Edgar Filing: KNOT INC

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2006


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

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER: 000-28271

THE KNOT, INC.
(Exact Name of Registrant as Specified in its Charter)


Delaware		13-3895178
(State of incorporation)		(I.R.S. Employer Identification Number)

462 Broadway, 6^th Floor
New York, New York 10013
(Address of Principal Executive Officer and Zip Code)

(212) 219-8555
(Registrant’s Telephone Number, Including Area Code)

Indicate by check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):


	Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of November 3, 2006, there were 30,985,849 shares of the registrant’s common stock outstanding.


		Page Number


PART I	FINANCIAL INFORMATION

Item 1:	Financial Statements (Unaudited):

	Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005	3

	Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2006 and 2005	4

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	27

Item 4:	Controls and Procedures	27

PART II	OTHER INFORMATION

Item 1:	Legal Proceedings	27

Item 1A:	Risk Factors	27

Item 6:	Exhibits	31

Item 1. Financial Statements (Unaudited)

THE KNOT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30, 2006 (Unaudited)			December 31, 2005 (Note 1)

ASSETS
Current assets:
Cash and cash equivalents	$	70,651,802		$	17,685,067
Short-term investments		7,000,000			11,550,000
Accounts receivable, net of allowances of $1,681,188 and $379,464 at September 30, 2006 and December 31, 2005, respectively		8,901,442			4,804,581
Inventories		1,913,075			1,622,056
Deferred production and marketing costs		540,897			419,555
Other current assets		1,571,314			881,114

Total current assets		90,578,530			36,962,373
Property and equipment, net		10,018,106			2,986,354
Intangible assets, net		45,522,186			205,555
Goodwill		38,785,704			8,904,714
Deferred tax assets		11,860,000			—
Other assets		505,568			325,927

Total assets	$	197,270,094		$	49,384,923

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	11,162,426		$	5,574,078
Deferred revenue		11,448,840			7,816,435
Current portion of long-term debt		46,651			46,651

Total current liabilities		22,657,917			13,437,164
Deferred tax liabilities		18,401,000			—
Long term debt		105,906			105,906
Other liabilities		811,306			504,565

Total liabilities		41,976,129			14,047,635
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $.01 par value; 100,000,000 shares, authorized; 30,972,265 shares and 23,049,416 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively		309,723			230,494
Additional paid-in capital		188,372,615			77,550,250
Deferred compensation		—			(221,034	)
Accumulated deficit		(33,388,373	)		(42,222,422	)

Total stockholders’ equity		155,293,965			35,337,288

Total liabilities and stockholders’ equity	$	197,270,094		$	49,384,923

See accompanying notes.

THE KNOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)


	Three Months Ended September 30,				Nine Months Ended September 30,

	2006		2005		2006		2005

Net revenues:
Online sponsorship and advertising	$	9,379,888	$	6,686,531	$	25,533,198	$	18,516,008
Registry services		954,965		63,199		1,097,880		210,295
Merchandise		4,273,656		3,274,848		12,165,753		10,580,706
Publishing and other		3,897,744		3,092,309		12,189,710		9,308,916

Total net revenues	$	18,506,253	$	13,116,887	$	50,986,541	$	38,615,925
Cost of revenues:
Online sponsorship and advertising	$	320,854	$	221,623	$	928,621	$	533,172
Registry services		—		—		—		—
Merchandise		2,160,277		1,655,477		6,048,440		5,115,414
Publishing and other		1,719,472		1,170,590		4,410,451		3,186,006

Total cost of revenues	$	4,200,603	$	3,047,690	$	11,387,512	$	8,834,592

Gross profit		14,305,650		10,069,197		39,599,029		29,781,333
Operating expenses:
Product and content development		2,170,369		1,742,612		5,784,068		5,197,094
Sales and marketing		4,657,215		3,516,504		13,739,820		10,673,774
General and administrative		4,232,411		3,916,656		10,820,420		10,891,119
Depreciation and amortization		975,106		340,826		1,799,908		901,444

Total operating expenses		12,035,101		9,516,598		32,144,216		27,663,431

Income from operations		2,270,549		552,599		7,454,813		2,117,902
Interest and other income, net		1,082,226		206,796		1,745,687		504,133

Income before income taxes		3,352,775		759,395		9,200,500		2,622,035
Provision for income taxes		90,199		36,934		366,451		150,857

Net income	$	3,262,576	$	722,461	$	8,834,049	$	2,471,178

Net earnings per share—basic	$	0.12	$	0.03	$	0.36	$	0.11

Net earnings per share—diluted	$	0.11	$	0.03	$	0.33	$	0.10

Weighted average number of common shares outstanding
Basic		27,472,080		22,802,123		24,592,760		22,623,619

Diluted		29,766,300		25,085,676		27,059,012		24,701,236

See accompanying notes.

THE KNOT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)


	Nine Months Ended September 30,

	2006			2005

Operating activities
Net income	$	8,834,049		$	2,471,178
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,386,619			790,999
Amortization of intangibles		413,289			110,445
Stock-based compensation		1,077,270			23,750
Non-cash services expense		445,833			531,825
Reserve for returns		2,400,954			1,993,900
Allowance for doubtful accounts		123,646			(93,589	)
Other non-cash charges		97,937			(45,308	)
Changes in operating assets and liabilities (net of businesses acquired):
Accounts receivable		(2,710,922	)		(2,673,223	)
Inventories		(16,814	)		(326,475	)
Deferred production and marketing costs		(121,342	)		(28,250	)
Other current assets		(98,806	)		163,514
Other assets		(76,596	)		10,391
Accounts payable and accrued expenses		(37,969	)		229,883
Deferred revenue		1,854,964			1,760,612
Other liabilities		56,741			10,866

Net cash provided by operating activities		13,628,853			4,930,518

Investing activities
Purchases of property and equipment		(3,059,165	)		(1,397,220	)
Purchases of short-term investments		(9,300,000	)		(15,050,000	)
Proceeds from sales of short-term investments		13,850,000			24,600,000
Acquisition of businesses, net of cash acquired		(53,313,362	)		(621,105	)

Net cash (used in) provided by investing activities		(51,822,527	)		7,531,675

Financing activities
Financing costs		(5,285,741	)		—
Proceeds from issuance of common stock		95,403,788			126,783
Proceeds from exercise of stock options		1,042,362			1,096,041

Net cash provided by financing activities		91,160,409			1,222,824

Increase in cash and cash equivalents		52,966,735			13,685,017
Cash and cash equivalents at beginning of period		17,685,067			3,487,818

Cash and cash equivalents at end of period	$	70,651,802		$	17,172,835

See accompanying notes.

THE KNOT, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. BASIS OF PRESENTATION AND NATURE OF OPERATIONS

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company’s management in accordance with U.S. generally accepted accounting principles for interim financial information and applicable rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of the management, all adjustments (consisting only of normally recurring adjustments) considered necessary for a fair presentation have been included.

The accompanying condensed consolidated balance sheet and financial information as of December 31, 2005 is derived from audited financial statements but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The results of operations for the nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2005.

The Company has only achieved operating income in recent periods and has an accumulated deficit of $33,388,373 as of September 30, 2006. The Company believes that its current cash and cash equivalents will be sufficient to fund its working capital and capital expenditure requirements for the foreseeable future. This expectation is primarily based on internal estimates of revenue growth, as well as continuing emphasis on controlling operating expenses. However, there can be no assurance that actual costs will not exceed amounts estimated, that actual revenues will equal or exceed estimated amounts, or that the Company will sustain profitable operations, due to significant uncertainties surrounding its estimates and expectations.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

USE OF ESTIMATES

Preparing financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates. Interim results are not necessarily indicative of results for a full year.

EARNINGS PER SHARE

The Company computes earnings per share in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings per Share. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share adjusts basic earnings per share for the effects of stock options, restricted common stock, warrants and other potentially dilutive financial instruments, only in the periods in which the effects are dilutive. For the three months ended September 30, 2006 and 2005, the weighted average number of shares used in calculating diluted earnings per share includes stock options, restricted common stock and warrants to purchase common stock of 2,294,220 and 2,283,553, respectively. For the nine months ended September 30, 2006 and 2005, the weighted average number of shares used in calculating diluted earnings per share includes stock options, restricted common stock and warrants to purchase common stock of 2,466,252 and 2,077,617, respectively. The calculation of earnings per share for the three and nine months ended September 30, 2005 excludes a weighted average number of stock options of 16,000 and 43,000, respectively, because to include them in the calculation would be antidilutive.

