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Article by DailyStocks_admin    (07-06-08 07:10 AM)

The Daily Magic Formula Stock for 07/05/2008 is United Online Inc. According to the Magic Formula Investing Web Site, the ebit yield is 14% 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.

CEO BACKGROUND

Mark R. Goldston has served as our Chairman, Chief Executive Officer and a director since the Merger. Prior to May 2006 and since June 2007, Mr. Goldston served as our Chairman, President, Chief Executive Officer and a director. Between May 2006 and May 2007, he served as our Chairman, Chief Executive Officer 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.

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.

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.

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.

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.

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.

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. We perform an impairment test of our goodwill annually during the fourth quarter of our fiscal year or when events occur or circumstances change that would more likely than not indicate that goodwill might be permanently impaired. Events or circumstances which could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key management or other personnel, significant changes in the manner of our use of the acquired assets or the strategy for the acquired business or our overall business, significant negative industry or economic trends or significant underperformance relative to expected historical or projected future results of operations.

The testing for a potential impairment of goodwill involves a two-step process. The first step of the impairment test involves comparing the estimated fair values of each of our reporting units with their respective net book values, including goodwill. If the estimated fair value exceeds net book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the estimated fair value of the reporting unit is less than net book value, including goodwill, then the carrying amount of the goodwill is compared with its implied fair value. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess.

Although we operate in two reportable segments in accordance with SFAS No. 131, we have identified four reporting units—Classmates, The Names Database, MyPoints, and our Web hosting services—for purposes of evaluating goodwill. Each of these reporting units constitutes a business for which discrete financial information is available.

We performed step one of our annual goodwill impairment test in the fourth quarter of 2007 and determined that the fair value of our Classmates, The Names Database, MyPoints, and Web hosting services reporting units exceeded their net book values. Our analysis included sufficient tolerance for sensitivity in key assumptions. Accordingly, step two was not required. Estimated fair values continue to exceed carrying values because these businesses continue to meet or exceed our expectations and, in certain circumstances, market comparables continue to increase in values.

The determination of whether or not goodwill is impaired involves a significant level of judgment in the assumptions underlying the approaches used to determine the estimated fair value of our reporting units. The determination of the fair value of our reporting units included a study of market comparables, including the selection of appropriate valuation multiples, the compilation of recent applicable market sales transaction data and associated multiples, and discounted cash flow models based on our internal forecasts and projections. The estimated fair value of our reporting units was determined using a combination of the income approach and two methods under the market approach: the guideline company method and the guideline transaction method.

Under the income approach, we estimated fair value based on the discounted cash flow method. The discounted cash flow method is dependent on a number of factors, including projections of the amounts and timing of future revenues and cash flows, assumed discount rates and other assumptions. We considered factors such as historical performance, anticipated market conditions, operating expense trends, and capital expenditures, among others. The significant assumptions used in determining the estimated fair value of our reporting units under the income approach were: discount rate of 19% to 20%, terminal growth rate of 4% to 5% and resulting capitalization rate of 14% to 16%. A 1% increase or decrease in the discount rate and resulting capitalization rate would decrease or increase the estimated fair value of our reporting units by approximately $6.4 million or $6.5 million, respectively, at December 31, 2007. A 1% increase or decrease in the terminal growth rate and resulting capitalization rate would increase or decrease the estimated fair value of our reporting units by approximately $1.2 million or $1.3 million, respectively, at December 31, 2007. Changes in our future revenue and cash flow projections, capital expenditure forecasts or anticipated market conditions, among other factors, could significantly impact the estimated fair value of our reporting units and require adjustments to recorded amounts of goodwill.

Results of Operations

The following tables set forth for the periods presented, selected historical statements of operations data. The information contained in the tables below should be read in conjunction with Liquidity and Capital Resources, Contractual Obligations, and Critical Accounting Policies, Estimates and Assumptions included in this Item 7 as well as the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K.

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

Results of Operations

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

Quarter Ended March 31, 2008 compared to Quarter Ended March 31, 2007

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.

Consolidated Billable Services Revenues. Consolidated billable services revenues decreased by $5.7 million, or 6%, to $90.7 million for the quarter ended March 31, 2008, compared to $96.3 million for the quarter ended March 31, 2007. The decrease in billable services revenues for the quarter ended March 31, 2008 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 34.5% and 65.5%, respectively, of our consolidated billable services revenues for the quarter ended March 31, 2008, compared to 23.1% and 76.9%, respectively, for the quarter ended March 31, 2007. We anticipate that our consolidated billable services revenues will continue to decline in 2008 when compared to 2007 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.

Classmates Media Billable Services Revenues. Classmates Media billable services revenues increased by $9.0 million, or 41%, to $31.2 million for the quarter ended March 31, 2008, compared to $22.2 million for the quarter ended March 31, 2007. The increase in Classmates Media billable services revenues was due to a 46% increase in our average number of pay accounts from 2.3 million for the quarter ended March 31, 2007 to 3.4 million for the quarter ended March 31, 2008. This increase was partially offset by a 4% decrease in ARPU from $3.22 for the quarter ended March 31, 2007 to $3.10 for the quarter ended March 31, 2008. The decrease in ARPU was primarily attributable to limited-time promotional offerings in the fourth quarter of 2007 and, to a lesser extent, a greater percentage of pay accounts represented by international social networking pay accounts which have lower-priced subscription plans compared to the U.S. We did not offer similar promotional discounts in the quarter ended March 31, 2008. 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 $14.7 million, or 20%, to $59.4 million for the quarter ended March 31, 2008, compared to $74.1 million for the quarter ended March 31, 2007. The decrease in Communications billable services revenues was due to a 24% decrease in our average number of dial-up access pay accounts from 2.2 million for the quarter ended March 31, 2007 to 1.7 million for the quarter ended March 31, 2008. In addition, the decrease in revenues was partially due to a $0.6 million decrease in revenues associated with our VoIP business, which we exited during 2007. These decreases were partially offset by an increase in revenues from our DSL services in the quarter ended March 31, 2008 compared to the quarter ended March 31, 2007. 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 for advertisers.

