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Article by DailyStocks_admin    (03-24-08 03:40 AM)

The Daily Magic Formula Stock for 03/23/2008 is United Online Inc. According to the Magic Formula Investing Web Site, the ebit yield is 15% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Overview

United Online, Inc., a Delaware corporation headquartered in Woodland Hills, California, commenced operations in 2001 following the merger of dial-up Internet access providers NetZero, Inc. and Juno Online Services, Inc.

We are a leading provider of consumer Internet and media services through a variety of brands including Classmates, MyPoints, NetZero, and Juno. We report our business in two segments: Classmates Media and Communications. Our Classmates Media services are online social networking and online loyalty marketing. Our primary Communications services are Internet access and email. Our Web properties, in aggregate, attract a significant number of Internet users each month among our base of more than 60 million registered accounts. Our large online audience enables us to offer a broad array of Internet marketing products and services for advertisers.

We have modified our segment reporting structure during 2007 to establish Classmates Media as a separate operating segment in the place of the former Content & Media segment that no longer will be reported. The new Classmates Media segment includes our online social networking and online loyalty marketing operations, which had formerly been part of the Content & Media segment. Web hosting and photo sharing, which also had formerly been part of the Content & Media segment, have been moved to the Communications segment. In addition, we have eliminated our historical practice of separately reporting certain unallocated corporate expenses. Under the new reporting structure, corporate expenses are allocated to the operating segments.

Historically, our operations were focused on providing value-priced dial-up Internet access services in the United States and Canada. In 2004, our dial-up Internet access revenues began to decline and we began diversifying our business to include other Internet consumer offerings in an effort to provide new growth opportunities for the Company. In November 2004, we acquired Classmates Online, Inc., or Classmates, a provider of online social networking services, and in April 2006, we acquired MyPoints.com, Inc., or MyPoints, a provider of online loyalty marketing services. Our strategy is to continue to leverage our resources and core competencies to further expand our businesses beyond dial-up Internet access services, through internal development and acquisitions, while managing our declining dial-up Internet access services primarily for profitability and cash flows.

Revenue growth within our Classmates Media segment in recent years has helped offset declining revenues within our Communications segment. Classmates Media segment revenues increased from $84.9 million in 2005 to $139.4 million in 2006 and $193.4 million in 2007, and expanded to 42.5% of total revenues in the fourth quarter of 2007. By comparison, Communications segment revenues declined from $440.2 million in 2005 to $383.2 million in 2006 and $320.1 million in 2007, and decreased to 57.5% of total revenues in the fourth quarter of 2007. We expect our Classmates Media segment revenues and operating income to continue to grow, and our Communications segment revenues and operating income to continue to decrease, at least in the near term.

We generate revenues from two sources: selling subscriptions through our consumer services, which we call billable services revenues, and selling advertising on our services. Billable services revenues are derived from subscriptions that are typically billed in advance on a monthly basis or for the entire subscription term, which enhances our cash flows and the predictability of future revenues. Billable services revenues within our Classmates Media segment are derived from subscriptions to our social networking services, and substantially all of the billable services revenues within our Communications segment are derived from subscriptions to our dial-up Internet access services. As part of our diversification strategy, we have increased our focus on advertising as a means to monetize our large online audience. Our advertising revenues have increased from $59.1 million, or 11.3% of total revenues, in 2005 to $134.0 million, or 26.1% of total revenues, in 2007.

Industry Background

Classmates Media Segment—Online Social Networking

Online social networking is rapidly growing and evolving to include a broad spectrum of Web sites and online services. From a category that attracted a relatively small number of users a few years ago, during December 2007, social networking Web sites attracted approximately 516.3 million unique visitors worldwide and an average of 169.8 million daily visitors according to comScore MediaMetrix, an Internet industry research company.

We believe people have a fundamental drive to connect with others, be part of a community, express themselves and maintain personal relationships. Core, life-long relationships are often based on enduring affiliations related to shared experiences such as family, school, workplace or military service. People seek to foster these relationships as well as other meaningful affiliations, such as those based on common interests, hobbies and trends.

Some affiliations, such as those based on school, workplace and the military, encompass large numbers of individuals. According to the U.S. Census Bureau, as of 2006, there were approximately 186.2 million high school graduates living in the United States, and approximately 116.7 million people in the United States who had attended college. As of 2006, the U.S. military and armed forces included more than 24.7 million active members and veterans. As of 2004, there were 73.2 million employees of companies with 100 or more employees in the United States.

Over time, people frequently lose touch with each other for a variety of reasons, including geographic moves and job changes. According to the U.S. Census Bureau, approximately 39.9 million people relocate, and nearly one-third of America's workforce changes jobs, each year. In addition, it is estimated by the U.S. Department of Labor that the average American worker will hold more than 10 jobs by age 40. We believe there is a growing trend towards using new mediums of communication that facilitate social interaction and enable individuals to find and connect with friends, family and colleagues.

Social networking Web sites fulfill a number of different needs, including allowing users to find, connect or reconnect with individuals from their past and interact with new people based on shared interests, experiences, goals or other criteria. Widespread adoption of broadband Internet access, digital photography and online video has also served as a catalyst for growth in online social networking, facilitating the sharing of content over the Internet. We believe that social networking users frequently choose to participate in, and develop affiliations through, more than one online social networking service. These Web sites and services are used by individuals to, among other things, post content about themselves and to review or comment on the content posted by others. Users of social networking services may interact and communicate through email as well as through a variety of other online forums, including instant messaging, blogging, the posting of pictures and videos, voice chat, and discussion groups. Many social networking services provide users with tools that enable individuals to identify, build and maintain personal networks from their relevant affiliations.

Many advertisers, recognizing that consumers spend an increasing amount of time online, view social networking Web sites as an attractive marketing medium for their products and services. According to eMarketer, an independent Internet industry research firm, advertising spending on social networking Web sites in the United States is expected to increase more than 600%, from $350 million in 2006 to $2.7 billion in 2011.

Classmates Media Segment—Online Loyalty Marketing

The Internet is a growing channel for advertising and for consumers to find and purchase goods and services. According to IDC, a market research firm in the information technology industry, total advertising spending on the Internet in the United States is expected to almost double, from $16.9 billion in 2006 to $31.4 billion in 2011. In addition, more consumers are shopping online for goods and services. According to an April 2007 report by IDC, the number of unique buyers in the United States using the Internet to purchase goods or services is expected to grow from approximately 113.7 million in 2006 to approximately 199.5 million in 2012. As a result of both existing activity and expected growth, advertisers are seeking effective ways to target and reach online consumers.

Loyalty marketing programs are generally designed to reward consumers with points that accumulate based on their activities and which may be redeemed for products and services from participating vendors. These programs have long been popular with airlines, credit card vendors, hotels, and retailers. According to Aite Group, an independent research and advisory firm, 84% of credit card purchases will be made on rewards cards in the United States during 2007, more than double the comparable percentage in 2001, underscoring the growth in popularity of loyalty marketing programs. In recent years, loyalty marketing programs have expanded into a comprehensive direct marketing and targeted advertising strategy. Consumer adoption of loyalty marketing programs, however, has traditionally been associated with a single type of activity, such as airline, hotel or credit card selection.

Given the challenges faced by offline direct marketing, such as low response rates and rising costs of direct mail, advertisers are increasingly turning to the Internet to cost-effectively target and reach consumers. Online loyalty marketing programs enable advertisers to target consumers in ways that are generally impractical with traditional offline direct marketing channels. Online loyalty marketing programs often have the ability to, among other things, segment members based on personal interests, purchasing behavior and demographic profiles in order to create highly targeted advertising campaigns, thereby optimizing value to the advertiser. Online loyalty marketing programs use points as an incentive for members to update their personal interest profiles, helping advertisers target consumers interested in purchasing their products and services. Online loyalty marketing programs can also easily measure click-through rates on display advertising and response rates to email campaigns, providing rapid feedback for advertisers that can be used to identify potential customers and create new targeted offers.

In addition, an online loyalty marketing program that has attracted a large, responsive and loyal member base helps maximize returns on the advertisers' marketing investments. Online loyalty marketing programs that are not explicitly sponsored by a single large consumer brand, such as an airline, hotel chain or department store, appeal to a potentially broader audience because of the breadth of offers and the ability of the consumer to earn rewards quickly and more often.

Communications Segment

The U.S. consumer Internet access service market has evolved from one where the Internet was accessed primarily through dial-up access to one in which consumers can access the Internet through dial-up or a variety of high-speed, or broadband, connection methods including cable modems, DSL or wireless connections. Consumer adoption of Internet applications, such as music downloads and video, which require a broadband connection, has been increasing, while the retail pricing for broadband Internet access services has been decreasing. In addition, the Internet access market is now relatively mature with the rate of growth in the U.S. Internet population slowing. These factors have led to a significant decrease in dial-up accounts and a significant increase in broadband accounts. It is anticipated that the number of dial-up accounts will continue to decrease.

There are numerous dial-up Internet access providers in the United States although a small number of national providers account for a significant majority of the U.S. dial-up market, with AOL being the largest provider of dial-up Internet access services. The dial-up market has been, to some extent, divided into premium-priced services and value-priced services. In general, premium-priced services usually incorporate, in addition to Internet access and email, a number of complementary features, while value-priced services incorporate a more limited set of features. While the primary providers of premium-priced services, particularly AOL and EarthLink, continue to offer premium- priced services, they also offer, either directly or through related entities, value-priced services. Some of these value-priced services are now including many features that are also incorporated in premium-priced services. As a result, the distinction between value- and premium-priced services is becoming increasingly unclear.

Broadband Internet access services, once characterized by high prices and a limited coverage area, are now available to most of the U.S. population at prices that, in some cases, are equivalent to or lower than dial-up Internet access services. However, broadband continues to have a lower penetration in rural areas when compared to urban and suburban areas, and it may not be as available or affordable in rural areas. Many broadband providers, including cable companies such as Comcast and local exchange carriers such as AT&T, bundle their offerings with phone, entertainment or other services, which may result in lower prices than stand-alone services. Pricing in the broadband market varies based on the geographic region and speed of the service, among other factors, with introductory pricing for slower speed services as low as $10 per month.

Segment Services

Classmates Media

Our Classmates Media services include online social networking under the Classmates brand and online loyalty marketing under the MyPoints brand. Our Classmates Media services also include international social networking under the Trombi and StayFriends brands. For additional information regarding our Classmates Media segment, see Note 10—"Segment Information" of the Notes to the Consolidated Financial Statements, which appears in Part II, Item 8 of this Annual Report on Form 10-K.

