lower statutory rates and more (or determined to be more 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:

•: adverse fluctuations in currency exchange rates;
•: potentially adverse tax consequences, including the complexities of foreign value added taxes and restrictions on the repatriation of earnings;
•: increased financial accounting, tax and reporting burdens and complexities;

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•: disruption of our ongoing business and significant diversion of management attention from day-to-day responsibilities;
•: localization of our services, including translation into foreign languages and adaptation for local practices and regulatory requirements;
•: lack of familiarity with, and unexpected changes in, foreign regulatory requirements;
•: longer accounts receivable collection cycles;
•: difficulties in managing and staffing international operations;
•: the burdens of complying with a wide variety of foreign laws, regulations and legal and regulatory standards;
•: political, social and economic instability abroad, terrorist attacks and security concerns in general; and
•: reduced or varied protection for intellectual property and proprietary rights.

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

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. A decline in our cash flows, changes in our business needs, including working capital and funding for business initiatives or 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.

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

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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.

Our certificate of incorporation, our bylaws and Delaware law contain provisions that could delay or discourage takeover attempts that stockholders may consider favorable or beneficial.

Provisions of our certificate of incorporation, our bylaws and Delaware law could make it difficult for our stockholders to elect directors and take other corporate actions. These provisions could have the effect of delaying or discouraging takeover attempts that our stockholders may consider favorable or beneficial because of the premium price that would be offered by a potential acquirer. In addition, although our previous stockholder rights plan expired in February 2011, there are no assurances that our Board of Directors will not implement a new stockholder rights plan in the future.

Our stock price has been highly volatile and may continue to be volatile.

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.

ADDITIONAL RISKS RELATING TO OUR FTD SEGMENT

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, gifts. In the consumer market, consumers are our customers for direct sales of floral products and gifts through our websites and 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 access to the FTD and Interflora brands and the Mercury Man logo, access to the floral networks, credit card processing services, e-commerce website services, online advertising tools, telephone answering, order taking, order transmission, and clearing-house services.

The consumer market for flowers and gifts is highly competitive as consumers can purchase the products we offer from numerous sources, including traditional local retail florists, supermarkets, mass merchants, gift retailers, and floral mass marketers, such as those that use websites, 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, Inc. International key competitors include Marks & Spencer, NEXT, John Lewis, Teleflorist (also known as eFlorist), Flowers Direct, and Flying Flowers.

We believe competition in the consumer market will likely continue to intensify. Supermarkets, mass merchants and floral mass 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 mass merchants to continue to increase, and other floral mass 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 engage in more significant discounting, may devote significantly greater resources to marketing

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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 floral mass 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.

Shifts in the mix of products and services sold may adversely affect our financial results.

The cost of revenues associated with our products revenues is generally higher than that associated with our services revenues. As a result, changes in the proportion of FTD segment revenues that is

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represented by products revenues versus services revenues may adversely affect our revenues, cost of revenues, cost of revenues as a percentage of revenues, and segment income from operations.

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, we have been offering broader and greater discounts to the consumer, both on a promotional basis to consumers generally as well as through strategic arrangements with third parties that have a fixed, and in certain cases greater, discount or other associated costs. We also offer discounts on our floral network service fees from time to time on a promotional basis. Increases in the portion of products and services sold at a discount, including through such strategic arrangements, has resulted, and 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 a portion of our products and services at a discount, including through such strategic arrangements, and there are no assurances that the portion of products and services sold at a discount, including through such strategic arrangements, 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, including through such strategic arrangements, in order to sell our products and services, which could result in our having to reduce our standard pricing, and 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, restrictions relating to the management of pests and disease, and fair trade and other social or environmental issues, 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:

•: severe weather;
•: disease, infestation and other biological problems;
•: import duties and quotas;
•: time-consuming import regulations or controls at airports;
•: changes in trading status;
•: economic uncertainties and currency fluctuations, including as a result of the recent volatility and disruptions in the credit markets and general economy;
•: foreign government laws and regulations;
•: political, social and economic instability, terrorist attacks and security concerns in general;

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•: fair trade and other social or environmental certifications, requirements or practices;
•: governmental bans or quarantines;
•: disruption in transportation and delivery;
•: trade restrictions, including U.S. retaliation against foreign trade practices; and
•: transportation availability and costs.

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 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 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 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.