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. We also sell a portion of our advertising inventory through third-party advertising resellers. 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.

Our loyalty marketing service revenues are derived almost entirely 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!, display advertisements, referring members to third-party Web sites or services, and 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.

Consolidated Advertising Revenues. Consolidated advertising revenues decreased by $2.4 million, or 7%, to $31.1 million for the quarter ended March 31, 2008, compared to $33.5 million for the quarter ended March 31, 2007. The decrease was primarily attributable to a decrease in advertising revenues in our Communications segment, partially offset by an increase in advertising revenues in our Classmates Media segment. Advertising revenues related to our Classmates Media segment and our Communications segment constituted 66.3% and 33.7%, respectively, of our consolidated advertising revenues for the quarter ended March 31, 2008, compared to 60.3% and 39.7%, respectively, for the quarter ended March 31, 2007.

Classmates Media Advertising Revenues. Classmates Media advertising revenues increased by $0.4 million, or 2%, to $20.6 million for the quarter ended March 31, 2008, compared to $20.2 million for the quarter ended March 31, 2007. The increase was primarily related to a $1.4 million increase in revenues from our loyalty marketing service and, to a lesser extent, a $0.3 million increase in revenues associated with our international social networking services. These increases were partially offset by a $1.3 million decrease in revenues from post-transaction sales resulting from a change in our advertising partner in the fourth quarter of 2007. Our new partners have not generated as much revenue as generated by the agreement with the previous advertiser. We anticipate decreased revenues from post-transaction sales in 2008 compared to 2007.

Communications Advertising Revenues. Communications advertising revenues decreased by $2.8 million, or 21%, to $10.5 million for the quarter ended March 31, 2008, from $13.3 million for the quarter ended March 31, 2007. The decrease was primarily attributable to a decrease in "start page" advertising revenue and, to a lesser extent, search revenues, as a result of a decrease in pay accounts. 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 for our pay accounts; fees associated with the storage and processing of customer credit cards and associated bank fees; and domain name registration fees. Costs associated with our social networking services are relatively fixed. Costs associated with our loyalty marketing service, primarily costs of providing rewards to members, are largely variable based on 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 $1.4 million, or 5%, to $27.8 million for the quarter ended March 31, 2008, compared to $29.2 million for the quarter ended March 31, 2007. The decrease was primarily due to decreased costs associated with our Communications segment, partially offset by increased costs associated with our Classmates Media segment and a $0.3 million increase in depreciation. Cost of revenues related to our Classmates Media segment and our Communications segment constituted 36.4% and 63.6%, respectively, of our total segment cost of revenues for the quarter ended March 31, 2008, compared to 32.6% and 67.4%, respectively, for the quarter ended March 31, 2007.

Classmates Media Cost of Revenues. Classmates Media cost of revenues increased by $0.4 million, or 4%, to $9.3 million, or 17.9% of Classmates Media revenues, for the quarter ended March 31, 2008, compared to $8.9 million, or 21.0% of Classmates Media revenues, for the quarter ended March 31, 2007. The increase in costs was primarily related to a $0.6 million increase in overhead, personnel and customer support-related costs associated with our social networking services, partially offset by a $0.2 million decrease in costs associated with our loyalty marketing service, primarily associated with lower point costs in the quarter ended March 31, 2008 compared to the quarter ended March 31, 2007.

Communications Cost of Revenues. Communications cost of revenues decreased by $2.2 million, or 12%, to $16.2 million, or 23.2% of Communications revenues, for the quarter ended March 31, 2008, compared to $18.4 million, or 21.0% of Communications revenues, for the quarter ended March 31, 2007. The decrease in costs was primarily due to a $2.6 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 slightly lower average hourly telecommunications costs. In addition, Communications costs of revenues decreased as a result of a $0.6 million decrease in costs associated with our VoIP services as a result of our decision during 2007 to exit the VoIP business; a $0.6 million decrease in customer support and billing-related costs in the quarter ended March 31, 2008 compared to the quarter ended March 31, 2007 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 a $0.5 million decrease in overhead costs. These decreases were partially offset by a $2.4 million increase in costs associated with our DSL services.

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 $9.2 million, or 20%, to $36.8 million, or 30.2% of consolidated revenues, for the quarter ended March 31, 2008, compared to $46.0 million, or 35.4% of consolidated revenues, for the quarter ended March 31, 2007. The declines were primarily attributable to a reduction in marketing expenses related to our Communications segment and, to a lesser extent, a decrease in marketing expenses related to our Classmates Media segment. Sales and marketing expenses related to our Classmates Media segment and our Communications segment constituted 53.3% and 46.7%, respectively, of total segment sales and marketing expenses for the quarter ended March 31, 2008 versus 44.4% and 55.6%, respectively, for the quarter ended March 31, 2007.