Online Social Networking

On our social networking Web sites, we enable users to locate and interact with acquaintances from school, work and the military. Led by our flagship Classmates Web site ( www.classmates.com ) that serves the United States and Canada, our social networking properties comprise a large and diverse population of users, with over 50 million registered accounts as of December 31, 2007.

Using our interactive tools and features, our members have contributed to our social networking Web sites a substantial number of distinct, relevant pieces of content, such as names, school affiliations, profiles, biographies, interests, and photos. Our large membership base and the extensive user-generated content posted on our Web sites assist us in acquiring new members, and we receive tens of thousands of new free account registrations each day. We believe this valuable content also brings existing members back to our Web sites, with a significant number of our members visiting our Web sites on a recurring basis over many years.

Our social networking members can choose between free membership and a paid subscription offering additional features. Free accounts constitute the vast majority of our social networking accounts. Revenues from our social networking services are derived from subscription fees and advertising fees. We had approximately 3.2 million social networking pay accounts at December 31, 2007. During the quarter ended December 31, 2007, our average monthly revenue per social networking pay account was $3.26 per month.

Basic Membership. Basic membership on our Classmates Web site is free and provides members with access to a number of interactive features. Visitors to Classmates can become free members by completing the registration process and providing their name, year of birth, graduation year (or, in the case of workplace or military affiliations, years at such affiliation), and an email address. Free members are required to affiliate with at least one high school, college, work or military community. In addition, free members can elect to provide information about their personal interests and post photos.

Free members have free access to the following features:

•
Search. Free members can use our search feature to locate individuals within communities of interest and to browse our member database which is currently differentiated by high school, college, workplace or military unit. Our school communities are further subdivided into new members, teachers and staff, parents and friends, and missing members.

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Post profile information. Free members can post information about themselves, including personal profiles, biography information, photos, affiliations, and answers to our multiple choice questions about life, love, family, and hobbies.

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View editorial content. Free members can view other members' posted information, including personal profiles, biography information, photo albums, affiliations, and answers to our multiple choice questions about life, love, family, and hobbies.

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Email. Free members have the ability to send double-blind emails (where email addresses are not visible to the email sender or recipient) through our Web site to other Classmates members and respond to email messages received from our paying subscribers. However, free members are not able to read and respond to emails from other free members.

•
Read message boards. Free members have access to, and can read messages posted on, our interest group message boards encompassing a range of topics, including college life, fraternities and sororities, sports, politics, travel, hobbies, current events, and family life.

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Newsletter. Free members can subscribe to our weekly "Connections" newsletter that contains information on the various features available on Classmates, a listing of new members who joined their communities that week and announcements relating to new content posted by members within their communities.

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Reunions. Reunions and events can be organized and invitations can be sent through the Classmates Web site. Free members can read posted information regarding reunions and events on our Web site.

Gold Membership. Gold membership on our Classmates Web site is a paid subscription service that provides members with access to all of the features of a free membership as well as several additional features.

Paying members have access to the following additional features:

•
Digital guestbook. Our digital guestbook feature serves as an "icebreaker" to initiate communication between acquaintances by alerting a Classmates member when another member visits his or her profile, if the visiting member chooses to leave his or her name. However, only a paying member is able to see the name of the member that visited his or her profile.

•
Email. Paying members have the ability to send double-blind emails through our Web site to other Classmates members and respond to email messages from any other Classmates member, whether a free member or a paying subscriber.

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Post to message boards. In addition to reading information posted by members on our Classmates message boards, paying members are able to directly post content on the message boards and post pictures in the photo albums devoted to their affiliated communities.

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Classmates maps. Paying members have access to our Classmates maps feature which can generate a map, satellite or hybrid view showing the geographic locations, based on zip codes, of the individuals in a paying member's affiliated communities.

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Classmates dating. Members who elect to participate in our online dating feature can view photos and profiles and create a free dating profile on the Classmates Web site. However, only paying members can contact other members participating in the dating feature and conduct searches for singles within their geographic area.

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Newsletter. In addition to receiving our Connections newsletter, paying members also receive our monthly "Gold Standard" newsletter, which highlights ways for our paying members to get the most out of the subscription features accessible on our Classmates Web site.

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Reunions. Paying members can track RSVPs to reunions, build surveys, exchange party ideas on private message boards, and share pictures in photo albums devoted to the reunion event.

We are currently developing a number of new free and pay features on our Classmates Web site that we believe will enhance the member experience while providing an additional incentive for our free members to upgrade to a pay account. We expect the features available to free members and paying members to continue to change from time to time.

Pricing for a Classmates pay account varies by term of membership, with most pay accounts consisting of a three-month subscription for $15.00, or $5.00 per month, a 12-month subscription for $39.00, or $3.25 per month, or a 24-month subscription for $59.00, or $2.46 per month.

International. In addition to our flagship Classmates Web site, we operate four international social networking services. We operate StayFriends ( www.stayfriends.se ) in Sweden, Trombi ( www.trombi.com ) in France, StayFriends ( www.stayfriends.de ) in Germany, and StayFriends in Austria ( www.stayfriends.at ). Each service is similar to our Classmates service, although their affiliations are focused only on schools. Each service is offered in the local country's native language and is designed to appeal to the regional population. We offer free and pay accounts on all of our international Web sites, although certain features of our international social networking pay services differ from those of our Classmates pay services and pricing for our international social networking services is lower than for Classmates.

Our strategy for our online social networking services includes the following key elements: enhance the member experience and engagement on our Web sites; expand our member base through a variety of marketing and registration techniques; increase monetization of our social networking Web sites by marketing our pay account services to our free members; increase our advertising revenues; and evaluate further opportunities to expand internationally.

Online Loyalty Marketing

MyPoints connects advertisers with our members by allowing members to earn rewards points for engaging in online activities. MyPoints is a free service and users 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 surveys, shopping online, and engaging in other online activities. Rewards points are redeemable primarily in the form of third-party gift cards from over 60 merchants, including retailers, theaters, restaurants, airlines, and hotels. Participating merchants include, among others, Amazon.com™, iTunes®, Macy's, The Ritz-Carlton, and Target.

MyPoints provides advertisers with an effective means to reach a large online audience with targeted and untargeted marketing campaigns. We use a variety of criteria, including personal interests, purchasing behavior and demographic profiles, to create targeted promotions for advertisers. We tailor these marketing campaigns to meet the needs of the specific advertiser, which may include generating sales leads, soliciting information, registrations or the purchase of an advertiser's products or services, or increasing customer traffic on an advertiser's Web site.

All of our loyalty marketing service revenues are classified as advertising revenues. Advertisers primarily pay us when our emails are transmitted to members, when members respond to emails and when members complete online transactions. During 2007, we marketed the products and services of over 400 advertisers to our MyPoints members.

Media Services. MyPoints primarily allows advertisers to directly market their products or services to MyPoints members through the following media services:

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Bonusmail. We send personalized email marketing messages, called Bonusmail, directed specifically to individual MyPoints members, that showcase a single advertiser or offer. Generally, our members receive points for clicking through the media links in Bonusmail as well as for purchases or other actions taken within a limited time period.

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Newsletters. We email monthly and other periodic newsletters to our MyPoints members on topics such as books, travel and seasonal themes. Each newsletter features offers from one to five advertising sponsors.

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Exclusive member offers. Exclusive member offers, available on our MyPoints Web site, allow advertisers to offer multiple or bundled products and services to MyPoints members through our Web site and are regularly promoted to our members via email.

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Web site placements. We offer sponsorship opportunities for advertisers to prominently display their products and services to our members directly on our MyPoints Web site. Display advertisements on our Web site provide an additional form of exposure for advertisers to market their products or services.

This wide array of media services allows MyPoints to create targeted marketing campaigns for advertisers by selecting from more than 400 available demographic and behavioral parameters based on the personal interests, purchasing behavior and demographic profiles of our MyPoints members.

Other Services. Our members can earn points and advertisers or marketers can reach our members through a variety of other member activities including shopping on our MyPoints Web site which also serves as an online shopping portal; completion of online market research surveys on behalf of market research companies; searching through a MyPoints branded toolbar; acquiring and using a MyPoints branded credit card; and playing MyPoints branded online games.

Our strategy for our online loyalty marketing service includes the following key elements: enhance the member experience and engagement on our Web site by developing new features that provide a more personalized experience and new ways for our loyalty marketing members to earn points; expand our member base through new marketing techniques and acquisition channels, including cross-marketing our services to our Classmates members; and increase monetization on our Web site by developing additional methods for designing advertising campaigns for our loyalty marketing members that are specifically tailored to an individual's personal interests, purchasing behavior and demographic profile.

Communications

Our Communications pay services principally include consumer dial-up Internet access and email under the NetZero and Juno brands. We also offer Internet access and email services under other brands and offer several additional pay services, such as Internet security services, Web hosting services and premium email, but these additional services and brands do not generate significant revenues. In total, we had 2.2 million Communications pay accounts at December 31, 2007. For additional information regarding our Communications segment, see Note 10—"Segment Information" of the Notes to the Consolidated Financial Statements, which appears in Part II, Item 8 of this Annual Report on Form 10-K.

Internet Access Services

Our Internet access services consist of dial-up and, to a much lesser extent, DSL services. Our DSL services were launched during the fourth quarter of 2006 and have not generated significant revenues. We conduct only limited marketing of our DSL 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 10,000 cities across the United States and Canada. In general, monthly pricing for our dial-up Internet access services ranges from $6.95 for basic services to $14.95 for our bundled services, with $9.95 being our most prevalent price point.

Our DSL Internet access services are purchased from third-parties and, as of the end of 2007, were available only within a limited coverage area. While we intend to expand our DSL coverage in the future, our ability to do so will be dependent on acquiring services from additional third-parties. In general, monthly pricing for our DSL Internet access services ranges from $12.95 to $34.95, although we anticipate that our pricing may change and fluctuate based on connection speed and geographic region.

Our primary strategy for the Communications segment is to manage our dial-up business for profitability and cash flows while extending the business life cycle of our dial-up Internet access subscribers by offering them a DSL alternative to their dial-up service.

Sources of Revenue

We generate revenue from billable services and online advertising transactions.

Billable Services Revenues

Billable services revenues are comprised of amounts charged to pay accounts for our billable services. Classmates Media billable services revenues consist of amounts charged to pay accounts for social networking services. Communications billable services revenues consist of amounts charged to pay accounts for Internet access, Web hosting, email, Internet security, and other services, with substantially all of such revenues generated from Internet access. Our billable services revenues are primarily dependent on two factors: the average number of pay accounts for a period and the average monthly revenue per pay account, or ARPU. The average number of pay accounts is a simple average calculated based on the number of pay accounts at the beginning and end of a period.