SEGMENT INFORMATION

The Company operates in one reportable segment because it is organized around its online and offline media and e-commerce service lines. These service lines do not have operating managers who report to the chief operating decision maker. The chief operating decision maker generally reviews financial information at a consolidated results of operations level but does review revenue and cost of revenue results of the individual service lines.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. Cash, cash equivalents and short-term investments are deposited with three major financial institutions. The Company’s customers are primarily concentrated in the United States. The Company performs on-going credit evaluations, generally does not require collateral, and establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of customers, historical trends and other information.

For the three and nine months ended September 30, 2006, no customer accounted for more than 5% and 3% of net revenues, respectively. For the three and nine months ended September 30, 2005, no customer accounted for more than 2% of net revenues. As of September 30, 2006, one customer accounted for 19% of accounts receivable. At December 31, 2005, no single customer accounted for more than 7% of accounts receivable.

STOCK-BASED COMPENSATION

Prior to January 1, 2006, stock-based compensation was accounted for using the intrinsic value-based method in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and the Company complied with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. Accordingly, the Company only recorded compensation expense for stock options granted with an exercise price that was less than the fair market value of the underlying stock at the date of grant or in connection with the issuance of restricted common stock. Compensation expense was recognized over the service periods necessary to vest the awards. To the extent stock awards were forfeited prior to vesting, the corresponding expense that was previously recognized, including expense for pro-forma disclosure purposes, was reversed in the period of forfeiture. In addition, the Company did not record compensation expense for rights to purchase shares under its Employee Stock Purchase Plan (“ESPP”) because the plan satisfied certain conditions under APB No. 25.

Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment, using the modified prospective method. Under this method, previously reported amounts are not restated. SFAS No. 123(R) requires the measurement of compensation expense for all stock awards granted to employees and non-employee directors at fair value on the date of grant and recognition of compensation expense over the related service periods for awards expected to vest. Under the modified prospective method, the Company recognizes compensation expense for all stock awards granted after December 31, 2005, and for awards granted prior to January 1, 2006 that remained unvested as of that date or which may be subsequently modified. The fair value of restricted stock is determined based on the number of shares granted and the quoted price of the Company’s common stock, and the fair value of stock options granted is determined using the Black-Scholes valuation model, which is consistent with the Company’s valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123 and SFAS No. 148.

The Company will continue to recognize stock-based compensation for service-based graded-vesting stock awards granted prior to January 1, 2006 using the accelerated method prescribed by Financial Accounting Standards Board (“FASB”) Interpretation No. 28. As permitted under SFAS No. 123(R),for stock awards granted after December 31, 2005, the Company has adopted the straight-line attribution method. In addition, effective January 1, 2006, the Company has included an estimate of stock awards to be forfeited in the future in calculating stock-based compensation expense for the period. The cumulative effect of this accounting change for forfeitures was not material due to the significant reduction in both the number of personnel receiving stock awards and the aggregate amount of stock awards granted by the Company in 2004 and 2005.

In accordance with the requirements of SFAS No. 123(R), deferred stock-based compensation previously recorded on the Company’s balance sheet as of December 31, 2005 was netted against additional paid-in capital

effective January 1, 2006.

Total stock-based compensation expense related to all of the Company’s stock awards was included in various operating expense categories for the three and nine months ended September 30, 2006, as follows:


	Three Months Ended		Nine Months Ended

	September 30, 2006		September 30, 2006


Product and content development	$	62,000	$	116,000
Sales and marketing		62,000		183,000
General and administrative		264,000		778,000

Total stock-based compensation expense	$	388,000	$	1,077,000

The adoption of SFAS No. 123(R) resulted in an increase to stock-based compensation and a decrease to net income of $111,000 and $383,000 for the three and nine months ended September 30, 2006, respectively, and a related reduction in basic and diluted earnings per share of $0.02 and $0.01, respectively, for the nine months ended September 30, 2006. There was no impact on basic and diluted earnings per share for the three months ended September 30, 2006.

The following table details the effect on net income and earnings per share had stock-based compensation expense been recorded based on the fair value method under SFAS No. 123, as amended, for the three months and nine months ended September 30, 2005.


	Three Months Ended			Nine Months Ended

	September 30, 2005			September 30, 2005


Net income, as reported	$	722,461		$	2,471,178
Add: Total stock-based employee compensation expense included in reported net income		23,750			23,750
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards		(305,621	)		(766,850	)

Net income, pro forma	$	440,590		$	1,728,078

Basic earnings per share, as reported	$	0.03		$	0.11

Basic earnings per share, pro forma	$	0.02		$	0.08

Diluted earnings per share, as reported	$	0.03		$	0.10

Diluted earnings per share, pro forma	$	0.02		$	0.07

RECLASSIFICATION

The Company has reclassified goodwill from intangibles as of December 31, 2005 in the accompanying condensed consolidated balance sheet and reclassified registry services revenue from merchandise revenue in the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2005 to conform to the current presentation.

3. ACQUISITIONS

WeddingChannel

On September 8, 2006, the Company completed the acquisition of WeddingChannel.com, Inc. (“WeddingChannel”), through the merger of IDO Acquisition Corporation, a wholly-owned subsidiary of the Company, with and into WeddingChannel (the “Merger”). The Merger will increase the Company’s market share and provide the Company additional opportunities to leverage its core assets including its audience and local and national sales forces. WeddingChannel’s registry offerings will also enhance the services the Company is able to provide engaged couples and their wedding guests. The aggregate estimated purchase price for all of the capital stock and stock options of WeddingChannel was approximately $82.7 million, representing cash paid of $61.7 million, including an estimated working capital adjustment of $3.8 million, the issuance of 1,149,876 shares of common stock valued at $18.7 million and direct transaction costs of $2.3 million. The value of the common stock portion of the purchase price was determined based on the market price of the Company’s common stock at the time the Company made its determination to pay the primary consideration, as defined in the merger agreement, which fixed the consideration for

the outstanding capital stock and stock options of WeddingChannel. The purchase price is subject to adjustment based upon a final determination of the working capital of WeddingChannel, as defined, as of September 8, 2006. In addition, approximately $6.7 million in cash and 115,000 shares of common stock included in the purchase price are held in an escrow account and are subject to certain deductions in the event there are changes to the working capital adjustment or indemnification claims are successfully asserted by the Company pursuant to the merger agreement.

In connection with this acquisition, the Company has also recorded estimated liabilities of $1.3 million, primarily for costs resulting from a plan to involuntarily terminate certain employees of WeddingChannel and for the net present value of remaining lease obligations for acquired facilities to be closed or for acquired space leased which exceeds the Company’s current or projected needs due to staff reductions.

The estimated cost of the acquisition has been allocated to the assets acquired and liabilities assumed of WeddingChannel based on a preliminary determination of their fair values. These fair values are subject to change based on the Company’s final analysis.

The following table summarizes the preliminary cost allocation at the date of acquisition:


Current assets	$	17,702,000
Property and equipment		5,430,000
Intangible assets		45,450,000
Goodwill		28,064,000
Deferred tax assets		11,935,000
Other assets		101,000

Total assets acquired	$	108,682,000

Current liabilities	$	5,919,000
Deferred tax liabilities		18,535,000
Other liabilities		250,000

Total liabilities acquired		24,704,000

Total estimated cost	$	83,978,000

The Merger with WeddingChannel was a stock transaction for tax purposes, which results in different book and tax bases. Accordingly, the purchase price allocation includes $18.5 million of deferred tax liabilities related to the tax effect of the preliminary differences in the book and tax bases of property and equipment and acquired intangibles other than goodwill. In addition, a deferred tax asset of $11.9 million, associated with a reduction in the valuation allowance previously recorded by WeddingChannel with respect to its net operating carryforwards for federal and state income tax purposes, has been recorded based on the recognition and timing of reversal of the estimated deferred tax liabilities. To the extent further reductions in the valuation allowance are recorded, the offsetting credit would first reduce goodwill and then other intangible assets.