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ADDITIONAL RISKS RELATING TO OUR CONTENT & MEDIA SEGMENT

The transition of our historical Classmates business to the new Memory Lane business may not be successful.

In 2010, we made the strategic decision to expand upon the historical value proposition of our Classmates service and transition the website to be the premier U.S. website to access, acquire, interact with, and share nostalgic content under the new Memory Lane brand. There are many risks associated with such transition. We have marketed, and plan to continue marketing, the new website and brand through a significant marketing campaign, and our efforts may not be successful. In addition, we charge for certain premium content and other products, and there are no assurances that consumers will find such content and products to be compelling and be willing to pay for them, which could result in our having to reduce our standard pricing or change our pricing structure or business model. We also have altered, and will continue to evaluate and evolve, the ways in which we bring Internet traffic to the website and in which visitors navigate the website. Such changes may not be successful and could adversely affect Internet traffic to the website, the visitor's experience, as well as our key metrics, including the number of free accounts, pay accounts, active accounts, and visitors to the website generally. We intend to add new forms of content and social interaction features to the website, but we may experience delays or technical issues in connection with the implementation of such new content and features. Technology is also constantly evolving and the website may not be compatible with the latest mobile and other devices used by consumers. There are no assurances that the Memory Lane initiative will be successful. If this initiative is not successful, our business, key metrics and financial results will be adversely affected.

We face intense competition that could result in the failure of our online nostalgia services to be commercially successful.

As consumers continue to spend more time and money online, the competition for their time and engagement has continued to intensify. Consumers have a great number of options for online content and entertainment, including, by way of example, websites offering news and current events, movies, television shows, videos, information about any and virtually every topic, and the opportunity to communicate, socialize and interact with acquaintances and others. The value proposition of our historical Classmates service as well as that of our international services competes with major social networking websites such as Facebook and Internet search engines such as Google. Our expanded online nostalgia service continues to compete with these types of websites, as well as other websites that offer online content and entertainment, such as, by way of example, YouTube with respect to videos, Hulu with respect to television shows, websites offering games, and websites offering other forms of social media, such as Twitter. Many of our competitors offer their content and services free of charge.

The market for online loyalty marketing services is highly competitive, and we expect competition to significantly increase in the future as loyalty marketing programs continue to grow in popularity. Our MyPoints online loyalty marketing service faces competition for members from 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 or third-party content or offer their services or content free to their users. Some of our competitors have been more successful than we have been in attracting and retaining visitors and members, and our ability to attract visitors to our websites and maintain a large

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and growing member base has been adversely affected by such competition. If our competitors provide services similar to our online nostalgia services for free, we may not be able to charge for our online nostalgia services. Competition could have a material adverse effect on our subscription revenues from online nostalgia services, as well as on advertising revenues from our online nostalgia services 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 key business metrics, revenues, cash flows, and profitability could be adversely affected.

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

Pay accounts are critical to our business model. Only a small percentage of users visiting our websites or initially registering for our online nostalgia 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 visitors to our websites, register them as free members, encourage them to return to our websites, and 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 visitors to our websites and convert a significant portion to pay accounts, the number of pay accounts for our online nostalgia services will continue to decline and our business and financial results would be adversely affected.

A number of our pay account subscriptions each month are not renewed or are canceled, which, for the Content & 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 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 experience an increase in the percentage of credit card failures from time to time. 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 visitors to our websites and members for our online nostalgia and online loyalty marketing services or the activity level of these visitors and members could cause our business and financial results to suffer.

The success of our online nostalgia and online loyalty marketing services depends upon our ability to increase or maintain the number of visitors to our websites, our base of free members and the level of activity of those visitors and members. A decline in the number of visitors, registered or active free online nostalgia 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 the number of visitors to our websites, 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.

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

Due to economic conditions and for competitive and other reasons, from time to time, we have offered a greater percentage of discounted pricing plans on a promotional basis than we typically have offered. In general, these discounted pricing plans offer a subscription term at a significant discount compared to the standard pricing for such subscription term. Any such increases in the percentage of pay accounts under a discounted pricing plan and any increases in the level of the discounts will likely 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 volume or level of the discounts 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.

ADDITIONAL RISKS RELATING TO OUR COMMUNICATIONS SEGMENT

Our business will suffer if we are unable to compete successfully.