In general, we charge our pay accounts in advance of providing a service, which results in the deferral of billable services revenue to the period in which the services are provided. We have experimented with a variety of pricing plans, both in connection with offers extended to some of our existing accounts and through external marketing channels. We intend to continue testing a variety of pricing plans in the future to determine their impact on profitability, pay account acquisition, conversion rates of free accounts to pay accounts, and retention rates. We regularly evaluate the desirability and effectiveness of our pricing plans and may, in the future, make changes to these plans. We may also offer additional fee-based products and services as well as a wide range of discounted metered plans and promotions, such as one or more free months of service or discounted rates for an initial period or an extended commitment.

CEO BACKGROUND

Robert Berglass has served as one of our directors since the Merger and was a director of NetZero from November 2000 until the Merger. Mr. Berglass has been our Lead Independent Director since February 2006. Since January 2002, Mr. Berglass has been the Chairman of DAVEXLABS LLC. From 1998 until April 2001, Mr. Berglass was the Chairman, Chief Executive Officer and President of Schwarzkopf & DEP, Inc. (formerly DEP Corporation), a division of Henkel KGAA. Mr. Berglass had held those positions following Henkel KGAA’s acquisition of DEP Corporation in 1998. From 1969 to 1998, Mr. Berglass was the Chairman, Chief Executive Officer and President of DEP Corporation. Before joining DEP Corporation, Mr. Berglass held various positions at Faberge, Inc., including Corporate Executive Vice President.

Kenneth L. Coleman has served as one of our directors since September 2001. Since February 2006, Mr. Coleman has been the Chairman of Accelrys. In May 2002, Mr. Coleman founded ITM Software and served as its Chairman and Chief Executive Officer until January 2006. In May 2001, Mr. Coleman founded Coleman Consulting and consulted on various strategic matters for several companies through May 2002. From 1987 through May 2001, he held various positions, including Executive Vice President of Global Sales, Service and Marketing, with Silicon Graphics, Inc. Mr. Coleman serves on the board of directors of MIPS Technologies, Inc., City National Bank and Accelrys (formerly Pharmacopeia Inc.). Mr. Coleman received his B.S. and M.B.A. from Ohio State University.

Mark R. Goldston has served as our Chairman, Chief Executive Officer and a director since the Merger. Prior to May 2006, Mr. Goldston’s title was Chairman, Chief Executive Officer, President and a director. He served as NetZero’s Chairman and Chief Executive Officer and one of its directors from March 1999 until the Merger. Prior to joining NetZero, Mr. Goldston served as Chairman and Chief Executive Officer of The Goldston Group, a strategic advisory firm, from December 1997 to March 1999. From April 1996 to December 1997, he served as President, Chief Executive Officer and a director of Einstein/Noah Bagel Corp. after founding and serving his initial term with The Goldston Group from June 1994 to April 1996. Mr. Goldston also served as President and Chief Operating Officer of L.A. Gear from September 1991 to June 1994 and as a principal of Odyssey Partners, L.P., a private equity firm, from September 1989 to September 1991. Before joining Odyssey Partners, Mr. Goldston held various executive positions including Chief Marketing Officer of Reebok, President of Faberge USA, Inc. and Vice President of Marketing Worldwide for fragrance and skincare at Revlon, Inc. Mr. Goldston is the author of a business book entitled, The Turnaround Prescription, which was published in 1992 and is the named inventor on 13 separate U.S. patents on products such as inflatable pump athletic shoes, lighted footwear, and a method for delivering electronic content over the Internet. Mr. Goldston received his B.S.B.A. in Marketing and Finance from Ohio State University and his M.B.A. (M.M.) from the J.L. Kellogg School at Northwestern University. He serves on the Dean’s Advisory Board of the J.L. Kellogg School at Northwestern University and the Dean’s Advisory Board of the Ohio State University Fisher School of Business.

James T. Armstrong has served as one of our directors since the Merger and was a director of NetZero from 1998 until the Merger. Mr. Armstrong has been a Managing Director with Clearstone Venture Partners (formerly idealab! Capital Partners) since August 1998. From May 1995 to August 1998, Mr. Armstrong was an associate with Austin Ventures. From September 1989 to March 1992, Mr. Armstrong was a senior auditor with Ernst & Young. Mr. Armstrong serves on the board of directors of several private companies. Mr. Armstrong received his B.A. in Economics from the University of California at Los Angeles and his M.B.A. from the University of Texas.

Dennis Holt has served as one of our directors since the Merger and was a director of NetZero from January 2001 until the Merger. Mr. Holt founded US International Media LLC, and has been its Chairman and Chief Executive Officer since March 2004. Mr. Holt also serves as Chairman and Chief Executive Officer of Patriot Communications LLC, a telecommunications service bureau, which he created in 1990 as a subsidiary of Western International Media. Mr. Holt founded Western International Media, a media buying service, in 1970 and was the Chairman and Chief Executive Officer from 1970 through January 2002. Mr. Holt also serves on the board of directors of Westwood One, Inc. and several private and philanthropic companies. Mr. Holt received his B.A. in Administration from the University of Southern California.

Carol A. Scott has served as one of our directors since April 29, 2003. Ms. Scott is a professor of marketing and faculty director of the Executive Program at The John E. Anderson Graduate School of Management at the University of California at Los Angeles. Ms. Scott has been on the faculty at UCLA since 1977, and served the school in a variety of administrative positions from 1986 through 1994, including chairman of the faculty and associate dean for academic affairs. She was also a visiting associate professor at the Harvard Business School in 1985, and was on the faculty at Ohio State University for three years prior to joining UCLA in 1977. Ms. Scott is a frequent author and lecturer and has served on the Editorial Board of the Journal of Consumer Research since 1980.

COMPENSATION

During 2006, our non-employee directors received an annual retainer fee of $25,000, which was paid quarterly in arrears, as well as $1,000 for each meeting attended (including committee meetings). Members of the Audit Committee received an additional annual retainer fee of $6,000 and the Chairs of the Audit Committee and Compensation Committee each received an additional annual retainer fee of $8,500 and $7,500, respectively. The Lead Independent Director received an additional annual retainer fee of $10,000, which was paid at the end of 2006 in arrears.

Under our 2001 Stock Incentive Plan, non-employee directors may receive option grants, restricted stock or restricted stock unit awards and other equity incentives.

On February 3, 2006, each non-employee director received an award of 7,500 restricted stock units. Each unit entitled the non-employee director to receive one share of our common stock upon vesting. On the February 3, 2006 award date, the closing selling price of our common stock was $13.32 per share. The shares subject to those units vested and were issued on February 15, 2007 to each of the non-employee directors who continued in service through such date.

On March 28, 2007, each non-employee director received an award of 7,500 restricted stock units. Each unit will entitle the non-employee director to receive one share of our common stock upon vesting. On the March 28, 2007 award date, the closing selling price of our common stock was $13.95 per share. The shares subject to those units will vest and become issuable upon the non-employee director’s continued service as a Board member through February 15, 2008. Prior to such vesting date, should the director voluntarily cease to serve as a Board member, then the director would vest in the number of units in which such director would have been vested as of the termination date if such units had vested in successive equal monthly installments between February 15, 2007 and the February 15, 2008 scheduled vesting date, and the remaining units would immediately be cancelled. Should the director involuntarily cease to serve as a Board member prior to such vesting date, then all of the units would immediately be cancelled. No shares would be issued with respect to cancelled units. In the event of a change of control, the shares subject to the units would vest in full and become immediately issuable.

(1) Mr. Goldston, the company’s Chairman and Chief Executive Officer, is not included in this table because he is an employee of the company and does not earn any additional compensation for his services as a director. The compensation earned by Mr. Goldston as an employee of the company is shown in the Summary Compensation Table, which appears later in this proxy statement.

(2) Represents the compensation cost recognized for financial statement reporting purposes for the 2006 fiscal year, in accordance with Statement of Financial Accounting Standards No. 123(R) (“SFAS 123R”), with respect to the portion of the stock or option awards which vested in that year, including awards which may have been granted in earlier years. The reported dollar amounts do not take into account any estimated forfeitures related to service-based vesting conditions. There were no forfeitures by directors of the company in the 2006 fiscal year. For information regarding assumptions underlying the SFAS 123R valuation of our equity awards, see Note 5 of the Consolidated Financial Statements in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

(3) On February 3, 2006, each non-employee director of the company was awarded 7,500 restricted stock units. Each unit provides such director with the right to receive one share of our common stock upon the vesting of that unit. The grant date fair value of each such restricted stock unit award, computed in accordance with SFAS 123R, is $99,900, which is determined by multiplying (i) the closing price per share of our common stock on the grant date by (ii) the number of shares of our common stock subject to each award.

(4) The stock awards include restricted stock units which contain dividend equivalent rights. Pursuant to those rights, each non-employee director will receive, in the event dividends or other distributions are declared and paid on the company’s outstanding shares of common stock, an additional payment equal to each dividend or distribution which would have been paid on the shares of common stock underlying those units had such shares been issued and outstanding at the time that dividend or distribution was made to the company’s stockholders. The payment will be made in the same form as the actual dividend or distribution is made to the stockholders. The table includes the amounts received pursuant to the dividend equivalent rights pertaining to the restricted stock units awarded on April 29, 2005, because the company initiated its quarterly cash dividend in May 2005, and accordingly, the SFAS 123R value of those earlier units did not reflect the potential dividends on the company’s common stock. However, the SFAS 123R value of subsequent restricted stock unit awards made to the non-employee directors does take such dividend equivalent rights into consideration, and accordingly, the amounts received by the non-employee directors pursuant to those rights are not included as part of their compensation for the 2006 fiscal year. The amount which each non-employee director received during the 2006 fiscal year pursuant to those latter dividend equivalent rights was $6,000.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We are a leading provider of consumer Internet and media services through a number of brands including Classmates, MyPoints, NetZero, and Juno. Our Classmates Media segment services are online social networking and online loyalty marketing. Our primary Communications segment services are Internet access and email. On a combined basis, our Web properties attract a significant number of Internet users each month, and we offer marketers a broad array of Internet advertising services as well as online market research and measurement services.

We have modified our segment reporting structure during 2007 to establish Classmates Media as a separate operating segment in the place of the former Content & Media segment that no longer will be reported. The new Classmates Media segment includes our online social networking and online loyalty marketing operations, which had formerly been part of the Content & Media segment. Web hosting and photo sharing, which also had formerly been part of the Content & Media segment, have been moved to the Communications segment. In addition, we have eliminated our historical practice of separately reporting certain unallocated corporate expenses. Under the new reporting structure, corporate expenses are allocated to the operating segments. The new segment reporting structure is aligned with how management reviews and measures segment performance for internal reporting purposes. All prior periods have been adjusted to conform to the current presentation.