The results of operations for WeddingChannel have been included in the Company’s condensed consolidated statements of operations since September 8, 2006. The following unaudited pro forma financial information presents a summary of the results of operations assuming the acquisition of WeddingChannel occurred as of the beginning of the periods presented:


	Three Months Ended				Nine Months Ended

	September 30, 2006		September 30, 2005		September 30, 2006		September 30, 2005

Net revenues	$	24,318,817	$	19,188,477	$	70,119,910	$	55,340,023
Net income	$	2,949,615	$	1,641,819	$	8,149,178	$	4,524,026
Net earnings per share - basic	$	0.10	$	0.06	$	0.30	$	0.18
Net earnings per share - diluted	$	0.09	$	0.06	$	0.27	$	0.16

Pro forma adjustments have been made to reflect depreciation and amortization using asset values recognized after applying purchase accounting adjustments and related tax effects as well as to eliminate legal fees incurred in connection with the litigation between the Company and WeddingChannel, which was withdrawn pursuant to the Merger. Direct transaction and other costs related to the merger, a gain on the sale of an investment and losses from discontinued operations, all of which were recorded by WeddingChannel prior to September 8, 2006, have been

eliminated from the pro forma financial information. The pro forma earnings per share amounts are based on the pro forma weighted average number of shares outstanding which include the shares issued by the Company as a portion of the total consideration for the Merger and the shares sold on August 15, 2006 by the Company in connection with a follow-on offering, the net proceeds from which were used to fund a portion of the cash consideration for the Merger.

The pro forma consolidated financial information is presented for information purposes only. The pro forma consolidated financial information does not reflect the effects of any anticipated changes to be made by the Company to the operations of the combined companies, including synergies and cost savings and does not include one time charges expected to result from the Merger. The pro forma consolidated financial information should not be construed to be indicative of results of operations or financial position that actually would have occurred had the acquisition been consummated as of the date indicated or the Company’s future results of operations or financial position.

Lilaguides

On July 25, 2006, the Company acquired the publishing business and related assets of OAM Solutions, Inc., the publisher of the Lilaguides, local information guides for parents, for $2.1 million, which includes direct transaction costs. The acquisition represents the Company’s first significant step into the business of catering to the needs of first-time parents. The cost of this acquisition was allocated to the assets acquired based upon a preliminary determination of their fair values as follows:


Current assets	$	8,700
Property and equipment		14,300
Tradename		83,000
Other intangibles		168,000
Goodwill		1,817,000

Total cost	$	2,091,000

This acquisition would not have had a material impact with respect to the condensed consolidated results of operations for the three and nine months ended September 30, 2006 and 2005 had the acquisition been consummated on January 1, 2005.

4. SHIPPING AND HANDLING CHARGES

For the three months ended September 30, 2006 and 2005, merchandise revenue included outbound shipping and handling charges of approximately $655,000 and $494,000, respectively. For the nine months ended September 30, 2006 and 2005, merchandise revenue included outbound shipping and handling charges of approximately $1,815,000 and $1,522,000, respectively.

5. INVENTORY

Inventory consists of the following:

	September 30,		December 31,

	2006		2005

Raw materials	$	220,771	$	215,940
Finished goods		1,692,304		1,406,116

	$	1,913,075	$	1,622,056

6. GOODWILL

The changes in the carrying amount of goodwill for the nine months ended September 30, 2006, based upon a preliminary determination of the fair values of assets acquired and liabilities assumed for acquisitions during the period, are as follows:


Balance as of December 31, 2005	$	8,904,714
Acquisition of OAM Solutions, Inc. (See Note 3)		1,817,169
Acquisition of WeddingChannel.com, Inc. (See Note 3)		28,063,821

Balance as of September 30, 2006	$	38,785,704

The Company completed its most recent goodwill impairment test as of October 1, 2005. The test primarily involved the assessment of the fair market value of the Company as the single reporting unit. No impairment of goodwill was indicated at that time. Under SFAS No. 142, the Company is required to perform goodwill impairment tests on at least an annual basis or more frequently if circumstances dictate. There can be no assurance that future goodwill impairment tests will not result in a charge to income.

7. INTANGIBLE ASSETS


	September 30, 2006						December 31, 2005

	Gross Cost Carrying Amount		Accumulated Amortization		Net Cost		Gross Cost Carrying Amount		Accumulated Amortization		Net Cost

Indefinite lived intangibles:
Tradenames	$	16,780,000	$	—	$	16,780,000	$	—	$	—	$	—


Amortizable intangibles:
Customer and advertiser relationships		12,710,000		91,000		12,619,000		—		—		—
Developed technology and patents		15,230,000		195,000		15,035,000		—		—		—
Trademarks and tradenames		211,919		40,737		171,182		100,000		19,445		80,555
Service contracts and other		1,598,000		680,996		917,004		700,000		575,000		125,000

		29,749,919		1,007,733		28,742,186		800,000		594,445		205,555


Total	$	46,529,919	$	1,007,733	$	45,522,186	$	800,000	$	594,445	$	205,555

Definite lived intangible assets are amortized over their estimated useful lives as follows:


Customer and advertiser relationships		4 to 10 years
Developed technology and patents		5 years
Trademarks and tradenames		3 to 5 years
Service contracts and other		1 to 7 years

Amortization expense was $352,000 and $30,000 for the three months ended September 30, 2006 and 2005, respectively, and $413,000 and $110,000 for the nine months ended September 30, 2006 and 2005, respectively. Estimated annual amortization expense is $1,634,000 in 2006, $4,803,000 in 2007, $4,661,000 in each of 2008 and 2009, $4,639,000 in 2010, $3,523,000 in 2011 and $5,234,000, thereafter.

8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following:


	September 30,		December 31,

	2006		2005

Accounts payable	$	3,336,708	$	1,971,455
Professional services		620,764		1,198,788
Compensation and related benefits		3,806,966		1,030,129
Other accrued expenses		3,397,988		1,373,706

	$	11,162,426	$	5,574,078

Compensation and related benefits at September 30, 2006 includes $2,022,000 of the Merger consideration representing payroll taxes that will be withheld and remitted related to cash payments to WeddingChannel option holders in connection with the Merger (See Note 3).

9. LONG-TERM DEBT

Long-term debt as of September 30, 2006 consists of the following:


Note due in annual installments of $60,000 through October 2008, based on imputed interest of 8.75%	$	152,557

Less current portion		46,651


Long term-debt, excluding current portion	$	105,906

Maturities of long-term obligations during the three years ending September 30, 2009 are as follows: 2007, $46,651; 2008, $50,733 and 2009, $55,173. Interest expense for the three and nine months ended September 30, 2006 was $3,000 and $10,000, respectively. Interest expense for the three and nine months ended September 30, 2005 was $4,000 and $13,000, respectively.

10. STOCK PLANS

The 1999 Stock Incentive Plan (the “1999 Plan”) was adopted by the Board of Directors and approved by the stockholders in November 1999, as a successor plan to the Company’s 1997 Long Term Incentive Plan (the “1997 Plan”). All options under the 1997 Plan have been incorporated into the 1999 Plan. The 1999 Plan became effective upon completion of the Company’s initial public offering of its common stock and was amended and restated as of March 27, 2001.

Under the terms of the 1999 Plan, 3,849,868 shares of common stock of the Company were initially reserved for incentive stock options, nonqualified stock options (incentive and nonqualified stock options are collectively referred to as “options”), stock appreciation rights, stock issuances (which may be subject to the attainment of designated performance goals or service requirements (“Restricted Stock)), or any combination thereof. On May 15, 2001, the Company’s stockholders approved a further increase of 1,000,000 to the number of shares reserved for issuance under the 1999 Plan. Through September 30, 2006, an additional 1,835,711 shares were added to the reserve pursuant to the automatic share increase provisions of the 1999 Plan. The shares reserved under the 1999 Plan automatically increase on the first trading day in January of each calendar year by an amount equal to two percent (2%) of the total number of shares of the Company’s common stock outstanding on the last trading day of December in the prior calendar year, but in no event will this annual increase exceed 1,000,000 shares (or such other lesser number determined by the Board of Directors). In January 2006, the Board of Directors exercised its discretion under the 1999 Plan and determined that there would be no increase in the number of shares reserved for this year pursuant to the automatic increase provision. Awards may be granted to such non-employee directors, officers, employees and consultants of the Company as the Compensation Committee of Board of Directors shall in its discretion select. Only employees of the Company are eligible to receive grants of incentive stock options. Options are granted at the fair market value of the stock on the date of grant. Options vest over periods up to four years and have terms not to exceed 10 years. Restricted stock awards vest over periods ranging from two to four years.