Classmates Media Sales and Marketing Expenses. Classmates Media sales and marketing expenses decreased by $0.8 million, or 4%, to $19.6 million, or 37.7% of Classmates Media revenues, for the quarter ended March 31, 2008, compared to $20.4 million, or 48.1% of Classmates Media revenues, for the quarter ended March 31, 2007. The decrease was the result of a $0.5 million decrease in personnel- and overhead-related expenses and a $0.5 million decrease in marketing costs related to acquiring new members.

Communications Sales and Marketing Expenses. Communications sales and marketing expenses decreased by $8.4 million, or 33%, to $17.1 million, or 24.5% of Communications revenues, for the quarter ended March 31, 2008, compared to $25.5 million, or 29.2% of Communications revenues, for the quarter ended March 31, 2007. This decrease was attributable to a $6.8 million decline in advertising, promotion and distribution costs related to our dial-up Internet access services and a $1.6 million decrease in personnel- and overhead-related expenses as a result of lower headcount. These decreases were partially offset by a $0.5 million increase in stock-based compensation primarily related to new equity awards issued in 2007 and the quarter ended March 31, 2008.

CONF CALL

Erik Randerson

Thank you. Hello and welcome to United Online's conference call to discuss our financial results for the first quarter ended March 31, 2008. With me today is Mark Goldston, the Chairman, President and Chief Executive Officer, and Scott Ray, our Executive Vice President and Chief Financial Officer.

In addition, on today's call and in the accompanying slides that are available within the Investor Relations section of our website, we will refer to adjusted operating income before depreciation and amortization or OIBDA, segment adjusted OIBDA, adjusted net income, adjusted net income per share, and free cash flow.

Management believes that each of these measures is useful in evaluating the company's operating performance. These measures are not determined in accordance with accounting principles generally accepted in the U.S. or GAAP and should be considered in addition to, not as a substitute for or superior to, financial measures determined in accordance with GAAP. Definitions of these non-GAAP financial measures are provided in today's press release and the accompanying slides on our website, along with reconciliations to the most comparable GAAP financial measures.

Before we get started, I also need to point out that the company does apply the safe harbor provisions as outlined in the press release to any forward-looking statements that may be made on this call. Statements regarding our current expectations about our future operations, financial condition, performance, pay accounts, services and the industry in which we operate are forward-looking statements that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

More information about potential risk factors that could affect the company's business and its financial results is included in today's press release under the caption, "Cautionary Information Regarding Forward-Looking Statements," and in United Online's most recent filings with the Securities and Exchange Commission.

Projections provided by management in the press release and in today's call are based on information available to us at this time, and management expects that internal projections and expectations may change over time. However, the company does not intend to revise or update this information and may not provide this type of information in the future. Any persons replaying this broadcast after May 6, 2008 should recognize that any non-historical information discussed in today's call might not be current or valid after this date because the circumstances and assumptions underlying such information may have changed.

And with that, we're going to start out with a few comments from Mark and Scott, and then we're going to open it up for questions.

So now I'll give the floor to our Chairman, President and Chief Executive Officer, Mark Goldston.

Mark Goldston

Thanks, Erik. Welcome, everyone, to the United Online March 2008 quarter earnings call. I'll look at a high level of our operating results for the first quarter, and then I'll review the performance of our operating segments. And I'll also make a comment on the United Online announcement recently that we entered into a definitive merger agreement to acquire FTD Group.

Scott Ray, our Chief Financial Officer, will conclude with our prepared remarks and look at the numbers at the quarter and give you the new guidance going forward.

Before I get started I'd like to mention that we've created a very comprehensive PowerPoint presentation that summarizes our first quarter financial results and operating metrics. You can download a copy of this presentation on our Internet homepage at www.UnitedOnline.com and within the Investor Relations section right next to the earnings press release. And I'd encourage you to do that because it's very comprehensive.

In terms of looking at a review of Q1 2008 from a financial perspective, I'd like to say that we are really very pleased with the first quarter results that were delivered by the team at United Online. We had the best Q1 in the history of United Online in terms of adjusted OIBDA, increased and paid social networking subscribers, adjusted OIBDA as a percentage of revenues in our Communications business and in our Classmates Media business.

To that end, there were really five key highlights that I'd like you to take away from our outstanding Q1 2008 results.

Number one, revenues and adjusted OIBDA came in ahead of the high end of our guidance and Street expectations. And as I said, adjusted OIBDA was the best Q1 performance in the company's history. Our hybrid business model, which derives revenues from both subscription and advertising, performed very well even in a weaker economic environment.

Number two, the strong consolidated results were driven primarily by our Classmates Media segment, where record growth in pay accounts of 322,000 was the single highest quarterly increase in the history of the company and again led to impressive revenue growth. Classmates Media segment adjusted OIBDA more than doubled versus Q1 a year ago, recording an increase of 129%.

Meanwhile, our Communications segment once again delivered a strong quarter against our objective of running this business for profitability and cash flow. In fact, the Communications segment achieved yet another record in Q1 as our Communications segment adjusted OIBDA as a percentage of segment revenue reached an all-time high of 38.4% segment revenue.

Number four, for the first time in four years the quarterly net growth in paid subscribers for all of the United Online, what we call consolidated pay accounts, exceeded 200,000, which is virtually double the 110,000 in Q4 2007 and up 65% versus the Q1 2007 period.

In terms of cash flow, number five, United Online continues to generate a substantial amount of cash, and this has been a hallmark of our company for many years. Free cash flow increased 31% over the prior year quarter. Later this month, we will continue our practice of returning cash to shareholders by paying our 13th consecutive quarterly dividend of $0.20 per share.