We made the decision during 2007 to exit our photo sharing business and we have entered into a commercial arrangement with a third-party in connection therewith.

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 measures include:

Pay Accounts. Our pay accounts generate a significant portion of our revenues and represent one of the most important drivers of our business model. A pay account is defined as a member who has subscribed to, and paid for, our billable services, and whose subscription has not expired. In general, the key metrics that drive revenues from our pay accounts base include the number of pay accounts and the average monthly revenue per pay account. In general, a pay account becomes a free account following the expiration or termination of the related subscription.

ARPU. We monitor the average monthly revenue per pay account, or ARPU. ARPU is calculated by dividing billable services revenues for a period by the average number of 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 from period to period as a result of a variety of factors, including, but not limited to: changes in the mix of pay services and the related pricing plans; the use of promotional or retention pricing to attract new, or retain existing, paying subscribers; increases or decreases in the price of our services; and the timing of pay accounts being added or removed during a period.

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 the same 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. Except with respect to our social networking pay accounts, we do not include in our churn calculation those accounts cancelled 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 cancelled a pay account depending on the services and, as such, our overall churn rate is not necessarily indicative of the percentage of subscribers cancelling any particular service.

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

Critical Accounting Policies, Estimates and Assumptions

General

Our discussion and analysis of our financial condition and results of operations is based upon our audited and unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, including those for interim financial information and with the instructions for Form 10-K and Article 10 of Regulation S-X issued by the SEC. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates and assumptions. The results of operations for interim or transition periods are not necessarily indicative of the operating results for a full year.

We apply the following critical accounting policies in the preparation of our consolidated financial statements:

Revenue Recognition

Our revenues are comprised of billable services revenues, which are derived primarily from fees charged to pay accounts, and advertising revenues. We apply the provisions of SEC Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition in Financial Statements, which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. SAB No. 104 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the fee is fixed or determinable, no significant Company obligations remain, and collectibility is reasonably assured. We also apply the provisions of Emerging Issues Task Force, or EITF, Issue No. 00-21, Revenue Arrangements with Multiple Deliverables .

Billable services revenues are recognized in the period in which fees are fixed or determinable and the related services are provided to the customer. Our pay accounts generally pay in advance for their service by credit card, and revenue is then recognized ratably over the service period. Advance payments from pay accounts are recorded on the consolidated balance sheets as deferred revenue. We offer alternative payment methods to credit cards for certain pay service plans. These alternative payment methods currently include ACH, payment by personal check or money order or through a local telephone company. In circumstances where payment is not received in advance, revenue is only recognized if collectibility is reasonably assured.

Advertising revenues consist primarily of amounts from Internet search partners that are generated as a result of users utilizing partner Internet search services, amounts generated from the display of third-party registration offers at the end of Classmates' pay account registration process, amounts generated from other display advertisements, and amounts generated from referring members to third-party Web sites or services. We recognize advertising revenues in the period in which the advertisement is displayed or, for performance-based arrangements, when the related performance criteria are met. In determining whether an arrangement exists, we ensure that a binding contract is in place, such as a standard insertion order or a fully executed customer-specific agreement. We assess whether performance criteria have been met and whether the fees are fixed or determinable based on a reconciliation of the performance criteria and the payment terms associated with the transaction. The reconciliation of the performance criteria generally includes a comparison of internally tracked performance data to the contractual performance obligation and, when available, to third-party or customer-provided performance data.

Advertising revenues for our loyalty marketing service consist primarily of fees generated when emails are transmitted to members, when members respond to emails and when members complete online transactions. Each of these activities is a discrete, independent activity, which generally is specified in the sales agreement for each advertising customer. As the earning activities take place, activity measurement data (examples include the number of emails delivered and the number of responses received) is accumulated and the related revenue is recorded.

Probability of collection is assessed based on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If it is determined that collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. Deferred revenue also represents invoiced services that have not yet been performed.

Business Combinations

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

The judgments made in determining the estimated fair value and expected useful lives assigned to each class of assets and liabilities acquired can significantly impact net income. Consequently, to the extent an indefinite-lived, definite-lived or a longer-lived asset is ascribed greater value under the purchase method than a shorter-lived asset, there may be less amortization recorded in a given period. Definite-lived identifiable intangible assets are amortized on either a straight-line basis or an accelerated basis. We determine the appropriate amortization method by performing an analysis of expected cash flows over the estimated useful lives of the assets and match the amortization expense to the expected cash flows from those assets.

Determining the fair value of certain assets and liabilities acquired is subjective in nature and often involves the use of significant estimates and assumptions. Two areas, in particular, that require significant judgment are estimating the fair value and related useful lives of identifiable intangible assets. To assist in this process, we may obtain appraisals from valuation specialists for certain intangible assets. While there are a number of different methods used in estimating the fair value of acquired intangible assets, there are two approaches primarily used: the discounted cash flow and market comparison approaches. Some of the more significant estimates and assumptions inherent in the two approaches include: projected future cash flows (including timing); discount rate reflecting the risk inherent in the future cash flows; terminal growth rate; subscriber churn; terminal value; determination of appropriate market comparables; and the determination of whether a premium or a discount should be applied to market comparables. Most of the above assumptions are made based on available historical and market information.

Goodwill

Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. We account for goodwill in accordance with Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets , which among other things, addresses financial accounting and reporting requirements for acquired goodwill and other intangible assets. SFAS No. 142 requires goodwill to be carried at cost, prohibits the amortization of goodwill and requires us to test goodwill for impairment at least annually at the reporting unit level.

Results of Operations

The following tables set forth for the periods presented, selected historical statements of operations data.


Year Ended December 31, 2007 compared to Year Ended December 31, 2006

Revenues

Billable Services Revenues

Billable services revenues are comprised of amounts charged to pay accounts for our billable services. Classmates Media billable services revenues consist of amounts charged to pay accounts for social networking services. Communications billable 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 generated from Internet access. Our billable services revenues are primarily dependent on two factors: the average number of pay accounts for a period and the ARPU. The average number of pay accounts is a simple average calculated based on the number of pay accounts at the beginning and end of a period.

Consolidated Billable Services Revenues. Consolidated billable services revenues decreased by $44.0 million, or 10%, to $379.5 million for the year ended December 31, 2007, compared to $423.6 million for the year ended December 31, 2006. The decrease in billable services revenues for the year ended December 31, 2007 was due to a decrease in revenues from our Communications segment, partially offset by an increase in revenues from our Classmates Media segment. Billable services revenues related to our Classmates Media segment and our Communications segment constituted 28.1% and 71.9%, respectively, of our consolidated billable services revenues for the year ended December 31, 2007, compared to 19.2% and 80.8%, respectively, for the year ended December 31, 2006. We anticipate that our consolidated billable services revenues will decline in 2008 as a result of an expected continued decline in Communications billable services revenues which is expected to exceed the anticipated increase in Classmates Media billable services revenues, at least in the near term.

Classmates Media Billable Services Revenues. Classmates Media billable services revenues increased by $25.4 million, or 31%, to $106.5 million for the year ended December 31, 2007, compared to $81.1 million for the year ended December 31, 2006. The increase in Classmates Media billable services revenues was due to a 36% increase in our average number of pay accounts from 2.0 million for the year ended December 31, 2006 to 2.7 million for the year ended December 31, 2007. This increase in the average number of pay accounts was primarily attributable to a Classmates pay feature, our digital guestbook, which was introduced in the fourth quarter of 2006 and, to a lesser extent, an increase in the number of international pay accounts. The increase in Classmates Media billable services revenues due to pay accounts was partially offset by a 4% decrease in ARPU from $3.44 for the year ended December 31, 2006 to $3.31 for the year ended December 31, 2007. The decrease in ARPU was primarily attributable to a greater overall proportion of international pay accounts compared to U.S. pay accounts and the fact that pricing for our international social networking services is lower than for our Classmates social networking services. We anticipate our Classmates Media pay accounts and billable services revenues will continue to grow, at least in the near term.

Communications Billable Services Revenues. Communications billable services revenues decreased by $69.4 million, or 20%, to $273.0 million for the year ended December 31, 2007, compared to $342.4 million for the year ended December 31, 2006. The decrease in Communications billable services revenues was due to an 18% decrease in our average number of pay accounts from 3.0 million for the year ended December 31, 2006 to 2.4 million for the year ended December 31, 2007. The decrease in the average number of pay accounts was substantially attributable to a decrease in the number of dial-up Internet access pay accounts. In addition, the decrease in revenues was partially due to a 2% decrease in ARPU from $9.63 for the year ended December 31, 2006 to $9.41 for the year ended December 31, 2007. The decrease in ARPU was primarily attributable to an increased number of subscribers on lower-priced subscription plans. The decrease in dial-up billable services revenues was partially offset by a $6.3 million increase in 2007 versus 2006 in revenues from our DSL Internet access service, which was launched in the December 2006 quarter. We anticipate continued declines in our Communications pay accounts and, potentially, ARPU which will result in continued declines in Communications billable services revenues.

Advertising Revenues

We provide advertising solutions 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 use targeting technologies, Web site sponsorships and Web site integrations in order to provide effective solutions.

Our social networking services generate advertising revenues primarily from display advertisements and from post-transaction sales. Advertising inventory on our social networking Web sites includes text and graphic placements on the user home page, profile page, class list page, and most other pages on our Web sites. We are able to target the advertising delivered to most of our members based on a wide variety of factors, including age, gender, demographic data, affiliations, profile data, and zip code. Post-transaction sales are generated when a Classmates pay account is provided a third-party offer at the end of the pay account registration process. We also sell a portion of our advertising inventory through third-party advertising resellers.

Our loyalty marketing service revenues are derived from advertising fees, consisting primarily of fees generated when emails are transmitted to members, when members respond to emails and when members complete online transactions. We sell marketing solutions to advertisers with both brand and direct response objectives through a full suite of display, email and other advertising opportunities. We also use targeting technologies and Web site integrations in order to provide effective solutions for advertisers.

Our Communications services generate advertising revenues from our search agreement with Yahoo!, from display advertisements, from referring members to third-party Web sites or services, and from online market research. Substantially all of our Communications advertising revenues are generated from our Internet access services. We host and customize the initial Web site displayed to users of our Internet access services. This Web site, or "start page," displays sponsored links to a variety of content, products and services, including Internet search. We also display a toolbar on Internet access users' screens throughout their online access sessions that is generally visible regardless of the particular Web site they visit. The toolbar contains Internet search functionality and a variety of buttons, icons and drop-down menus. A variety of advertising opportunities also exist through our email platforms, including display advertising on the main pages and within emails.