The 2000 Non-Officer Stock Incentive Plan (the “2000 Plan”) was approved by the Board of Directors in June 2000. Under the terms of the 2000 Plan, 435,000 shares of common stock of the Company have been reserved for nonqualified stock options, stock issuances (which may be Restricted Stock) or any combination thereof. Awards may be granted to employees (other than officers or directors of the Company) and consultants and other independent advisors who provide services to the Company. Options are granted at the fair market value of the stock on the date of grant. Generally, options vest over a four-year period and have terms not to exceed 10 years.

As of September 30, 2006, under the 1999 Plan and the 2000 Plan, there were 1,931,610 shares subject to outstanding options and 1,690,085 shares subject to outstanding options that were exercisable at such date. As of

September 30, 2006, there were 333,500 of service-based restricted stock awards outstanding. As of September 30, 2006, there were 2,137,450 shares available for future grants under the 1999 Plan and 270,418 shares available for future grants under the 2000 Plan.

The Employee Stock Purchase Plan (the “ESPP”) was adopted by the Board of Directors and approved by the stockholders in November 1999 and became effective upon completion of the Company’s initial public offering of its common stock. The Compensation Committee of the Board of Directors administers the ESPP. The ESPP permits a participating employee to make contributions to purchase shares of common stock by having withheld from his or her salary an amount between 1 percent and 15 percent of compensation. Under the ESPP, eligible employees of the Company may elect to participate on the start date of an offering period or subsequent semi-annual entry date, if any, within the offering period. On each purchase date during an offering period, a participating employee’s contributions will be used to purchase up to 1,000 shares of the Company’s common stock for such participating employee at a 15 percent discount from the fair market value, as defined in the ESPP, of such stock. Each offering period is determined by the plan administrator and may not exceed two years. The Company initially reserved 300,000 shares of common stock under the ESPP. The shares reserved automatically increase on the first trading day in January of each calendar year by the lesser of the (i) the number of shares of common stock issued under the ESPP in the immediately preceding calendar year, (ii) 300,000 shares or (iii) such other lesser amount approved by the Board of Directors. Through September 30, 2006, 365,767 shares were issued under the ESPP and 305,203 shares were added to the reserve pursuant to the automatic increase provision.

The following represents a summary of the Company’s stock option activity under the 1999 and 2000 Plans for the nine months ended September 30, 2006:


	Shares			Weighted Average Exercise Price

Options outstanding at December 31, 2005		2,515,749		$	2.63
Options granted		—			—
Options exercised		(534,950	)		1.95
Options canceled		(49,189	)		4.41

Options outstanding at September 30, 2006		1,931,610		$	2.78

The weighted average grant-date fair value of options granted during the nine months ended September 30, 2005 was $2.43. The fair value of options which vested during the three months ended September 30, 2006 and September 30, 2005 was $1.99 and $1.79, respectively. The fair value of options which vested during the nine months ended September 30, 2006 and September 30, 2005 was $1.82 and $1.72, respectively. The total intrinsic value of options exercised during the three months ended September 30, 2006 and 2005 was $5.6 million and $2.1 million, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2006 and 2005 was $7.9 million and $3.8 million, respectively.

The following table summarizes information about options outstanding at September 30, 2006:


			Options Outstanding				Options Exercisable

Range of exercise price	Number Outstanding as of September 30, 2006		Weighted Average Remaining Contractual Life (In Years)		Weighted Average Exercise Price		Number Exercisable as of September 30, 2006		Weighted Average Exercise Price

$0.42 to $1.03		544,116		4.48	$	0.80		543,082	$	0.80
$1.37 to $4.10		1,229,094		6.72		3.32		1,067,077		3.25
$4.80 to $9.00		158,400		7.75		5.41		79,926		5.83

		1,931,610		6.18	$	2.78		1,690,085	$	2.58

The weighted average remaining contractual life of options exercisable as of September 30, 2006 was 5.94 years.

As of September 30, 2006, there were 2,137,450 shares available for future grants under the 1999 Plan and

270,418 shares available for future grants under the 2000 Plan.

The aggregate intrinsic value of stock options outstanding at September 30, 2006 was $37.4 million, of which $33.0 million relates to vested awards. The intrinsic value for stock options is calculated based on the exercise price of the underlying awards and the quoted price of the Company’s common stock as of September 30, 2006. The following table summarizes nonvested stock option activity for the nine months ended September 30, 2006:


	Shares			Weighted Average Exercise Price

Nonvested options outstanding at December 31, 2005		558,377		$	3.89
Vested		(268,934	)		3.53
Canceled		(47,918	)		4.49

Nonvested options outstanding at September 30, 2006		241,525		$	4.16

The weighted average grant-date fair value of ESPP rights arising from elections made by ESPP plan participants during the nine months ended September 30, 2006 and 2005 was $6.30 and $2.89, respectively. During the nine months ended September 30, 2006, ESPP rights to approximately 13,000 shares were granted to employees who elected to change their payroll percentage deductions effective February 1, 2006, as permitted semi-annually within the offering period in effect at that date under the ESPP plan. These ESPP rights were treated as modified stock awards which had a weighted average grant-date value of $10.60. The fair value of ESPP rights that vested during the nine months ended September 30, 2006 and 2005 was $7.80 and $1.66, respectively. On January 31, 2006, the Company issued 24,040 shares at a weighted average price of $3.89 under the ESPP. On July 31, 2006, the Company issued 36,524 shares at a weighted average price of $4.55 under the ESPP.

The intrinsic value of shares purchased through the ESPP on January 31, 2006 and July 31, 2006 and of outstanding ESPP rights as of September 30, 2006 were $237,000 and $530,000, respectively. The intrinsic value of outstanding ESPP rights as of September 30, 2006 was $99,000. The intrinsic value of ESPP rights is calculated as the discount from the quoted price of the Company’s common stock, as defined in the ESPP, which was available to employees as of the respective dates.

As of September 30, 2006, there was $198,000 of unrecognized compensation cost related to nonvested stock options and ESPP rights, net of estimated forfeitures, which is expected to be recognized over a weighted average period of 1.2 years.

The fair value for options and ESPP rights have been estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

Nine Months Ended September 30,

2006

2005

Options

ESPP Rights

Options

ESPP Rights

Weighted average expected option lives

N/A

0.50 years

3.69 years

0.82 years

Risk-free interest rate

N/A

4.60%-5.18%

3.25%-3.71%

2.95%-3.80%

Expected volatility

N/A

25.8%-26.8%

33%-67.1%

23.6%-34.2%

Dividend yield

N/A

Expected volatility is based on the historical volatility of the market price of the Company’s stock. The expected lives of options granted are based on analyses of historical employee termination rates and option exercises. The risk-free interest rates are based on the expected option lives and the corresponding U.S. treasury yields in effect at the time of grant. The fair value for ESPP rights includes the option exercise price discount from market value provided for under the ESPP.

During the three and nine months ended September 30, 2006, the Company recorded $111,000 and $383,000, respectively, of compensation expense related to options and ESPP rights and received cash from the exercise of options and ESPP rights of $779,000 and $1,302,000, respectively, for which the Company issued new shares of common stock.

As of September 30, 2006, there were 333,500 service-based restricted stock awards outstanding. During the three and nine months ended September 30, 2006, 99,500 and 301,000 shares of restricted stock were awarded at a weighted average grant-date fair value of $16.95 and $13.36, respectively, and no shares of restricted stock vested or canceled during the period. The aggregate intrinsic value of restricted shares at September 30, 2006 was $7.4 million. The intrinsic value for restricted shares is calculated based on the par value of the underlying shares and the quoted price of the Company’s common stock as of September 30, 2006.

As of September 30, 2006, there was $3.1 million of total unrecognized compensation cost related to nonvested restricted shares, net of estimated forfeitures, which is expected to be recognized over a weighted average period of 2.7 years. During the three and nine months ended September 30, 2006, the Company recorded $277,000 and $694,000, respectively, of compensation expense related to restricted shares.