You know, since the inception of the dividend back in 2005, with the payment of the upcoming $0.20 per share dividend on May 30, 2008 we will have returned almost $180 million of cash to United Online shareholders.

We're also going to put our balance sheet and cash flow to work with our recent announcement that the United Online family will acquire the FTD Group for $800 million. I'll talk more about this important development in a few minutes, but to that objective following the closing of the transaction we expect to decrease our regularly quarterly cash dividend from $0.20 a share to $0.10 a share as we announced last week.

As a result of our strong performance in Q1 and our continued confidence in both the Classmates Media and Communications segments of the business one month into the second quarter, Scott Ray will then provide details of our new guidance that reflects increased expectations for adjusted OIBDA going forward in 2008.

Let's take a look at the operating segments, and we'll start with Classmates Media.

Classmates Media, to put it in a word, had a blockbuster Q1 quarter. I mean, I mentioned that a minute ago but I want to go into a little bit more detail now. Segment pay accounts increased by a record 322,000 during the first quarter. That surpassed our previous high achieved in Q2 of last year by 45,000 pay accounts. So it was a 45% year-over-year increase.

Actually, this represents the first quarter in the 13-year history of Classmates where net paid accounts increased over 300,000. Never happened before.

Remember that when we bought Classmates Online back in November of 2004, the business had lost 246,000 paid subscribers for the year 2004. Since United Online has owned Classmates and its subsidiaries, we've seen that negative 246,000 in 2004 go to a positive 300,000 in 2005, a positive 342,000 in 2006, we increased to 1.03 million in 2007, and now we've just had an all-time record single quarter of the 322,000 in Q1 of '08.

In the four quarters from Q1 2006 through Q4 2006, Classmates Media pay accounts grew an average of 85,000 per quarter. In the last five quarters from Q1 2007 through Q1 2008, Classmates Media pay accounts grew an average of 270,000 per quarter, so from an average of 85,000 to an average of 270,000 per quarter.

We continue to see a great deal of potential to drive further growth in pay accounts as we continue to execute our product and marketing initiatives.

You know, people ask me all the time what do I attribute our strong growth in pay accounts to, and I can tell you it's great execution by the team at Classmates across all of our key initiatives, and I shared a lot of those with you last quarter. They've just continued to do phenomenonal things up there. And we put in a great growth plan in our international business, and that continues to exceed our expectations as well.

So let me take a look now starting with the domestic business, and I want to repeat a couple of our key goals for 2008 that I spoke about last quarter.

By the way, remember that a critical new website redesign initiative was launched during the latter part of 2007 on both Classmates and MyPoints domestic. These new web redesigns were intended to make the user experience more compelling and drive an increase in overall visits and time spent on the sites while facilitating increased levels of user engagement and hopefully satisfaction. Our hopes for the improvements generated by the web redesigns were central to the messaging that we gave you on the Q4 2007 Classmates Media IPO process as we had high hopes for those initiatives.

As I mentioned on the Q4 investor call, it was our specific goal to freshen up the Classmates website with new, compelling features that were designed to encourage more user-generated content, more frequent site visits, and a higher level of overall engagement from our free and paid Classmates members. Against this objective in January we launched a new version of our member profile page that encourages Classmates members to create more user-generated content and interact with other members on a more frequent basis.

The early results against our stated objectives are quite impressive, particularly in terms of our user engagement metrics. For example, we experienced an average of 74% more photos posted per day on Classmates during the first quarter of 2008 versus the average number of photos posted per day in the fourth quarter of 2007. We think this has a lot to do with the successful rollout and response to our new profile pages that now allow unlimited photographs.

Remember, fresh content and corresponding notifications that members receive highlighting the new content in their communities, that's what brings members back to Classmates, which in turn provides us the opportunity to monetize them through advertising and paid subscriptions. So generating such a strong increase in member photos is a really important part of our strategy.

I'm also quite pleased to report that daily visitors to the Classmates site are up as are page views per visit by our internal measures. The most telling indicator of our traction is the active accounts metric that we report to you in the investment community. Active accounts increased by more than 1 million sequentially in the first quarter versus Q4 2007, and importantly, active accounts increased by 2.5 million from Q1 a year ago. While the MyPoints active members are included in that metric as well, virtually all of the active member growth has been in the social networking business. Those are stunning results, and they represent significant improvement even over recent trends.

Equally important, we plan to launch a broad range of new enhancements throughout the balance of the year both on our flagship Classmates website in the U.S. and overseas on StayFriends, our social networking business in Europe.

We previously stated the Classmates website redesign had five key pods that would be launched during the 12month period of Q4 2007 to Q4 2008. In fact, just last week we introduced the third of the five pods, which has a new set of features on Classmates that encourage members to create personal networks of classmates, friends, and other acquaintances, and then they can prominently display the photos of those friends on a newly designed Classmates profile page.

Establishing personal networks and promoting member interaction on Classmates is entirely consistent with our strategy to broaden the appeal of the Classmates site and give members more to do when they visit the site.

I've stated this previously but our intent is to evolve Classmates from a destination that's been primarily used as a site to reconnect with your past into a much richer set of active communities where, in addition to reconnecting with past acquaintances, members can return to maintain existing relationships and establish new friendships with Classmates members that share common interests, not just common schools.

To promote the new relationships and interactions among the members with common interests, the next pod which will be the fourth pod - that we plan to launch is a neighborhood feature, and that will allow Classmates members to affiliate with other people in their local municipality regardless of where they went to school. This enhancement is scheduled for the back half of the second quarter of 2008.