Consolidated Advertising Revenues. Consolidated advertising revenues increased by $34.9 million, or 35%, to $134.0 million for the year ended December 31, 2007, compared to $99.1 million for the year ended December 31, 2006. The increase was primarily attributable to an increase in advertising revenues in our Classmates Media segment and, to a lesser extent, also our Communications segment. Advertising revenues related to our Classmates Media segment and our Communications segment constituted 64.9% and 35.1%, respectively, of our consolidated advertising revenues for the year ended December 31, 2007, compared to 58.8% and 41.2%, respectively, for the year ended December 31, 2006.

Classmates Media Advertising Revenues. Classmates Media advertising revenues increased by $28.6 million, or 49%, to $86.9 million for the year ended December 31, 2007, compared to $58.3 million for the year ended December 31, 2006. The increase was primarily related to revenues from our loyalty marketing service, which we acquired in April 2006 and which was included in our results of operations for the year ended December 31, 2007 compared to only 266 days for the year ended December 31, 2006. Revenues from our loyalty marketing service increased by $25.7 million in the year ended December 31, 2007, compared to the year ended December 31, 2006, primarily due to the fact that no such revenues were included in our consolidated financial statements in the first three months and nine days of 2006 (the period prior to our acquisition of MyPoints) and an increase in the number of loyalty marketing active accounts in the year ended December 31, 2007 compared to the year ended December 31, 2006. Our Classmates Media advertising revenues for the year ended December 31, 2007 also increased as a result of a $3.0 million increase in advertising revenues, compared to the year ended December 31, 2007, generated from our social networking services. The increase in advertising revenues generated from our social networking services was primarily related to increased revenues from post-transaction sales resulting from pay account growth in the year ended December 31, 2007. We have historically derived a significant portion of our social networking advertising revenues from a post-transaction sales agreement which expired in October 2007. While we entered into a new post-transaction sales agreement with a different advertiser in December 2007, we anticipate decreased revenues from post-transaction sales going forward.

Communications Advertising Revenues. Communications advertising revenues increased by $6.3 million, or 15%, to $47.1 million for the year ended December 31, 2007, from $40.8 million for the year ended December 31, 2006. The vast majority of the increase was attributable to an increase in search revenues. We anticipate that Communications advertising revenues will decrease going forward as a result of decreasing pay accounts.

Cost of Revenues

Cost of revenues includes telecommunications and data center costs; costs of providing rewards to members of our loyalty marketing service; personnel- and overhead-related costs associated with operating our networks and data centers; depreciation of network computers and equipment; email technical support and license fees; costs related to providing telephone technical support; customer billing and billing support to our pay accounts; fees associated with the storage and processing of customer credit cards and associated bank fees; and domain name registration fees. Historically, the costs that comprise our Classmates Media cost of revenues have been relatively fixed. However, as a result of our loyalty marketing service, which was acquired in April 2006, our cost of revenues has become more variable as the costs associated with this service tend to fluctuate with revenues. The majority of the costs that comprise our Communications cost of revenues are variable. As such, our Communications cost of revenues as a percentage of revenues is highly dependent on our ARPU, our average hourly telecommunications cost and usage, and our average customer billing and billing support costs per pay account.

Consolidated Cost of Revenues. Consolidated cost of revenues decreased by $2.8 million, or 2%, to $117.2 million for the year ended December 31, 2007, compared to $120.0 million for the year ended December 31, 2006. The decrease was primarily due to decreased costs associated with our Communications segment and a $1.1 million decrease in depreciation, partially offset by increased costs associated with our Classmates Media segment. Cost of revenues related to our Classmates Media segment and our Communications segment constituted 36.3% and 63.7%, respectively, of our total segment cost of revenues for the year ended December 31, 2007, compared to 24.4% and 75.6%, respectively, for the year ended December 31, 2006.

Classmates Media Cost of Revenues. Classmates Media cost of revenues increased by $12.6 million, or 47%, to $39.5 million, or 20.4% of Classmates Media revenues, for the year ended December 31, 2007, compared to $26.9 million, or 19.3% of Classmates Media revenues, for the year ended December 31, 2006. The increase was primarily related to costs of our loyalty marketing service, which we acquired in April 2006 and which was included in our results of operations for the full year ended December 31, 2007 compared to only 266 days for the year ended December 31, 2006. Cost of revenues from our loyalty marketing service increased by $9.7 million in the year ended December 31, 2007 compared to the year ended December 31, 2006 primarily due to the fact that no such revenues or cost of revenues were included in our consolidated financial statements in the first three months and nine days of 2006 (the period prior to our acquisition of MyPoints) and an increase in costs associated with providing rewards in the year ended December 31, 2007 compared to the year ended December 31, 2006. In addition, customer support, overhead and personnel-related costs associated with our social networking services increased by $2.7 million in the year ended December 31, 2007 compared to the year ended December 31, 2006 as a result of growth in the business and an increase in headcount. As a percentage of revenues, Classmates Media cost of revenues increased primarily due to our loyalty marketing service which has a higher cost of revenues as a percentage of revenues as compared to our social networking services. The higher cost of revenues associated with our loyalty marketing service is largely due to the benefits provided to our loyalty marketing members when they redeem points earned in connection with our loyalty marketing service.

Communications Cost of Revenues. Communications cost of revenues decreased by $14.3 million, or 17%, to $69.3 million, or 21.6% of Communications revenues, for the year ended December 31, 2007, compared to $83.5 million, or 21.8% of Communications revenues, for the year ended December 31, 2006. The decrease was primarily due to a $15.4 million decrease in telecommunications costs associated with our dial-up Internet access business due to a decrease in the number of pay accounts, a decrease in hourly usage per pay account as well as lower average hourly telecommunications costs. In addition, customer support and billing-related costs decreased by $5.4 million in 2007 versus 2006 as a result of a decrease in the number of dial-up Internet access pay accounts and a decrease in the hourly rate charged by our third-party vendor, and by $2.1 million due to a decrease in costs associated with our VoIP services as a result of our decision during 2007 to exit our VoIP services. These decreases were partially offset by a $7.4 million increase in costs associated with our DSL Internet access service, which was launched in the December 2006 quarter.

Sales and Marketing

Sales and marketing expenses include expenses associated with promoting our services and with generating advertising revenues. Expenses associated with promoting our 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 personnel; and telemarketing costs incurred to acquire and retain pay accounts and up-sell pay accounts to additional services. Expenses associated with generating advertising revenues include sales commissions and personnel-related expenses. We have expended significant amounts on sales and marketing, including branding and customer acquisition campaigns consisting of television, Internet, sponsorships, radio, print and outdoor advertising, and on retail and other performance-based distribution relationships. Marketing and advertising costs to promote our products and services are expensed in the period incurred. Advertising and promotion expenses include media, agency and promotion expenses. Media production costs are expensed the first time the advertisement is run. Media and agency costs are expensed over the period the advertising runs.

Consolidated Sales and Marketing Expenses. Consolidated sales and marketing expenses decreased by $13.6 million, or 8%, to $163.4 million, or 31.8% of consolidated revenues, for the year ended December 31, 2007, compared to $177.0 million, or 33.9% of consolidated revenues, for the year ended December 31, 2006. The decrease was primarily attributable to a reduction in marketing expenses related to our Communications segment, partially offset by an increase in marketing expenses related to our Classmates Media segment. Sales and marketing expenses related to our Classmates Media segment and our Communications segment constituted 48.4% and 51.6%, respectively, of total segment sales and marketing expenses for the year ended December 31, 2007 versus 34.4% and 65.6%, respectively, for the year ended December 31, 2006.

Classmates Media Sales and Marketing Expenses. Classmates Media sales and marketing expenses increased by $18.2 million, or 30%, to $78.9 million, or 40.8% of Classmates Media revenues, for the year ended December 31, 2007, compared to $60.7 million, or 43.6% of Classmates Media revenues, for the year ended December 31, 2006. A portion of the increase was related to sales and marketing expenses associated with our loyalty marketing service, which we acquired in April 2006 and which was included in our results of operations for the full year ended December 31, 2007 compared to only 266 days for the year ended December 31, 2006. Sales and marketing expenses associated with our loyalty marketing service increased by $9.5 million in the year ended December 31, 2007 when compared to the year ended December 31, 2006 primarily due to the fact that no such sales and marketing expenses were included in our consolidated financial statements in the first three months and nine days of 2006 (the period prior to our acquisition of MyPoints). In addition, the increase was the result of a $5.8 million increase in marketing costs related to acquiring new free social networking members, a $2.6 million increase in personnel- and overhead-related expenses associated with our social networking services as a result of growth in our business and a $0.4 million increase in stock-based compensation.

Communications Sales and Marketing Expenses. Communications sales and marketing expenses decreased by $31.9 million, or 27%, to $84.1 million, or 26.3% of Communications revenues, for the year ended December 31, 2007, compared to $116.0 million, or 30.3% of Communications revenues, for the year ended December 31, 2006. This decrease was attributable to a $24.3 million decline in advertising, promotion and distribution costs related to our dial-up Internet access services and an $8.6 million decrease in advertising costs associated with our VoIP services as a result of our decision during 2007 to exit our VoIP services. These decreases were partially offset by a $1.5 million increase in advertising costs related to our DSL Internet access service, which was launched in the December 2006 quarter.

Product Development

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

Consolidated Product Development Expenses. Consolidated product development expenses decreased by $1.6 million, or 3%, to $51.0 million, or 9.9% of consolidated revenues, for the year ended December 31, 2007, compared to $52.6 million, or 10.1% of consolidated revenues, for the year ended December 31, 2006. The decrease was attributable to a decrease in expenses in the Communications segment, partially offset by an increase in expenses in the Classmates Media segment and a $0.7 million increase in depreciation. Product development expenses related to our Classmates Media segment and our Communications segment constituted 35.1% and 64.9%, respectively, of total segment product development expenses for the year ended December 31, 2007, compared to 21.9% and 78.1%, respectively, for the year ended December 31, 2006.