11. AGREEMENT WITH COLLAGES. NET, INC. (“Collages”)

In March 2005, the Company entered into a Marketing Services Agreement (the “Agreement”) with Collages, a provider of hosting and website development services to professional photographers. Under the Agreement, which has a term of three years, the Company delivers online and print advertising services to Collages in exchange for having received Collages Series A Preferred Stock, which vests over the first two years of the Agreement. Through September 30, 2006, the fair value of the marketing services to be provided over the term of the Agreement approximated the fair value of Series A Preferred Stock received.

Since inception of the Agreement through September 30, 2006, the Company has earned approximately $882,000 in revenue pursuant to the Agreement. The Company has deferred recognition of this revenue since the realization of the resulting asset, representing an equity investment in Collages, is not reasonably assured.

12. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

On September 19, 2003, WeddingChannel.com, Inc. (“WeddingChannel”) filed a complaint against the Company in the United States District Court for the Southern District of New York. The complaint alleged that the Company violated U.S. Patent 6,618,753 (“Systems and Methods for Registering Gift Registries and for Purchasing Gifts”), and further alleged that certain actions of the Company gave rise to various federal statute, state statute and common law causes of actions. WeddingChannel sought, among other things, damages and injunctive relief. This complaint was served on the Company on September 22, 2003. On September 26, 2006, the Court approved a stipulation between WeddingChannel and the Company dismissing the case without prejudice and without costs.

The Company is engaged in other legal actions arising in the ordinary course of business and believes that the ultimate outcome of these actions will not have a material effect on its results of operations, financial position or cash flows.

13. PRIVATE PLACEMENT OF COMMON STOCK

On July 10, 2006, the Company completed the sale of 2,750,000 shares of common stock to three institutional investors for gross proceeds of $50.2 million. The net proceeds after placement fees and other offering costs were approximately $47.6 million.

14. COMMON STOCK OFFERING

On August 15, 2006, the Company completed a follow-on offering for the sale of 2,000,000 shares of its common stock at a public offering price per share of $16.00. On September 13, 2006, the Company issued an additional 809,600 shares of its common stock at $16.00 per share pursuant to the overallotment option set forth in the related underwriting agreement to the follow-on offering. The Company received proceeds of approximately $42.1 million net of fees, underwriting discounts and other expenses associated with the follow-on offering. The proceeds from the sale of shares completed on August 15, 2006 were used to fund a portion of the cash consideration for the WeddingChannel acquisition.

15. WARRANT EXERCISE

On August 16, 2006, The Knot issued 316,859 shares of common stock upon the exercise of a warrant in consideration of the termination of the right to purchase an additional 150,890 shares of common stock pursuant to the warrant’s net exercise provision. The warrant was exercised by TW AOL Holdings Inc. (“TW AOL”), an affiliate of Time Warner Inc., following assignment of the warrant to TW AOL by a successor of America Online, Inc. (“AOL”).

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements relating to future events and the future performance of The Knot based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results and timing of various events could differ materially from those anticipated in such forward-looking statements as a result of a variety of factors, as more fully described in this section and elsewhere in this report. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Overview

The Knot is a leading lifestage media company targeting couples planning their weddings and future lives together. We commenced operations in May 1996. Our principal website, at www.theknot.com, is the most trafficked wedding site online and offers extensive wedding-related content and shopping and an active community. We also provide wedding content to MSN and Comcast. We publish The Knot Weddings Magazine, which features editorial content and a shopping directory format which covers every major wedding planning decision and is distributed to newsstands and bookstores across the nation. We also publish The Knot Weddings regional magazines in 15 markets in the United States and The Knot Real Weddings in two additional local markets. We also author books on wedding-related and newlywed-related topics.

In November 2004, we launched The Nest, the first online destination for the newly married audience, at www.thenest.com. In August 2006, we published the first issue of our new lifestyle magazine, The Nest.

In January 2005, we acquired the business and assets of GreatBoyfriends LLC including the websites www.greatboyfriends.com and www.greatgirlfriends.com, which are referral-based online dating services supported by subscriptions.

On July 25, 2006, we acquired the publishing business and related assets of OAM Solutions, Inc., the publisher of Lilaguides, local information guides for parents, for $2.1 million in cash, including transaction costs.

On September 8, 2006, we completed the acquisition of WeddingChannel.com, Inc. (“WeddingChannel”), through the merger of a wholly-owned subsidiary of the Company, with and into WeddingChannel (the “Merger”). The results of operations for WeddingChannel have been included in the Company’s consolidated statements of operations since that date. The Merger will increase the Company’s market share and provide the Company additional opportunities to leverage its core assets including its audience and local and national sales forces. WeddingChannel’s registry offerings will also enhance the services the Company is able to provide engaged couples and their wedding guests. We intend to maintain WeddingChannel.com as a separate website and continue to offer WeddingChannel’s services ranging from planning content and interactive tools to convenient, comprehensive shopping and community participation. The aggregate estimated purchase price for all of the capital stock and stock options of WeddingChannel was approximately $82.7 million representing cash paid of $61.7 million, including an estimated working capital adjustment of $3.8 million, issuance of 1,149,876 shares of common stock valued at $18.7 million and direct transaction costs of $2.3 million. The Merger is expected to have a material effect on our results of operations and financial condition.

Each year, approximately 2.2 million couples get married in the United States. According to an independent research report, the domestic wedding market generates approximately $72 billion in retail sales annually, including gifts purchased from couples’ registries. Presumed to be a once-in-a-lifetime occasion, a wedding is a major milestone event and, therefore, consumers tend to allocate significant budgets to the wedding and related purchases. Weddings also generate substantial revenues for travel services companies. Honeymoon travel generates an estimated $5.0 billion annually.

Vendors and advertisers highly value to-be-weds as a consumer group. Replenished on an annual basis, wielding substantial budgets and facing a firm deadline, engaged couples are the ideal recipients of advertisers’ messages and vendors’ products and services. During the year prior to and the year following a wedding, the average couple will make more buying decisions and purchase more products and services than at any other time in their lives. The challenges and obstacles that engaged couples face make them especially receptive to marketing messages. We provide national and local advertisers with targeted access to couples actively seeking information and advice and making meaningful spending decisions relating to all aspects of their weddings.

We address a portion of the retail opportunity in the wedding market by integrating our informative content with shopping services which range from wedding gifts to a comprehensive array of supplies that relate to the wedding itself.

WeddingChannel offers couples and their guests one place to view all their gift registries via its registry system that searches approximately 1.5 million registries from its many retail partners including Macy’s, Bloomingdale’s, Tiffany & Co., Crate & Barrel, Neiman Marcus, Williams-Sonoma, Pottery Barn, The Home Depot, JCPenney, Starwood Hotels, Sandals Resorts and others. The Knot Gift Registry Center offers additional product selections through our partnerships with Target Club Wedd and Michael C. Fina. We earn commissions from the sale of products in connection with these retail partnerships.

We sell wedding supplies direct to consumers through our integrated shopping destination, The Knot Wedding Shop. We offer over one thousand products, including disposable cameras, wedding bubbles and bells, candy and cookies, ring pillows, toasting flutes, reception decorations, table centerpieces, goblets and glasses, garters and unity candles. We offer personalization options for many of our wedding supplies. We have launched our own line of Knot-branded wedding supplies called The Knot Wedding Collections and our own line of wedding-themed apparel, which can be personalized as well. To further enhance our shopping experience, the WeddingChannel Store was launched in September 2006. Similar to The Knot Wedding Shop, WeddingChannel’s informative content is integrated with shopping services allowing the bride a one-stop destination to purchase all of her wedding day needs. The merchandise is similar to that of The Knot Wedding Shop and is offered to a new audience in order to generate further revenues. Wedding supplies are sold direct to the consumer and are fulfilled from our Redding, California facility.

Our strategy is to expand our position as a leading lifestage media and services company providing comprehensive planning and other information, services and products to couples planning their weddings and future lives together. Key elements of our business strategy include the following:

Increase Market Share and Leverage Assets. Acquiring companies or services that are complementary to our business will increase our leverage with advertisers in the marketplace as well as our ability to satisfy our customers. The completion of the pending merger with WeddingChannel will significantly increase our market share and provide additional opportunities to leverage our core assets of our audience and local and national sales forces. WeddingChannel’s registry offerings will also enhance the service we are able to provide our engaged couples and their wedding guests. We have also acquired and created other small properties to leverage the services to clients and the technologies that we have developed. Recent acquisitions of WeddingTracker.com and Wed-o-rama.com allow us to offer our engaged couples premium personal wedding webpage design and hosting for a fee. Our recent launch of PartySpot.com leverages our local sales force and their vendors to provide local party planning information and resources to families hosting rehearsal dinners, proms, bar mitzvahs, sweet sixteens and graduation parties.