The team at Classmates deserves a lot of credit for a job well done in promoting the benefits of our new features to our membership and in acquiring new members. In terms of new member acquisition, I'm really pleased to report that our marketing efforts are attracting increasing numbers of Classmates registration from organic or unpaid sources particularly as a result of our search engine optimization initiative. Increasing the quantity of unpaid registrations has really to improve the overall efficiency of our marketing spending, so we're really pleased with those efforts.

A final note on social networking. I couldn't be more excited about the growth of our international social networking websites that are located in Germany, France, Sweden and Austria under the StayFriends and in France under the [Trombi] brand name. Revenues from out international websites nearly tripled in the first quarter versus a year ago and were a major driver of our record growth in pay accounts. Our European team is doing an outstanding job in driving the business to an all-time record level.

What's really exciting to me personally is that one of the biggest drivers of our business overseas is a member interest in the viral friends feature that we just launched at Classmates in the U.S. last week. So it's going to be especially interesting to see how that feature impacts the U.S. Classmates business as it's been so successful overseas.

Let me take look now at the MyPoints business, which is our online loyalty marketing service. It represents the other major property within the Classmates Media segment.

MyPoints delivered another solid quarter in Q1 and had a particularly strong quarter in growing the emailable base of members who are interested in engaging with the advertising campaign to earn redeemable points on MyPoints. Bear in mind the emailable members are the lifeblood of the MyPoints program.

Relative to the recent quarter, MyPoints experienced a bit of slowing in year-over-year revenue growth which reflected tough comps to last year's first quarter when the world's largest soft drink manufacturer ran a huge campaign to promote its rewards program on MyPoints as well as the pockets of weakness in the ad market that affected many companies that you've seen reporting on the first quarter of 2008.

But to be clear, our Q1 revenue guidance had anticipated the weakening ad trends I just mentioned, so the environment obviously didn't impact our overall outlook. And as you can see from our strong Q1 results and the fact that we're going to increase overall 2008 adjusted OIBDA guidance, we feel really good about where we are.

In fact, we continue to believe that the Classmates Media business is uniquely well positioned relative to its peers in a very challenging economic environment. We feel this way for two reasons. First, one of the key competitive advantages - and I've said this time and time again, and I really can't say it too emphatically - one of the key competitive advantages is that 60% of Classmates Media revenues are derived from paid subscriptions which are highly visible sources of recurring revenue that are primarily derived from deferred revenues on the balance sheet at Classmates.

Our paid subscription business has performed at all-time record levels over the past five quarters in the face of the largest growth in history of free social networking subscribers across the Internet from the likes of Facebook, MySpace, ViVo, etc. Huge free growth on the Internet, and huge paid growth on Classmates.

I have repeatedly stated that we thought this would be the case, and a lot of people said they questioned our - in fact, they wrote that they questioned our ability to grow paid subscribers in that environment. Many people put a stake in the ground on this. I believe the addition of 1.35 million new net paid subscribers in just the past five quarters alone - which brings our social networking paid sublevel to 3.5 million at the end of Q1 2008 - solidly proves that point. Also, the fact that we just finished with 322,000 net paid additions in this quarter puts an exclamation point on that.

You've got to remember that Classmates only had 1.4 million paid subs when we bought that business back in 2004, and not only do they have 1.4 million but in the year completed 2004 - so one month after we owned it they went down 246,000 paid subscribers. So think about the turnaround that's occurred on that business since 2004 and how with 3.5 million paid subscribers what a really major factor we are in that market.

The second point I want to make is that the majority of the MyPoints campaigns that we execute for clients are measurable with pricing terms that are specifically tied to performance. So if you're a client of MyPoints, you can take comfort in the fact that you paid for measurable metrics that demonstrate a much clearer return on investment than a tradition CPM advertising model would.

So that's it sort of for Classmates Media. I now want to jump into the Communications segment, which is primarily our NetZero and Juno ISP brands. This segment again delivered impressive results against our objective of managing the communications business for profitability and cash flow.

You know, by managing our costs very efficiently, we delivered yet another record quarter in which adjusted OIBDA as a percentage of segment revenue rose to an all-time record high of 38.4% in Q1 2008. There are many companies that don't have gross margins at 38.4% much less an adjusted OIBDA margin at that level.

You know, clearly one of the hallmarks of United Online and our management team has been our ability over the past several years to value engineer our cost structure as the dial-up market has matured and its subscriber counts have declined over time. I should add that we believe our value priced dial-up Internet access services remain relatively well positioned in today's challenging economic environment. When you compare it to premium dial services that charge $20 or more a month, we really think we're in a great place.

In addition, according to Forrester Research concerns about price ranks as the number one leading barrier to high-speed adoption. Fifty-nine percent of dial-up users surveyed by Forrester cited the high price of broadband as a concern that could keep them on dial-up.

Additional information supporting the viability of the dial segment is reflected in the numbers reported by the various cable and DSL providers along with research published in September 2007 by J.D. Power and Associates which indicates that the broadband penetration in the United States either has reached or it's starting to reach saturation level, and that the lower income and more rural C&D county areas remain the key target zones for new dial-up subscribers.

In today's economic environment, our $9.95 a month offering from the reliable NetZero and Juno brands are well positioned in the value price segment, and the reduced competitive environment in the dial-up market is really quite advantageous to us as we look to the future.