Classmates Media Product Development Expenses. Classmates Media product development expenses increased by $5.5 million, or 53%, to $16.0 million, or 8.3% of Classmates Media revenues, for the year ended December 31, 2007, compared to $10.5 million, or 7.5% of Classmates Media revenues, for the year ended December 31, 2006. The increase in expenses was primarily due to a $2.7 million increase in personnel-related expenses due to increased headcount to develop new product features related to our social networking services. In addition, a portion of the increase was related to expenses associated with our loyalty marketing service, which we acquired in April 2006 and which was included in our results of operations for the full year ended December 31, 2007 compared to only 266 days for the year ended December 31, 2006. Product development expenses associated with our loyalty marketing service increased by $2.3 million in the year ended December 31, 2007 compared to the year ended December 31, 2006 primarily due to the fact that no such product development expenses were included in our consolidated financial statements in the first three months and nine days of 2006 (the period prior to our acquisition of MyPoints). The increase in expenses was also due to a $0.4 million increase in overhead expenses and a $0.3 million increase in stock-based compensation. Communications Product Development Expenses. Communications product development expenses decreased by $7.8 million, or 21%, to $29.6 million, or 9.3% of Communications revenues, for the year ended December 31, 2007, compared to $37.4 million, or 9.8% of Communications revenues, for the year ended December 31, 2006. The decrease was primarily the result of a $4.9 million decrease in personnel-related expenses associated with reduced headcount needs, a $1.8 million decrease in other overhead-related expenses and a $0.8 million decrease in stock-based compensation. Internal capitalized software development expenses decreased to $6.1 million for the year ended December 31, 2007, compared to $7.3 million for the year ended December 31, 2006, due to a decrease in the number of development projects in 2007 compared to 2006. We anticipate that Communications product development expenses will decline in 2008 when compared to 2007 as a result of a restructuring-related reduction in the number of product development employees in this segment in October 2007.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Quarter and Nine Months Ended September 30, 2007 Compared to
Quarter and Nine Months Ended September 30, 2006

Revenues

Billable Services Revenues

Billable services revenues are comprised of fees charged to pay accounts for our billable services. Our billable services revenues are primarily dependent on two factors: the average number of pay accounts for a period and the average monthly revenue per pay account ("ARPU") for a period. The average number of pay accounts is a simple average calculated based on the number of pay accounts at the beginning and end of a period. ARPU is calculated by dividing billable services revenues for a period by the average number of pay accounts for that period. ARPU may fluctuate from period to period as a result of a variety of factors including changes in the mix of billable services and their related pricing plans; the use of promotions, such as one or more free months of service, and discounted pricing plans to obtain or retain subscribers; increases or decreases in the price of our services; the number of services subscribed to by each pay account; pricing and success of new billable services and the penetration of these types of services as a percentage of total pay accounts; and the timing of pay accounts being added or removed during a period.

Consolidated Billable Services Revenues. Consolidated billable services revenues decreased by $9.6 million, or 9%, to $94.6 million for the quarter ended September 30, 2007, compared to $104.2 million for the quarter ended September 30, 2006. Consolidated billable services revenues decreased by $36.2 million, or 11%, to $288.0 million for the nine months ended September 30, 2007, compared to $324.2 million for the nine months ended September 30, 2006. The decrease in billable services revenues for the quarter and nine months ended September 30, 2007 was due to a decrease in revenues from our Communications segment, partially offset by an increase in revenues from our Content & Media segment. Billable services revenues related to our Content & Media segment and our Communications segment constituted 31.1% and 68.9%, respectively, of our consolidated billable services revenues for the quarter ended September 30, 2007, compared to 21.2% and 78.8%, respectively, for the quarter ended September 30, 2006. Billable services revenues related to our Content & Media segment and our Communications segment constituted 27.7% and 72.3%, respectively, of our consolidated billable services revenues for the nine months ended September 30, 2007, compared to 19.8% and 80.2%, respectively, for the nine months ended September 30, 2006. We anticipate that our consolidated billable services revenues will continue to decline as a result of an expected continued decline in Communications billable services revenues.

Content & Media Billable Services Revenues. Content & Media billable services revenues consist of fees charged to pay accounts for social networking, Web hosting and photo sharing services, with substantially all such revenues generated from social networking. Content & Media billable services revenues increased by $7.3 million, or 33%, to $29.4 million for the quarter ended September 30, 2007, compared to $22.1 million for the quarter ended September 30, 2006. The increase in Content & Media billable services revenues was due to a 37% increase in our average number of pay accounts from 2.1 million for the quarter ended September 30, 2006 to 2.9 million for the quarter ended September 30, 2007. Substantially all of this increase in the number of pay accounts was due to an increase in the number of social networking pay accounts, primarily attributable to the introduction of a new pay feature by Classmates in the fourth quarter of 2006 and, to a lesser extent, an increase in the number of international pay accounts. The increase in Content & Media billable services revenues was partially offset by a 3% decrease in ARPU from $3.45 for the quarter ended September 30, 2006 to $3.35 for the quarter ended September 30, 2007. The decrease in ARPU was primarily attributable to a greater percentage of pay accounts represented by international social networking pay accounts which have lower-priced subscription plans, and, to a lesser extent, to decreases in the average monthly revenue received from our Web hosting pay accounts and no revenue received from our photo sharing business beginning in the quarter ended September 30, 2007 as a result of our decision to exit the photo sharing business. We anticipate our Content & Media billable services revenues will continue to grow, at least in the near term.

Content & Media billable services revenues increased by $15.3 million, or 24%, to $79.7 million for the nine months ended September 30, 2007, compared to $64.3 million for the nine months ended September 30, 2006. The increase in Content & Media billable services revenues was due to a 33% increase in our average number of pay accounts from 2.0 million for the nine months ended September 30, 2006 to 2.7 million for the nine months ended September 30, 2007. Substantially all of this increase in the number of pay accounts was due to an increase in the number of social networking pay accounts, primarily attributable to the introduction of a new pay feature by Classmates in the fourth quarter of 2006 and, to a lesser extent, an increase in the number of international pay accounts. The increase in Content & Media billable services revenues was partially offset by a 7% decrease in ARPU from $3.57 for the nine months ended September 30, 2006 to $3.34 for the nine months ended September 30, 2007. The decrease in ARPU was primarily attributable to a greater percentage of pay accounts represented by international social networking pay accounts which have lower-priced subscription plans, and, to a lesser extent, decreases in the average monthly revenue received from our Web hosting and photo sharing pay accounts.

Communications Billable Services Revenues. Communications billable services revenues consist of fees charged to pay accounts for access, email, Internet security and other services, with substantially all of such revenues generated from Internet access. Communications billable services revenues decreased by $16.9 million, or 21%, to $65.2 million for the quarter ended September 30, 2007, compared to $82.1 million for the quarter ended September 30, 2006. The decrease in revenues was due to a 20% decrease in our average number of pay accounts from 2.8 million for the quarter ended September 30, 2006 to 2.3 million for the quarter ended September 30, 2007. The decrease in average number of pay accounts is substantially attributable to a decrease in the number of dial-up pay access accounts. In addition, the decrease in revenues was partially due to a 1% decrease in ARPU from $9.71 for the quarter ended September 30, 2006 to $9.64 for the quarter ended September 30, 2007. We may experience declines in ARPU primarily as a result of discounted prices for extended service commitments on our dial-up access services, including providing our $14.95 accelerated dial-up access services at $9.95 for a one-year commitment. We anticipate continued declines in Communications billable services revenues.

Communications billable services revenues decreased by $51.5 million, or 20%, to $208.4 million for the nine months ended September 30, 2007, compared to $259.9 million for the nine months ended September 30, 2006. The decrease in revenues was due to a 19% decrease in our average number of pay accounts from 3.0 million for the nine months ended September 30, 2006 to 2.4 million for the nine months ended September 30, 2007, and a 1% decrease in ARPU from $9.76 for the nine months ended September 30, 2006 to $9.68 for the nine months ended September 30, 2007. The decrease in average number of pay accounts is substantially attributable to a decrease in the number of dial-up pay access accounts.

Advertising Revenues

We connect advertisers to consumers through a variety of online marketing initiatives integrated throughout our services and Web properties, including advertising and search placements, email campaigns and user registration placements. In addition, we offer advertisers sophisticated market research capabilities and online direct marketing solutions. Factors impacting our advertising revenues generally include changes in orders from significant customers, the performance of our online marketing initiatives, the state of the online search and advertising markets, seasonality, increases or decreases in our active accounts, and increases or decreases in advertising inventory available for sale. Advertising revenues also include post-transaction revenues pursuant to an agreement whereby we generate revenues by displaying a third-party's service offerings to our Classmates' members upon their completion of the paid subscription registration process.

Consolidated Advertising Revenues. Consolidated advertising revenues increased by $6.8 million, or 27%, to $32.2 million for the quarter ended September 30, 2007, compared to $25.4 million for the quarter ended September 30, 2006. Consolidated advertising revenues increased by $32.4 million, or 48%, to $100.1 million for the nine months ended September 30, 2007, compared to $67.7 million for the nine months ended September 30, 2006. The increases were primarily attributable to increases in advertising revenues in our Content & Media segment and, to a lesser extent, our Communications segment. Advertising revenues related to our Content & Media segment and our Communications segment constituted 68.1% and 31.9%, respectively, of our consolidated advertising revenues for the quarter ended September 30, 2007, compared to 60.3% and 39.7%, respectively, for the quarter ended September 30, 2006. Advertising revenues related to our Content & Media segment and our Communications segment constituted 65.5% and 34.5%, respectively, of our consolidated advertising revenues for the nine months ended September 30, 2007, compared to 57.3% and 42.7%, respectively, for the nine months ended September 30, 2006.

Content & Media Advertising Revenues. Content & Media advertising revenues increased by $6.6 million, or 43%, to $22.0 million for the quarter ended September 30, 2007, compared to $15.3 million for the quarter ended September 30, 2006. The increase was due to increased revenues generated from our loyalty marketing service and, to a lesser extent, increased revenues generated from our post-transaction sales agreement as a result of significant growth in Content & Media pay accounts and increases in advertising rates. We anticipate that Content & Media advertising revenues will increase sequentially in the December 2007 quarter due to the December quarter being a seasonally stronger quarter.

Content & Media advertising revenues increased by $26.8 million, or 69%, to $65.6 million for the nine months ended September 30, 2007, compared to $38.8 million for the nine months ended September 30, 2006. The increase was primarily related to revenues from our loyalty marketing service, which we acquired in April 2006 and which was included in our results of operations for the full nine months ended September 30, 2007 compared to only 174 days for the nine months ended September 30, 2006. Revenues from our loyalty marketing service increased by $22.5 million in the nine months ended September 30, 2007 when compared to the nine months ended September 30, 2006 primarily due to the fact that no revenues from our loyalty marketing service were included in our consolidated financial statements in the first three months and nine days of 2006 (the period prior to acquisition) and, to a lesser extent, an increase in the number of active accounts in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. Our revenues for the nine months ended September 30, 2007 also increased as a result of a $3.8 million increase in advertising revenues generated from our social networking services related to increased revenues from post-transaction sales resulting from pay account growth in the nine months ended September 30, 2007 and a $0.5 million increase in advertising revenues generated from our Web hosting business primarily related to increased search revenues.