Build Strong Brand Recognition. Maintaining The Knot’s strong brand position is critical to attracting and expanding both our online and offline user base and securing our leading position in the bridal market.

We promote our brand through aggressive public relations outreach, including television appearances by Carley Roney, our editor-in-chief and lead wedding expert. Through our regional magazines and the expansion of our in-depth online city guides, we are aggressively increasing our brand awareness at the local level. Our local advertising sales force further supports The Knot brand through participation in their local wedding professional associations and appearances at local bridal events.

Capitalize on Multiple Revenue Opportunities. We intend to use the size and favorable demographics of our online and offline communities to continue to grow our existing multiple revenue streams within the wedding space. We will pursue additional revenue opportunities in connection with the needs of today’s engaged and newly married couples including premium services.

Leverage our Relationship with our Audience. We believe a large and active membership base is critical to our success. Membership enrollment is free; and our members enjoy the use of personal Web pages, message boards, budgeting and planning tools, wedding checklists and wedding fashion and honeymoon searches. New membership growth has leveled off in recent years. We enrolled approximately 1.0 million and 1.1 million new members in the years 2005 and 2004, respectively. During the first nine months of 2006, we were enrolling an average of approximately 3,300 new members per day. Our priority in the wedding space is to increase member usage through our content and product offerings, additional interactive premium services, active community participation and strategic relationships.

Expansion into other Life Stages and Services. With the launch of our website at www.thenest.com, The Nest magazine and the acquisition of the Lilaguides, we are expanding our relationship with our core membership base and providing access to additional services and products relevant to newlyweds and first time parents. We plan to develop The Nest brand in the same manner we built The Knot brand with increased consumer awareness leading to increased advertiser adoption.

We have also created or acquired other small properties to leverage the clients and technologies we have developed and to broaden the complementary services we offer.

The pursuit of our business strategies may involve further acquisitions, or investments in, complementary businesses or products.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities on an on-going basis. We evaluate these estimates including those related to revenue recognition, allowances for doubtful accounts and returns, inventory provisions, impairment of intangible assets including goodwill and deferred taxes. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

We derive revenues from the sale of online sponsorship and advertising programs, from the sale of gift registry products, from the sale of merchandise and from the publication of magazines.

Online sponsorship programs are designed to integrate advertising with online editorial content. Sponsors can purchase the exclusive right to promote products or services on a specific online editorial area and can purchase a special feature on our sites. These programs commonly include banner advertisements and direct e-mail marketing. Sponsors can also promote their services and products within the programming on our streaming video channel, The Knot TV.

Online advertising includes online banner advertisements and direct e-mail marketing as well as placement in our online search tools. This category also includes online listings, including preferred placement and other premium programs, in the local area of our websites for local wedding and other vendors. Local vendors may purchase online listings through fixed term contracts or open-ended subscriptions.

Certain elements of online sponsorship and advertising contracts provide for the delivery of a minimum number of impressions. Impressions are the featuring of a sponsor’s advertisement, banner, link or other form of content on our sites. To date, we have recognized applicable online sponsorship and advertising revenues over the duration of the contracts on a straight-line basis, as we have exceeded minimum guaranteed impressions. To the extent that minimum guaranteed impressions are not met, we are generally obligated to extend the period of the contract until the guaranteed impressions are achieved. If this were to occur, we would defer and recognize the corresponding revenues over the extended period.

Registry services revenue represents commissions earned in connection with the sale of products from gift registries under agreements with certain retail partners where we are not primarily obligated in a transaction, not subject to inventory risk and amounts earned are determined using a fixed percentage. This commission revenue is recognized when the products are sold by the retail partners.

Merchandise revenue generally includes the selling price of wedding supplies through our websites as well as related outbound shipping and handling charges since we are the primary party obligated in a transaction, are subject to inventory risk, and we establish our own pricing and selection of suppliers. Merchandise revenues are recognized when products are shipped to customers, reduced by discounts as well as an allowance for estimated sales returns.

Publishing revenue primarily includes print advertising revenue derived from the publication of national and regional magazines. These revenues are recognized upon the publication of the related magazines, at which time all material services related to the magazine have been performed. Additionally, publishing revenues are derived from the sale of magazines on newsstands and in bookstores, and from author royalties received related to book publishing

contracts. Revenues from the sale of magazines are recognized when the products are shipped, reduced by an allowance for estimated sales returns. Author royalties, to date, have been derived from publisher royalty advances that are recognized as revenue when all of our contractual obligations have been met which is typically upon the delivery to, and acceptance by, the publisher of the final manuscript.

For contracts with multiple elements, including programs which combine online and print advertising components, we allocate revenue to each element based on evidence of its fair value. Evidence of fair value is the normal pricing and discounting practices for those deliverables when sold separately. We defer revenue for any undelivered elements and recognize revenue allocated to each element in accordance with the revenue recognition policies set forth above.

Revenue for which realization is not reasonably assured is deferred.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. As of September 30, 2006 and December 31, 2005, our allowance for doubtful accounts amounted to $941,000 and $274,000, respectively. In determining these allowances, we evaluate a number of factors, including the credit risk of customers, historical trends and other relevant information. If the financial condition of our customers were to deteriorate, additional allowances may be required.

Inventory

In order to record our inventory at its lower of cost or market, we assess the ultimate realizability of our inventory, which requires us to make judgments as to future demand and compare that with current inventory levels. We record a provision to adjust our inventory balance based upon that assessment. If our merchandise revenues grow, the investment in inventory would likely increase. It is possible that we would need to further increase our inventory provisions in the future.

Goodwill and Other Intangibles

As of September 30, 2006, we had recorded goodwill and other intangible assets of $84.3 million which includes estimated goodwill and other intangible assets of $73.5 million arising from our recent acquisition of WeddingChannel in September 2006. In our most recent assessment of impairment of goodwill as of October 1, 2005, we made estimates of fair value using multiple approaches. In our ongoing assessment of impairment of goodwill and other intangible assets, we consider whether events or changes in circumstances such as significant declines in revenues, earnings or material adverse changes in the business climate, indicate that the carrying value of assets may be impaired. As of September 30, 2006, no impairment indicators were noted. Future adverse changes in market conditions or poor operating results of strategic investments could result in losses or an inability to recover the carrying value of the investments, thereby possibly requiring impairment charges in the future.

Deferred Taxes

A tax valuation allowance is established, as needed, to reduce net deferred tax assets to the amount for which recovery is probable. As of September 30, 2006, we have established a full valuation allowance of $11.1 million against certain of our net deferred tax assets which primarily result from net operating loss carryforwards generated prior to 2006. Depending on the amount and timing of taxable income we may ultimately generate in the future, as well as other factors including limitations which may arise from changes in the Company’s ownership, we could recognize no benefit from these deferred tax assets, in accordance with our current estimate, or we could recognize some or all of their full value.

The Merger with WeddingChannel was a stock transaction for tax purposes, which results in different book and tax bases. Accordingly, the purchase price allocation includes $18.5 million of deferred tax liabilities related to the tax effect of the preliminary differences in the book and tax bases of property and equipment and acquired intangibles other than goodwill. In addition, a deferred tax asset of $11.9 million, associated with a reduction in a portion of the valuation allowance previously recorded by WeddingChannel with respect to its net operating carryforwards for federal and state income tax purposes, has been recorded based on the recognition and timing of reversal of the estimated deferred tax liabilities. To the extent further reductions in the valuation allowance are recorded, the offsetting credit would first reduce goodwill and then other intangible assets.

Stock-Based Compensation

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payment, using the modified perspective method. Under this method, previously reported amounts are not restated. SFAS No. 123(R) requires the measurement of compensation expense for all stock awards granted to employees and non-employee directors at fair value on the date of grant and recognition of compensation expense over the related service periods for awards expected to vest. Under the modified perspective method, we recognize compensation expense for all stock awards granted after December 31, 2005, and for awards granted prior to January 1, 2006 that remained unvested as of that date or which may be subsequently modified.