Not surprisingly, when you consider our attractive price point and the outstanding service level we've achieved on NetZero and June, United Online's experience of a slightly lower rate of net decline in dial-up pay accounts than the rate reported by the two other major dial-up providers who offer premium dial services based on our analysis of press releases that were issued by our dial-up competitors for the quarter ended March 31, 2008.

It's important to note our access pay accounts declined by just 104,000 in Q1 2008 after a decline of 100,000 in Q4 2007. Those are two of the lowest decline levels we have seen in our access business in many, many years.

Clearly, we don't manage the Communications business for subscriber metrics at this point given that we're in cash flow harvest mode. But the analysis represents an interesting observation nonetheless because it implies that United Online is actually gaining market share in the current environment in the dial-up market.

You know, we've said numerous times before we believe there's a long tail attached to the dial-up market life cycle. You've heard me say that for years now. And that theory is starting to play out. The hard facts relating to the lack of broadband penetration outside of the major metropolitan areas on top of the attractiveness of less than $10 a month for lower income individuals who are looking to get access to the Internet, that's what we believe will extend the life cycle of the dial-up market for many years into the future.

A lot of people in the financial community have predicted the demise of the dial-up market for the past five-plus years. In fact, you've heard them on these earnings calls. In the face of those predictions, really since 2002, United Online's generated roughly $688 million of adjusted OIBDA, with more than 85% of that $688 million coming from the Communications business.

We've said it before; we'll say it again. We love the dial-up business. We think it's going to be around for a long time. It's been a tremendous profitability machine for this company.

I'd like to conclude with a few words about our major announcement from last week on an acquisition. If you look at the three major acquisitions made by our company - Juno Online was acquired in 2001, Classmates Online in 2004, and MyPoints.com was acquired in 2006 - you can see that all three of those acquisitions required a lot of work on our part. Several of them were turnarounds. And they have performed phenomenonally well since being acquired by United Online.

And our strong results in Q1 2008, particularly at Classmates Media, where we've got MyPoints and Classmates, demonstrates that the businesses we've acquired over the past several years are performing exceptionally well and that we now have the capacity and the desire to acquire another major company.

Last Wednesday we announced a definitive merger agreement to acquire FTD Group, a leading provider of floral and floral-related products in the U.S., Canada and the U.K. and the Republic of Ireland under the FTD and Interflora brand name.

From a strategic perspective it's important to note that FTD has a significant presence on the Internet, with 90% of its consumer segment orders originating online at FTD.com.

There are five key reasons why this deal makes sense for United Online and I want to go through them.

Number one, it significantly increases scale. The transaction results in pro forma combined company revenues of approximately $1.1 billion and pro forma combined company operating income of approximately $175 million for the 12months ended December 31, 2007.

Number two, it greatly diversifies our revenue stream. We expect that following the acquisition United Online's Communications segment revenues, which is NetZero, Juno and the other elements we talked about, they will represent less than 25% of United Online's consolidated revenue. The transaction also provides a third revenue stream, ecommerce and retail, to complement the Classmates Media and Communications businesses under the United Online umbrella.

As investors on this call know all too well, even though United Online has had six consecutive years of record adjusted OIBDA and the $688 million I referred to previously, the perceived terminal value risk of dial-up Internet access - and I say perceived because as of yet we have not seen that as real but if you buy into the logic that there is perceived terminal value risk in dial, that has clearly impacted our trading multiple for many years.

So despite the dependable performance of the Communications segment from a cash flow and adjusted OIBDA perspective over the last several years, given some of the external concern about the life cycle of the dial business my hope is that investors will now focus on the fact that after we acquire FTD United Online's dial business will represent under 25% of total United Online revenues while continuing to contribute valuable cash flow to the overall corporation. That's really important.

Number three, attractive financial characteristics of the deal. We expect FTD and this acquisition to provide a stable and recurring cash flow base with attractive growth opportunities for the combined company. We also expect the FTD acquisition to be accretive to GAAP diluted net income per share beginning in the second quarter of 2009, which is very consistent with our previously stated objective about acquisitions and when they ought to become accretive.

Number four, this is an expansion for us into a very attractive market segment. The transaction will enable United Online to participate in a very large $20 billion floral market that is experiencing strong migration to the Internet channel. While the Internet represents approximately 12% of the floral market in 2008, it's expected to become a much larger share in the future. FTD is ideally positioned to benefit from this Internet market growth.

And lastly, number five, we expect great marketing opportunities and efficiencies. There are compelling opportunities to deploy United Online's proven expertise in implementing marketing campaigns to drive results, particularly in promoting the FTD brand that's got exceptional awareness among floral customers.

We are really excited about the potential benefits of cross-selling FTD products to United Online's more than 50 million registered consumer accounts that have virtually identical demographic characteristics as FTD's existing customer base. We're going to be looking to significantly enhance the focus on the FTD member florist network and take advantage of that huge asset that has literally thousands and thousands of retail floral shops featuring the famous FTD blackandgold Mercury Man logo. We're also going to explore opportunities to encourage repeat purchases of FTD products using loyalty reward programs based upon our MyPoints loyalty marketing service.

FTD has got a terrific management team, and they've got outstanding knowledge of the floral industry. I've been really impressed with these folks. And the combination of our expertise in marketing, branding and retail and their demonstrated business acumen and category knowledge we think makes for a really powerful combination.