Communications Advertising Revenues. Communications advertising revenues increased by $0.2 million, or 2%, to $10.3 million for the quarter ended September 30, 2007, from $10.1 million for the quarter ended September 30, 2006. The increase was primarily attributable to an increase in search revenues and, to a lesser extent, increases in advertising rates, partially offset by a decrease in advertising inventory as a result of a decrease in the number of our active accounts. We anticipate that Communications advertising revenues will be flat to slightly up in the December 2007 quarter when compared to the September 2007 quarter.

Communications advertising revenues increased by $5.6 million, or 19%, to $34.5 million for the nine months ended September 30, 2007, compared to $28.9 million for the nine months ended September 30, 2006. The increase was primarily attributable to an increase in search revenues and, to a lesser extent, an increase in advertising rates, partially offset by a decrease in advertising inventory as a result of a decrease in the number of our active accounts.

Cost of Revenues

Cost of revenues includes telecommunications and data center costs; costs of providing rewards to members of our loyalty marketing service; personnel and overhead-related costs associated with operating our networks and data centers; depreciation of network computers and equipment; email technical support and license fees; costs related to providing telephone technical support; customer billing and billing support to our pay accounts; and domain name registration fees. Historically, the costs that comprise our Content & Media cost of revenues have been relatively fixed. However, as a result of our loyalty marketing service, which was acquired in April 2006, these costs have become more variable as the costs associated with this service tend to fluctuate with revenues. The majority of the costs that comprise our Communications cost of revenues are variable. As such, our Communications cost of revenues as a percentage of revenues is highly dependent on our ARPU, our average hourly telecommunications cost and usage, and our average customer billing and billing support costs per pay account.

Consolidated Cost of Revenues. Consolidated cost of revenues decreased by $1.1 million, or 4%, to $27.9 million for the quarter ended September 30, 2007, compared to $29.0 million for the quarter ended September 30, 2006. The decrease was primarily due to decreased costs associated with our Communications segment and a $0.3 million decrease in depreciation, partially offset by increased costs associated with our Content & Media segment. Cost of revenues related to our Content & Media segment and our Communications segment constituted 38.7% and 61.3%, respectively, of our total segment cost of revenues for the quarter ended September 30, 2007, compared to 28.6% and 71.4%, respectively, for the quarter ended September 30, 2006.

Consolidated cost of revenues decreased by $2.5 million, or 3%, to $87.5 million for the nine months ended September 30, 2007, compared to $90.0 million for the nine months ended September 30, 2006. The decrease was primarily due to decreased costs associated with our Communications segment and a $1.1 million decrease in depreciation, partially offset by increased costs associated with our Content & Media segment. Cost of revenues related to our Content & Media segment and our Communications segment constituted 36.5% and 63.5%, respectively, of our total segment cost of revenues for the nine months ended September 30, 2007, compared to 22.2% and 77.8%, respectively, for the nine months ended September 30, 2006.

Content & Media Cost of Revenues. Content & Media cost of revenues increased by $2.3 million, or 31%, to $9.9 million for the quarter ended September 30, 2007, compared to $7.5 million for the quarter ended September 30, 2006. The increase was primarily related to increased costs associated with increased revenues from our loyalty marketing service and, to a lesser extent, our social networking services. As a percentage of Content & Media revenues, Content & Media cost of revenues decreased to 19.2% in the quarter ended September 30, 2007, compared to 20.1% in the quarter ended September 30, 2006, primarily due to an increase in our social networking revenues as a percentage of total Content & Media revenues for the quarter ended September 30, 2007, compared to the quarter ended September 30, 2006. Our social networking services have a lower cost of revenues as a percentage of revenues as compared to our loyalty marketing service.

Content & Media cost of revenues increased by $11.2 million, or 61%, to $29.4 million for the nine months ended September 30, 2007, compared to $18.2 million for the nine months ended September 30, 2006. The increase was primarily related to costs of our loyalty marketing service, which we acquired in April 2006 and which was included in our results of operations for the full nine months ended September 30, 2007 compared to only 174 days for the nine months ended September 30, 2006. Cost of revenues from our loyalty marketing service increased by $8.7 million in the nine months ended September 30, 2007 when compared to the nine months ended September 30, 2006 primarily due to the fact that no revenues or cost of revenues related to our loyalty marketing service were included in our consolidated financial statements in the first three months and nine days of 2006 (the period prior to acquisition) and, to a lesser extent, an increase in costs associated with increased revenues in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. In addition, customer support, overhead and headcount costs associated with our social networking services and Web hosting business increased by $2.0 million in the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. As a percentage of Content & Media revenues, Content & Media cost of revenues increased to 20.2% in the nine months ended September 30, 2007, compared to 17.7% in the nine months ended September 30, 2006, primarily due to an increase in our loyalty marketing revenues as a percentage of total Content & Media revenues for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006. Our loyalty marketing service has a higher cost of revenues as a percentage of revenues as compared to our social networking services and Web hosting business. The higher cost of revenues associated with our online loyalty marketing service is due to the benefits provided to our loyalty marketing members when they redeem points earned in connection with activities on our MyPoints Web site.

Communications Cost of Revenues. Communications cost of revenues decreased by $3.2 million, or 17%, to $15.6 million for the quarter ended September 30, 2007, compared to $18.8 million for the quarter ended September 30, 2006. The decrease was primarily due to a $4.1 million decrease in telecommunications costs associated with our dial-up access business, a $1.6 million decrease in customer support and billing-related costs as a result of a decrease in the number of pay accounts and a $0.4 million decrease in costs associated with our VoIP service. These decreases were partially offset by a $2.5 million increase in costs associated with our DSL service. As a percentage of Communications revenues, Communications cost of revenues increased slightly to 20.7% in the quarter ended September 30, 2007, compared to 20.4% in the quarter ended September 30, 2006.

Communications cost of revenues decreased by $12.6 million, or 20%, to $51.2 million for the nine months ended September 30, 2007, compared to $63.8 million for the nine months ended September 30, 2006. The decrease was primarily due to a $12.6 million decrease in telecommunications costs associated with our dial-up access business, a $4.3 million decrease in customer support and billing-related costs as a result of a decrease in the number of pay accounts and a $1.5 million decrease in costs associated with our VoIP service. These decreases were partially offset by a $4.9 million increase in costs associated with our DSL service. As a percentage of Communications revenues, Communications cost of revenues decreased to 21.1% in the nine months ended September 30, 2007, compared to 22.1% in the nine months ended September 30, 2006, largely as a result of a decrease in telecommunications costs per hour and a decrease in the average number of hours used per month.

Sales and Marketing

Sales and marketing expenses include advertising and promotion expenses; fees paid to distribution partners, third-party advertising networks and co-registration partners to acquire new accounts; personnel-related expenses for sales and marketing personnel; and telemarketing costs incurred to acquire and retain pay accounts and up-sell pay accounts to additional services. Advertising and promotion expenses include media, agency and promotion expenses. Most of our marketing expenses are expensed in the period incurred except that media production costs are expensed the first time the advertisement is run and media and agency fees are expensed over the period the advertising runs. Sales expenses are expensed in the period incurred or, in the case of commissions paid to sales personnel, when the associated advertising revenue is recognized.

Consolidated Sales and Marketing Expenses. Consolidated sales and marketing expenses decreased by $5.0 million, or 12%, to $38.4 million, or 30.3% of consolidated revenues, for the quarter ended September 30, 2007, compared to $43.4 million, or 33.5% of consolidated revenues, for the quarter ended September 30, 2006. The decrease was primarily attributable to a significant reduction in marketing expenses related to our Communications segment, partially offset by an increase in marketing expenses related to our Content & Media segment and a $0.4 million increase in stock-based compensation. Sales and marketing expenses related to our Content & Media segment and our Communications segment constituted 52.5% and 47.5%, respectively, of total segment sales and marketing expenses for the quarter ended September 30, 2007 versus 40.3% and 59.7%, respectively, for the quarter ended September 30, 2006.

Consolidated sales and marketing expenses decreased by $5.9 million, or 4%, to $127.1 million, or 32.8% of consolidated revenues, for the nine months ended September 30, 2007, compared to $133.0 million, or 33.9% of consolidated revenues, for the nine months ended September 30, 2006. The decrease was primarily attributable to a significant reduction in marketing expenses related to our Communications segment, largely offset by an increase in marketing expenses related to our Content & Media segment. Sales and marketing expenses related to our Content & Media segment and our Communications segment constituted 49.6% and 50.4%, respectively, of total segment sales and marketing expenses for the nine months ended September 30, 2007 versus 35.5% and 64.5%, respectively, for the nine months ended September 30, 2006.

Content & Media Sales and Marketing Expenses. Content & Media sales and marketing expenses increased by $2.3 million, or 14%, to $19.5 million for the quarter ended September 30, 2007, compared to $17.2 million for the quarter ended September 30, 2006. The increase was the result of a $1.8 million increase in costs related to acquiring free accounts, primarily social networking accounts and, to a lesser extent, loyalty marketing accounts, and a $0.6 million increase in personnel and overhead-related expenses. However, as a percentage of Content & Media revenues, sales and marketing expenses decreased from 45.9% in the quarter ended September 30, 2006 to 38.0% in the quarter ended September 30, 2007 as a result of our ability to increase revenues without a commensurate increase in marketing spend.

Content & Media sales and marketing expenses increased by $15.3 million, or 33%, to $61.4 million, or 42.3% of Content & Media revenues, for the nine months ended September 30, 2007, compared to $46.2 million, or 44.8% of Content & Media revenues, for the nine months ended September 30, 2006. A portion of the increase was related to sales and marketing expenses associated with our loyalty marketing service, which we acquired in April 2006 and which was included in our results of operations for the full nine months ended September 30, 2007 compared to only 174 days for the nine months ended September 30, 2006. Sales and marketing expenses associated with our loyalty marketing service increased by $8.1 million in the nine months ended September 30, 2007 when compared to the nine months ended September 30, 2006 primarily due to the fact that no sales and marketing expenses were included in our consolidated financial statements in the first three months and nine days of 2006 (the period prior to acquisition). In addition, the increase was the result of a $6.2 million increase in marketing costs primarily related to acquiring new free social networking services members and a $1.2 million increase in personnel and overhead-related expenses related to our social networking services and Web hosting business.

Communications Sales and Marketing Expenses. Communications sales and marketing expenses decreased by $7.8 million, or 31%, to $17.7 million, or 23.4% of Communications revenues, for the quarter ended September 30, 2007, compared to $25.5 million, or 27.6% of Communications revenues, for the quarter ended September 30, 2006. This decrease was attributable to a $6.7 million decline in advertising, promotion and distribution costs related to our access services, the majority of which was due to reductions in media and telemarketing costs and a $1.3 million decrease in advertising costs associated with our VoIP service. These decreases were partially offset by a $0.3 million increase in advertising costs related to our broadband services. We anticipate that Communications sales and marketing expenses may continue to decline throughout 2008 as a result of expected continued declines in pay accounts and the reduction in the number of employees in this segment in October 2007.