We compete with numerous other dial-up Internet access providers as well as providers of broadband services. Our principal 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. Certain portions of the U.S., primarily rural areas, currently have limited or no access to broadband services. However, the U.S. government has indicated its intention to provide broadband services to such rural areas. Such expansion of the availability of broadband services will increase the competition for Internet access subscribers in such areas and will likely adversely affect our business. 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

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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, and we anticipate our profitability will decrease 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.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) - (b) Not applicable

(c) Repurchases

United Online, Inc.'s Board of Directors authorized a common stock repurchase program (the "Program") that allowed us to repurchase shares of our common stock through open market or

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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 December 31, 2010, we had repurchased $150.2 million of our common stock under the Program, leaving $49.8 million of authorization remaining under the Program. In February 2011, the Board of Directors extended the Program through December 31, 2011 and increased the amount authorized to $80 million. At March 31, 2011, the authorization remaining under the Program was $80 million.

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 most 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 employee withholding taxes due, which is accounted for as a repurchase of common stock. We then pay the applicable required employee withholding taxes.

Common stock repurchases during the quarter ended March 31, 2011 were as follows (in thousands, except per share amounts):

Period		Total Number of Shares Purchased			Average Price Paid per Share			Total Number of Shares Purchased as Part of a Publicly Announced Program			Maximum Approximate Dollar Value that May Yet be Purchased Under the Program

February 2011			888		$	6.94			—		$	80,000

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ITEM 6. EXHIBITS

				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
	4.1	Amendment No. 2 to Rights Agreement, dated as of February 28, 2011, between the Registrant and Computershare Trust Company, N.A.		8-K	000-33367	3/1/2011
	4.2	Certificate of Elimination of Series A Junior Participating Preferred Stock		8-K	000-33367	3/1/2011
	10.1	2011 Management Bonus Plan	X		000-33367	5/9/2011
	10.2	2011 Special Bonus Plan	X		000-33367	5/9/2011
	10.3	Amended and Restated United Online, Inc. Severance Benefit Plan	X		000-33367	5/9/2011
	31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X		000-33367	5/9/2011
	31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X		000-33367	5/9/2011
	32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X		000-33367	5/9/2011
	32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X		000-33367	5/9/2011
	101.INS	XBRL Instance Document	X		000-33367	5/9/2011
	101.SCH	XBRL Taxonomy Extension Schema Document	X		000-33367	5/9/2011
	101.CAL	XBRL Taxonomy Calculation Linkbase Document	X		000-33367	5/9/2011
	101.LAB	XBRL Taxonomy Label Linkbase Document	X		000-33367	5/9/2011
	101.PRE	XBRL Taxonomy Presentation Linkbase Document	X		000-33367	5/9/2011
	101.DEF	XBRL Taxonomy Extension Definition Document	X		000-33367	5/9/2011

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SIGNATURES

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.


Date: May 9, 2011	UNITED ONLINE, INC. (Registrant)
	By:	/s/ NEIL P. EDWARDS Neil P. Edwards Acting Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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EXHIBIT INDEX

				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
	4.1	Amendment No. 2 to Rights Agreement, dated as of February 28, 2011, between the Registrant and Computershare Trust Company, N.A.		8-K	000-33367	3/1/2011
	4.2	Certificate of Elimination of Series A Junior Participating Preferred Stock		8-K	000-33367	3/1/2011
	10.1	Form of Restricted Stock Unit Issuance Agreement for 2010 Incentive Compensation Plan (non-employee directors—initial grant)	X		000-33367	5/9/2011
	10.2	2011 Special Bonus Plan	X		000-33367	5/9/2011
	10.3	Amended and Restated United Online, Inc. Severance Benefit Plan	X		000-33367	5/9/2011
	31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X		000-33367	5/9/2011
	31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X		000-33367	5/9/2011
	32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X		000-33367	5/9/2011
	32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X		000-33367	5/9/2011
	101.INS	XBRL Instance Document	X		000-33367	5/9/2011
	101.SCH	XBRL Taxonomy Extension Schema Document	X		000-33367	5/9/2011
	101.CAL	XBRL Taxonomy Calculation Linkbase Document	X		000-33367	5/9/2011
	101.LAB	XBRL Taxonomy Label Linkbase Document	X		000-33367	5/9/2011
	101.PRE	XBRL Taxonomy Presentation Linkbase Document	X		000-33367	5/9/2011
	101.DEF	XBRL Taxonomy Extension Definition Document	X		000-33367	5/9/2011

Attached files

UNITED ONLINE INC Reports

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