So net-net, we think this is an excellent opportunity to deploy our substantial cash resources, leverage our strong cash flow to enhance stockholder value, and acquire a business with one of the truly great brand names in the entire world. On a pro forma basis, giving effect to the debt that we anticipate incurring in the transaction, the combined company would have a leverage ratio of just 1.9 times 2007 adjusted OIBDA for the 12 months ended December 31, 2007. We think this amount of leverage is certainly appropriate for businesses like United Online and FTD, that generate significant amounts of free cash flow.

Bear in mind, by the way, that FTD operates a consumer business in which customers pay the company upfront for flowers ordered on the Internet. FTD then distributes all of its consumer orders to the thousands of florist partners in its network, which means that FTD doesn't actually carry any inventory in its consumer business. Even more attractive, FTD doesn't pay the florist who fulfills the order for several weeks. That's a great cash flow business with minimal Capex requirements.

By the way, this may sound a little familiar to those of you who have been on United Online investor calls over the years, because this really resembles the dynamics of our own business. In case you missed last weeks' conference call, I would encourage you to either listen to a replay or download a copy of the investor presentation we put together that's located in the Events section of our Investor Relations website, which does a great job of explaining this acquisition.

Lastly, I want to talk about the Classmates Media IPO. Several investors continue to ask me about the Classmates Media IPO, and let me be very clear on this point. The FTD acquisition should not impact our plans for the initial public offering please find Classmates Media. It remains our strategy to pursue an IPO of Classmates Media, subject, of course, to the improvement of the current market conditions. And as to whether or not Classmates Media business is ready for the public market, well, we believe the exceptional performance of Classmates Media, particularly during the last few quarters, speaks for itself.

Further, the uncertainties surrounding launch of the major new web design for Classmates and MyPoints which existed back in December 2007, which was a major point we heard repeatedly on the road show, how will those do, well, that concern has now been replaced by demonstrated success achieved by both Classmates and MyPoints with their website redesigns over the past several months.

So with that I want to turn the mike over to Scott, who will take you though a review of the financial results and an update of the guidance. Scott?

Scott Ray

Thank you, Mark, and good afternoon, everybody.

Let me first begin with a review of consolidated financial highlights for the first quarter, and then I'll get into some of the specifics of our operating segments as well as guidance going forward.

Starting with consolidated financial highlights, our first quarter results again demonstrated strong performance against the key priorities we have previously outlined for the investment community. Bear in mind that within the Classmates Media segment, we focused on subscriber growth, revenue growth, and adjusted OIBDA contribution. And by comparison, in the Communications segment, we continue to focus on successfully managing a mature dialup Internet access business for profitability and cash flow, which has been our long-standing objective.

Turning more specifically on consolidated results - some of these measures are measures Mark has spoken to in his presentation, but I think they're some great points to reinforce and call out again - consolidated pay accounts increased by a net 215,000 in the first quarter, an increase of 65% compared to net additions of 130,000 pay accounts in the year ago quarter. Importantly, the 215,000 net increase in pay accounts represented our highest quarterly organic growth in pay accounts since the March 2003 quarter. Our total pay accounts at the end of the first quarter were 5.6 million.

Consolidated revenues were $121.8 million, which was almost $2 million above the high end of our guidance range. Consolidated revenues declined by 6% from the $129.9 million reported in the year ago quarter, as strong growth in Classmates Media was more than offset by the decline in Communications revenue. Classmates Media represented 42.6% of consolidated revenues in the first quarter, up from 32.7% in the year ago quarter.

Our consolidated gross margin in the first quarter decreased slightly, to 77.1% from 77.5% in the year ago quarter, as the decline in the Communications segment gross margin was partially offset by gross margin expansion at Classmates Media.

As Mark pointed out earlier, consolidated adjusted OIBDA was $38.7 million in the first quarter, an extremely strong first quarter for us; we're really proud of it. And it was up $4.2 million or 12% from $34.4 million in the year ago quarter, and it also exceeded the high end of our guidance range by $4.7 million. We achieved this strong year-over-year first quarter growth in consolidated adjusted OIBDA despite an $8 million decrease in consolidated revenues over the same period.

Consolidated adjusted OIBDA margin, which represents consolidated adjusted OIBDA as a percentage of consolidated revenue, increased by 520 basis points to 31.7% in the first quarter, up from 26.5% in the year ago quarter and reflecting both the operating leverage we are realizing within Classmates Media and our disciplined financial management throughout the company.

The company's consolidated GAAP diluted net income per share was $0.19 in the first quarter, unchanged from the year ago quarter, and the company's adjusted diluted net income per share in the first quarter was $0.31, up $0.04 or 15% from the year ago quarter.

During the first quarter the company generated free cash flow of $26.6 million, up $6.3 million or 31% from $20.3 million in the year ago quarter.

Now let's turn to the first quarter 2008 operating segment results.

Starting with Classmates Media, pay accounts increased by a net 322,000, as Mark pointed out, during the first quarter, a new record high for the company and that was versus net growth of 265,000 in the year ago quarter. Classmates Media pay accounts at March 31, 2008 represented 63.3% of our total pay accounts compared to 48.8% at March 31, 2007. Also at March 31, 2008, the Classmates Media segment had 3.5 million pay accounts, a 45% increase from March 31, 2007.

Pay account churn for the Classmates Media segment was 4.3% in the first quarter, down from 4.7% in the 2007 fourth quarter and also down from 4.5% in the year ago quarter.

Active accounts in the Classmates Media segment increased to 13.9 million in the first quarter from 12.6 million in the 2007 fourth quarter and 11.4 million in the year ago quarter.