Communications sales and marketing expenses decreased by $21.5 million, or 26%, to $62.4 million, or 25.7% of Communications revenues, for the nine months ended September 30, 2007, compared to $83.9 million, or 29.1% of Communications revenues, for the nine months ended September 30, 2006. This decrease was attributable to a $16.5 million decline in advertising, promotion and distribution costs related to our access services, the majority of which was due to reductions in distribution, telemarketing and media costs and a $7.8 million decrease in advertising costs associated with our VoIP service. These decreases were partially offset by a $1.6 million increase in personnel and overhead-related expenses and a $1.1 million increase in advertising costs related to our broadband services.

Product Development

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

Consolidated Product Development Expenses. Consolidated product development expenses decreased by $0.9 million, or 7%, to $12.3 million, or 9.7% of consolidated revenues, for the quarter ended September 30, 2007, compared to $13.2 million, or 10.2% of consolidated revenues, for the quarter ended September 30, 2006. The decrease was primarily attributable to a decrease in expenses in the Communications segment, partially offset by a $0.2 million increase in stock-based compensation. Product development expenses related to our Content & Media segment and our Communications segment constituted 41.7% and 58.3%, respectively, of total segment product development expenses for the quarter ended September 30, 2007, compared to 36.3% and 63.7%, respectively, for the quarter ended September 30, 2006.

Consolidated product development expenses decreased by $0.6 million, or 1%, to $38.8 million, or 10.0% of consolidated revenues, for the nine months ended September 30, 2007, compared to $39.4 million, or 10.0% of consolidated revenues, for the nine months ended September 30, 2006. The decrease was attributable to a decrease in expenses in the Communications segment as well as a $0.4 million decrease in stock-based compensation, partially offset by increases in expenses in the Content & Media segment and a $0.4 million increase in depreciation. Product development expenses related to our Content & Media segment and our Communications segment constituted 39.6% and 60.4%, respectively, of total segment product development expenses for the nine months ended September 30, 2007, compared to 30.1% and 69.9%, respectively, for the nine months ended September 30, 2006.

Content & Media Product Development Expenses. Content & Media product development expenses increased by $0.1 million, or 2%, to $4.0 million for the quarter ended September 30, 2007, compared to $3.9 million for the quarter ended September 30, 2006. As a percentage of Content & Media revenues, Content & Media product development expenses decreased to 7.7% in the quarter ended September 30, 2007, compared to 10.3% in the quarter ended September 30, 2006.

Content & Media product development expenses increased by $2.8 million, or 29%, to $12.3 million for the nine months ended September 30, 2007, compared to $9.5 million for the nine months ended September 30, 2006. A portion of the increase was related to expenses associated with our loyalty marketing service, which we acquired in April 2006 and which was included in our results of operations for the full nine months ended September 30, 2007 compared to only 174 days for the nine months ended September 30, 2006. Product development expenses associated with our loyalty marketing service increased by $1.7 million in the nine months ended September 30, 2007 when compared to the nine months ended September 30, 2006 primarily due to the fact that no product development expenses were included in our consolidated financial statements in the first three months and nine days of 2006 (the period prior to acquisition). In addition, the increase in expenses was primarily due to a $1.8 million increase in personnel-related expenses due to increased headcount related to our social networking services and a $0.3 million increase in overhead-related expenses. As a percentage of Content & Media revenues, Content & Media product development expenses decreased to 8.4% in the nine months ended September 30, 2007, compared to 9.2% in the nine months ended September 30, 2006.

Communications Product Development Expenses. Communications product development expenses decreased by $1.2 million, or 18%, to $5.6 million for the quarter ended September 30, 2007, compared to $6.8 million for the quarter ended September 30, 2006. The decrease was primarily the result of a $0.8 million decrease in personnel-related expenses and a $0.4 million decrease in other overhead-related expenses. Capitalized software development expenses decreased to $1.7 million for the quarter ended September 30, 2007, compared to $1.9 million for the quarter ended September 30, 2006, due to a decrease in the number of development projects in 2007 compared to 2006. As a percentage of Communications revenues, Communications product development expenses remained flat at 7.4% for the quarters ended September 30, 2007 and 2006. We anticipate that Communications product development expenses will decline throughout 2008 as a result of the reduction in the number of employees in this segment in October 2007.

Communications product development expenses decreased by $3.3 million, or 15%, to $18.7 million for the nine months ended September 30, 2007, compared to $22.0 million for the nine months ended September 30, 2006. The decrease was primarily the result of a $2.2 million decrease in personnel-related expenses and a $1.1 million decrease in other overhead-related expenses. Capitalized software development expenses decreased to $5.0 million for the nine months ended September 30, 2007, compared to $5.9 million for the nine months ended September 30, 2006, due to a decrease in the number of development projects in 2007 compared to 2006. As a percentage of Communications revenues, Communications product development expenses increased slightly to 7.7% in the nine months ended September 30, 2007, compared to 7.6% in the nine months ended September 30, 2006.

General and Administrative

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

Consolidated General and Administrative Expenses. Consolidated general and administrative expenses increased by $4.6 million, or 26%, to $21.9 million, or 17.3% of consolidated revenues, for the quarter ended September 30, 2007, compared to $17.3 million, or 13.3% of consolidated revenues, for the quarter ended September 30, 2006. The increase was due to increases in expenses associated with our Content & Media segment, and, to a lesser extent, our Communications segment and a $0.8 million increase in stock-based compensation. This increase was partially offset by a $0.4 million decrease in depreciation and a reduction in unallocated corporate expenses. General and administrative expenses related to our Content & Media segment and our Communications segment constituted 49.9% and 50.1%, respectively, of total segment general and administrative expenses for the quarter ended September 30, 2007, compared to 43.6% and 56.4%, respectively, for the quarter ended September 30, 2006.

Consolidated general and administrative expenses increased by $3.3 million, or 6%, to $54.3 million, or 14.0% of consolidated revenues, for the nine months ended September 30, 2007, compared to $51.0 million, or 13.0% of consolidated revenues, for the nine months ended September 30, 2006. The increase was due to increases in expenses associated with our Content & Media segment, and, to a lesser extent, our Communications segment. This increase was partially offset by a $2.3 million decrease in stock-based compensation primarily related to the resignation of a former executive and equity awards granted prior to 2006 being expensed in connection with Financial Accounting Standards Board ("FASB") Interpretation No. ("FIN") 28; a reduction in unallocated corporate expenses; and a $0.1 million decrease in depreciation. General and administrative expenses related to our Content & Media segment and our Communications segment constituted 53.0% and 47.0%, respectively, of total segment general and administrative expenses for the nine months ended September 30, 2007, compared to 43.2% and 56.8%, respectively, for the nine months ended September 30, 2006.

Content & Media General and Administrative Expenses. Content & Media general and administrative expenses increased by $2.8 million, or 73%, to $6.7 million for the quarter ended September 30, 2007, compared to $3.9 million for the quarter ended September 30, 2006. The increase was due to a $2.7 million increase in consulting fees primarily related to audit and executive search fees incurred as a result of our planned subsidiary IPO of CMC and a $0.3 million increase in personnel-related costs, partially offset by a $0.2 million decrease in facilities and other overhead-related costs. As a percentage of Content & Media revenues, Content & Media general and administrative expenses increased to 13.1% in the quarter ended September 30, 2007, compared to 10.4% in the quarter ended September 30, 2006.

Content & Media general and administrative expenses increased by $6.3 million, or 59%, to $16.9 million for the nine months ended September 30, 2007, compared to $10.6 million for the nine months ended September 30, 2006. The increase was primarily related to expenses associated with our loyalty marketing service, which we acquired in April 2006 and which was included in our results of operations for the full nine months ended September 30, 2007 compared to only 174 days for the nine months ended September 30, 2006. General and administrative expenses associated with our loyalty marketing service increased by $3.7 million in the nine months ended September 30, 2007 when compared to the nine months ended September 30, 2006 primarily due to the fact that no general and administrative expenses were included in our consolidated financial statements in the first three months and nine days of 2006 (the period prior to acquisition). In addition, the increase was due to a $3.1 million increase in consulting fees primarily related to audit and executive search fees incurred as a result of our planned subsidiary IPO of CMC, a $1.5 million increase in facilities and other overhead-related costs and a $0.7 million increase in bad debt expense related to a specific account relationship. As a percentage of Content & Media revenues, Content & Media general and administrative expenses increased to 11.6% in the nine months ended September 30, 2007, compared to 10.3% in the nine months ended September 30, 2006.

Communications General and Administrative Expenses. Communications general and administrative expenses increased by $1.7 million, or 34%, to $6.7 million for the quarter ended September 30, 2007, compared to $5.0 million for the quarter ended September 30, 2006. The increase was primarily due to a combined $2.4 million increase in bad debt expense related to a technology partner and a litigation-related allowance recorded in the September 2007 quarter and a $0.5 million increase in facilities and other overhead-related expenses. These increases were partially offset by a $1.0 million decrease in consulting fees. As a percentage of Communications revenues, Communications general and administrative expenses increased to 8.9% for the quarter ended September 30, 2007, compared to 5.5% in the quarter ended September 30, 2006.

Communications general and administrative expenses increased by $1.0 million, or 7%, to $15.0 million for the nine months ended September 30, 2007, compared to $14.0 million for the nine months ended September 30, 2006. The increase was due to a combined $2.4 million increase in bad debt expense related to a technology partner and a litigation-related allowance recorded in the September 2007 quarter and a $0.5 million increase in facilities and other overhead-related expenses. These increases were partially offset by a $1.3 million decrease in consulting fees, a $0.3 million decrease in personnel-related costs and a $0.3 million decrease in recruiting and relocation costs. As a percentage of Communications revenues, Communications general and administrative expenses increased to 6.2% in the nine months ended September 30, 2007, compared to 4.8% in the nine months ended September 30, 2006.

Unallocated Corporate General and Administrative Expenses. Excluding stock-based compensation and depreciation, unallocated corporate general and administrative expenses decreased by $0.3 million, or 7%, to $4.0 million for the quarter ended September 30, 2007, compared to $4.3 million for the quarter ended September 30, 2006. The decrease was primarily due to decreases in facilities and other overhead-related expenses, partially offset by increases in personnel-related costs.

Excluding stock-based compensation and depreciation, unallocated corporate general and administrative expenses decreased by $1.5 million, or 10%, to $12.8 million for the nine months ended September 30, 2007, compared to $14.3 million for the nine months ended September 30, 2006. The decrease was primarily due to decreases in facilities and other overhead-related expenses and consulting fees, partially offset by an increase in personnel-related costs.

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