The fair value of restricted stock is determined based on the number of shares granted and the quoted price of our common stock, and the fair value of stock options is determined using the Black-Scholes valuation model. The calculation for fair value of stock options requires considerable judgment including the estimation of stock price volatility, expected option lives and risk-free investment rates. We develop estimates based on historical data and market information which may change significantly over time and, accordingly, have a large impact on valuation.

We will continue to recognize stock-based compensation for service-based graded-vesting stock awards granted prior to January 1, 2006 using the accelerated method prescribed by FASB Interpretation No. 28. As permitted by SFAS No. 123(R), for stock awards granted after December 31, 2005, we have adopted the straight-line attribution method. In addition, effective January 1, 2006, we have included an estimate of stock awards to be forfeited in the future in calculating stock-based compensation expense for the period. The cumulative effect of this accounting change for forfeitures as of January 1, 2006 was not material due to the significant reduction in both the number of personnel receiving stock awards and the aggregate amount of stock awards granted by us in 2004 and 2005. We consider several factors when estimating future forfeitures, including types of awards, employee level and historical experience. Actual forfeitures may differ substantially from our current estimates.

Refer to the section entitled “Stock-Based Compensation” on page 24 for a further discussion of the impact of SFAS No. 123(R) on our recording of stock-based compensation for the three and nine months ended September 30, 2006.

Results of Operations

General

Net revenues and operating expenses of WeddingChannel have been included in our consolidated statements of operations since September 8, 2006. Accordingly, the WeddingChannel amounts are identical for the three and nine months ended September 30, 2006.

Net Revenues

Net revenues were $18.5 million and $51.0 million for the three and nine months ended September 30, 2006, respectively, compared to $13.1 million and $38.6 million for the corresponding periods in 2005. Net revenues in 2006 include $1.5 million from WeddingChannel.

Online sponsorship and advertising revenues increased to $9.4 million and $25.5 million for the three and nine months ended September 30, 2006, respectively, as compared to $6.7 million and $18.5 million for the corresponding periods in 2005. The 2006 revenue amounts include $378,000 for WeddingChannel. In addition to the impact from WeddingChannel, revenue from local vendor online advertising programs increased by $1.1 million and $3.5 million for the three and nine months ended September 30, 2006, respectively, or by approximately 25% and 27% when compared to the corresponding periods in 2005, primarily as a result of an increase in the number and average spending of local vendor clients, including the continuing impact of price increases. There was also an increase of $1.2 million and $3.2 million in national online sponsorship and advertising revenue for the three and nine months ended September 30, 2006, or approximately 55% and 54%, respectively, when compared to the corresponding periods in 2005, largely due to an increase in the average spending by our national accounts. Online sponsorship and advertising revenues amounted to 51% of our net revenues for the three months ended September 30, 2006 and 2005.

For the nine months ended September 30, 2006 and 2005, sponsorship and advertising revenues amounted to 50% and 48% of our net revenues, respectively.

Registry services revenue was $955,000 and $1.1 million for the three and nine months ended September 30, 2006 as compared to $63,000 and $210,000 for the corresponding periods in 2005. The increases are primarily the result of $797,000 in commissions earned from WeddingChannel’s retail partners. Registry services revenue amounted to 5% of our net revenues for the three months ended September 30, 2006 and 0.5% for the three months ended September 30, 2005. For the nine months ended September 30, 2006 and 2005, registry services revenue was 2% and 0.5% of our net revenues, respectively.

Merchandise revenues increased to $4.3 million and $12.2 million for the three and nine months ended September 30, 2006, respectively, as compared to $3.3 million and $10.6 million for the corresponding periods in 2005. The 2006 revenue amounts include $262,000 sold through the WeddingChannel store. In addition, revenues for The Knot Wedding Shop increased by $867,000 and $1.9 million or 29% and 20% for the three and nine months ended September 30, 2006, respectively, as compared to the prior year. Site improvements and more effective marketing efforts resulted in increased traffic and sales with respect to the shopping areas on our site. The sale of wedding supplies to wholesale customers decreased by $93,000 and $318,000 for the three and nine months ended September 30, 2006, respectively, as compared to the prior year. Subsequent to August 2006, we are no longer pursuing wholesale customers. The balance of the merchandise revenue variance relates to registry revenue. In 2006, we are no longer maintaining inventory and recording sales of registry-related products. Merchandise revenues amounted to 23% of our net revenues for the three months ended September 30, 2006 and 25% for the three months ended September 30, 2005. For the nine months ended September 30, 2006 and 2005, merchandise revenue was 24% and 27% of our net revenues, respectively.

Publishing and other revenues increased to $3.9 million and $12.2 million for the three and nine months ended September 30, 2006, respectively, as compared to $3.1 million and $9.3 million for the corresponding periods in 2005. Local print revenue increased by $436,000 and $1.7 million for the three and nine months ended September 30, 2006, respectively, or approximately 35% and 30%, respectively, when compared to the corresponding periods in 2005, due to an increase in advertising pages sold, including pages associated with the local section of our national magazine, and a small increase in pricing. For the three and nine months ended September 30, 2006, national print revenue increased by $251,000 and $560,000, respectively, or 14% and 17%, respectively, primarily as a result of an increase in the number of designer advertisers and advertising page rates for both designer and national advertisers in our national magazine. We also recorded a small amount of revenue from the initial issue of The Nest magazine. We recorded $361,000 in author royalties for the nine months ended September 30, 2006 upon the delivery and acceptance of two new books from our current program of wedding and newlywed-related publications. Additionally, for the nine months ended September 30, 2006, we recorded revenues of $314,000 from our bridal events program in partnership with Four Seasons Hotels and Resorts. Publishing and other revenue amounted to 21% and 24% of our net revenues for the three months ended September 30, 2006 and 2005, respectively. For the nine months ended September 30, 2006 and 2005, publishing and other revenue were both 24% of our net revenues.

Cost of Revenues

Cost of revenues consists of the cost of merchandise sold, including outbound shipping costs, costs related to the production of national and regional magazines and The Knot TV, payroll and related expenses for our personnel who are responsible for the production of online and offline media, and costs of Internet and hosting services.

Cost of revenues increased to $4.2 million and $11.4 million for the three and nine months ended September 30, 2006, respectively, from $3.0 million and $8.8 million for the corresponding periods in 2005. Online advertising cost of revenue increased by $99,000 and $395,000 for the three and nine months ended September 30, 2006, respectively, primarily due to the production costs associated with The Knot TV. The cost of revenues from the sale of merchandise increased by $505,000 and $933,000 for the three and nine months ended September 30, 2006, respectively, due to the increases in revenue. Publishing and other cost of revenue increased by $549,000 and $1.2 million for the three and nine months ended September 30, 2006, respectively, due to higher production costs for both our national and local print publications as a result of increased advertising page counts, production costs associated with the initial issue of The Nest magazine in August 2006 and direct costs related to the bridal events program. As a percentage of our net revenues, cost of revenues was 23% and 22% for the three and nine months ended September 30, 2006, respectively, as compared to 23% for each of the corresponding periods in the prior year. Margin improvements resulting from a higher mix of registry services revenue and higher online advertising revenue for the three and nine

months ended September 30, 2006, respectively, were generally offset by lower margins for publishing and other revenue due to the investment in The Nest magazine and the costs for the bridal events program.

Product and Content Development

Product and content development expenses consist primarily of payroll and related expenses for editorial, creative and information technology personnel and computer hardware and software costs.

Product and content development expenses increased to $2.2 million and $5.8 million for the three and nine months ended September 30, 2006, respectively, from $1.7 million and $5.2 million for the corresponding periods in 2005. These increases include $329,000 associated with WeddingChannel, primarily for personnel and related expenses. Other personnel and related expenses increased by $326,000 and $761,000 for the three and nine months ended September 30, 2006, respectively, primarily due to additional investments in information technology and editorial staff, including increases of approximately $62,000 and $116,000, respectively, related to stock-based compensation. These increases were offset, in part, by reductions in costs for computer hardware and software and outside consultants. In addition, for the nine months ended September 30, 2005, we incurred severance and other costs of approximately $120,000 in connection with the relocation of a significant portion of our information technology function to Austin, Texas. As a percentage of our net revenues, product and content development expenses decreased to 12% and 11% for each of the three and nine months ended September 30, 2006, respectively, as compared to 13% for the corresponding periods in the prior year.