Classmates Media revenues increased to $51.9 million in the first quarter, up $9.5 million or 22% from $42.4 million in the year ago quarter. This increase was principally attributable to growth in billable services revenue, which increased $9 million or 41% versus the year ago quarter.

First quarter advertising revenues increased $0.4 million or 2% compared to the year ago quarter. We previously spoke to the expiration of a long-term sales agreement in October 2007. This agreement was replaced by a similar agreement with a different advertiser late in the 2007 fourth quarter. The agreement with this advertiser is not expected to generate as much revenue on an annual basis as the agreement with the previous advertiser.

Average monthly revenue per pay account or ARPU in the first quarter was $3.10, down 4% from $3.22 in the year ago quarter and down 5% sequentially from $3.26 in the 2007 fourth quarter. The decline from the fourth quarter was primarily due to a limited time promotion we offered during the 2007 fourth quarter that allowed our free social networking members to sign up for a pay membership at a deeply discounted rate. It's important to note we did not promote similar discounts of pay memberships in the just-completed first quarter.

Segment adjusted OIBDA increased 129% year-over-year during the first quarter to $11.8 million from $5.2 million in the year ago quarter. Classmates Media segment adjusted OIBDA in the first quarter represented 22.8% of segment revenues, up significantly from 12.2% of segment revenues in the year ago quarter, as a result of the operating leverage associated with higher segment revenues and also as a result of the disciplined management of our operating expenses.

Turning to our Communications segment, pay accounts decreased by a net 107,000 during the first quarter versus a 106,000 net decline in the 2007 fourth quarter and a 133,000 net decline in the year ago quarter. This is the first time in more than two years that the Communications segment has experienced net pay account losses of less than 110,000 for two consecutive quarters.

Communications segment revenues in the first quarter were $69.9 million, a decrease of $17.5 million or 20% from $87.4 million in the year ago quarter due to a decrease in pay accounts.

Our ARPU in the first quarter was $9.45, up slightly from $9.43 in the year ago quarter and up 2% sequentially from $9.28 in the 2007 fourth quarter.

Our pay account churn was 4.8% during the first quarter, and that was down from 4.9% in the year ago quarter.

Although our segment revenues declined by $17.5 million or 20% in the first quarter compared to the year ago quarter, our segment adjusted OIBDA was $26.8 million and down just $2.5 million or 8% from $29.3 million in the year ago quarter due to the company's continuing disciplined management of operating expenses in connection with our focus on driving the business segment for profitability and cash flow.

Communications segment adjusted OIBDA, as Mark pointed out, as a percentage of segment revenues increased to a record 38.4% in the first quarter, and that was up from 33.5% of segment revenues in the year ago quarter and from 37.2% in the 2007 fourth quarter.

Subscriber acquisition costs or SAC in the first quarter was $88, and that was down 14% versus the year ago quarter and down 10% versus the 2007 fourth quarter. As a reminder, our SAC computation is equal to total segment sales and marketing expenses divided by gross pay account additions for the period.

With respect to our balance sheet and dividend, total cash and short-term investment balances increased by a net $5.7 million in first quarter to a total of $224 million at March 31, 2008. The first quarter is seasonality our slowest period for growth in cash and investment balances, due primarily to the payment of our annual bonuses and the payment of payroll taxes in connection with the vesting of restricted stock [inaudible]. And also during the first quarter we paid $14.6 million in cash dividends.

Moving on to guidance, this afternoon we are initiating guidance for the second quarter and increasing our guidance for the full year 2008.

Starting with the 2008 second quarter, we are establishing second quarter guidance for consolidated revenues in the range of $117 million to $121 million.

Our 2008 second quarter guidance for consolidated adjusted OIBDA is in the range of $34 million to $38 million.

Moving on to guidance for the full year 2008, in terms of the top line we continue to anticipate that total consolidated revenues will decline in 2008 when compared to 2007. We expect a continued decline in Communications segment revenues that will be partially offset by an increase in Classmates Media segment revenue.

We are increasing our 2008 consolidated adjusted OIBDA guidance to the range of $147 million to $152 million, which is up from our prior 2008 guidance of between $143 million and $149 million.

We expect capital expenditures in 2008 in the range of $18 million to $23 million, unchanged from our estimate provided last quarter.

And we are also maintaining our previously guidance for cash taxes. We expect to pay cash taxes in 2008 of between $30 million to $35 million.

That concludes my prepared remarks. Thank you and back to you, Mark.

Mark Goldston

Thank you, Scott.

I also wanted to point out and I think it's worth mentioning - and it is in the online investor support slide that you can see at UnitedOnline.com - that the impressive growth that we had in the Classmates business with the 322,000 net paid subs in Q1 and getting us to an all-time record of 3.5 million, the churn on that business in Q1 2008 was - I believe it may be the all-time low - 4.3%.

When we bought this company, the churn rates were up in the 8% to 10% range, and it has been running approximately 4.6%, 4.7% - that's what it was in Q4 - and it is absolutely counterintuitive to find paid subscription businesses where you have dramatic increases in paid subscribers and your churn goes down. It is absolutely we've been in the paid subscription business now for 10 years, and if you look at it year-over-year, Q1 2007 to Q1 2008, it declined, and Q4 2007 was 4.7% churn and Q1 2008 4.3%.

So if growth is impressive in the absolute, it's even more impressive when you consider the fact that we're increasing the loyalty and the satisfaction of the paid subscriber at Classmates in the face of a huge free social networking growth arena. So that just tells you how powerful the paid model is at Classmates.

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