Sales and Marketing

Sales and marketing expenses consist primarily of payroll and related expenses for sales and marketing, customer service, registry and public relations personnel, as well as the costs for promotional activities and fulfillment and distribution of merchandise.

Sales and marketing expenses increased to $4.7 million and $13.7 million for the three and nine months ended September 30, 2006, respectively, from $3.5 million and $10.7 million for the corresponding periods in 2005. These costs include $372,000 associated with WeddingChannel, primarily for personnel and related expenses. Other personnel and related costs increased by $274,000 and $1.5 million for the three and nine months ended September 30, 2006, respectively, primarily as a result of investments in national and local sales staff, in part, as additional support for sales efforts for new initiatives, including The Nest. These increases include approximately $46,000 and $168,000, respectively, related to stock-based compensation. For the three and nine months ended September 30, 2006, we incurred higher sales commissions and incentives of $136,000 and $258,000, respectively, as a result of the increases in online and print advertising revenue and additional promotion expenses of $294,000 for the nine months. Both periods in 2006 include $224,000 of fulfillment expenses for the initial issue of The Nest magazine. As a percentage of our net revenues, sales and marketing expenses were 25% and 27% for the three and nine months ended September 30, 2006, respectively, and 27% and 28% for the corresponding periods in 2005.

General and Administrative

General and administrative expenses consist primarily of payroll and related expenses for our executive management, finance and administrative personnel, legal and accounting fees, facilities costs, insurance and bad debt expenses.

General and administrative expenses increased to $4.2 million and decreased to $10.8 million for the three and nine months ended September 30, 2006, respectively, as compared to $3.9 million and $10.9 million for the corresponding periods in 2005. Legal and other professional costs related to our previous litigation with WeddingChannel amounted to $163,000 for the nine months ended September 30, 2006. On September 26, 2006, the Court approved a stipulation between WeddingChannel and us dismissing the case without prejudice and without costs. Legal costs related to this litigation were $1.5 million and $3.7 million in the three and nine months ended September 30, 2005, respectively. For the three months ended September 30, 2006 compared to September 30, 2005, we incurred additional stock-based compensation expense of approximately $248,000, higher costs of $249,000 with respect to the development of a formal disaster recovery plan, higher consulting and audit costs related to Sarbanes-Oxley compliance of $412,000, additional professional and other legal costs of $212,000 and higher bad debt expense of $112,000. For the nine months ended September 30, 2006 compared to September 30, 2005, we incurred additional stock-based compensation expense of approximately $761,000, higher costs of $576,000 with respect to the

development of a formal disaster recovery plan, higher consulting and audit costs related to Sarbanes-Oxley compliance of $659,000, additional professional and other legal costs of $585,000, and higher bad debt expense of $217,000. Other general and administrative expenses associated with WeddingChannel for the three and nine months ended September 30, 2006 were $314,000. As a percentage of our net revenues, general and administrative expenses decreased to 23% and 21% for the three and nine months ended September 30, 2006, respectively, from 30% and 28% for each of the corresponding periods in 2005.

Stock-Based Compensation


	Three Months Ended			Nine Months Ended
	September 30, 2005			September 30, 2005

Net income, as reported	$	722,461		$	2,471,178
Add: Total stock-based employee compensation expense included in reported net income		23,750			23,750
Deducted: Total stock-based employee compensation expense determined under fair value method for all awards		(305,621	)		(766,850	)

Net income, pro forma	$	440,590		$	1,728,078

Basic earnings per share, as reported	$	0.03		$	0.11

Basic earnings per share, pro forma	$	0.02		$	0.08

Diluted earnings per share, as reported	$	0.03		$	0.10

Diluted earnings per share, pro forma	$	0.02		$	0.07

As of September 30, 2006, total unrecognized estimated compensation expense related to nonvested stock options, restricted shares and ESPP rights was $3.3 million, which is expected to be recognized over a weighted average period of 2.6 years. We currently believe that stock-based compensation expense for the calendar year ended December 31, 2006 will range from $1.5 million to $1.6 million.

Since June 2005, we have awarded shares of restricted stock as our primary form of stock-based compensation. However, we may elect to resume granting stock options in the future.

Depreciation and Amortization

Depreciation and amortization consists of depreciation and amortization of property and equipment and capitalized software, and amortization of intangible assets related to acquisitions.

Depreciation and amortization increased to $975,000 and $1.8 million for the three and nine months ended September 30, 2006, respectively, as compared to $341,000 and $901,000 for the corresponding periods in 2005. For the three months ended September 30, 2006, we recorded additional depreciation and amortization of property, equipment, capitalized software and intangible assets of $460,000, primarily related to assets acquired as a result of the WeddingChannel acquisition. The increase was also due to increasing capital expenditures during calendar year 2005 and in the nine months ended September 30, 2006, including amounts for our new e-commerce platform and additional computer hardware and software to establish secondary back-up systems in connection with the development of a formal disaster recovery plan.

Interest Income

Interest income, net of interest expense, increased to $1.1 million and $1.7 million for the three and nine months ended September 30, 2006, respectively, as compared to $207,000 and $504,000 for the corresponding periods in 2005. These increases were primarily the result of higher funds available for investment, resulting from proceeds from the private placement, the availability of proceeds received from the follow-on offering prior to the payment of the cash portion of the purchase price for WeddingChannel and higher interest rates.

Provision for Taxes on Income

For the three and nine months ended September 30, 2006, we recorded income tax expense of $90,000 and $366,000, respectively, as compared to $37,000 and $151,000 for the corresponding periods in 2005. This was primarily due to operating income generated in certain states and a provision for federal minimum tax related to the use of our net operating loss carryforwards.

Liquidity and Capital Resources

On July 10, 2006, we completed the sale of 2,750,000 shares of common stock to three institutional investors for gross proceeds of $50.2 million. The net proceeds after placement fees and other offering costs were approximately $47.6 million.

On August 15, 2006, we completed a follow-on offering for the sale of 2,000,000 shares of our common stock at a public offering price per share of $16.00. On September 13, 2006, we issued an additional 809,600 shares of our common stock at $16.00 per share pursuant to the overallotment option set forth in the underwriting agreement related to the follow-on offering. We received proceeds of approximately $42.1 million net of fees, underwriting discounts and other expenses associated with the follow-on offering. The proceeds from the sale of shares completed on August 15, 2006 were used to fund a portion of the cash consideration for the WeddingChannel acquisition.

As of September 30, 2006, our cash, cash equivalents and short-term investments amounted to $77.7 million. We currently invest primarily in short-term debt instruments that are highly liquid, of high-quality investment grade, and have maturities of less than three months, with the intent to make such funds readily available for operating purposes.

Net cash provided by operating activities was $13.6 million for the nine months ended September 30, 2006. This resulted primarily from the net income for the period of $8.8 million, depreciation, amortization, non-cash services expense and stock-based compensation of $3.3 million and a decrease in accounts receivable, net of deferred revenue and net of businesses acquired of $1.7 million due to improved collection efforts and further credit card usage by local vendors. These sources of cash were offset, in part, by an increase in deferred production and marketing costs of $121,000. Net cash provided by operating activities was $4.9 million for the nine months ended September 30, 2005. This resulted primarily from the net income for the period of $2.5 million, depreciation, amortization, non-cash services expense and stock-based compensation of $1.5 million, a decrease in accounts receivable, net of deferred revenue, of $988,000 due to improved collection efforts and further credit card usage by local vendors and an increase in accounts payable and accrued expenses of $230,000. These sources of cash were offset, in part, by an increase in inventory of $389,000.

Net cash used in investing activities was $51.8 million for the nine months ended September 30, 2006 due primarily to cash paid in connection with the acquisition of WeddingChannel, net of cash acquired, and the business and assets of OAM Solutions, Inc. aggregating $53.3 million and purchases of property, equipment and software of $3.1 million, offset, in part, by the sale of short-term investments, net of purchases, of $4.6 million. Net cash provided by investing activities was $7.5 million for the nine months ended September 30, 2005 and consisted primarily of proceeds from the sale of short-term investments, net of purchases, of $9.6 million offset, in part, by purchases of property and equipment of $1.4 million and cash paid for the acquisition of the business and assets of GreatBoyfriends LLC of $621,000. We currently believe that purchases of property and equipment for the calendar year ended December 31, 2006 will range between $3.5 million and $4.0 million as a result of the planned acquisition of additional computer hardware and software to establish secondary back-up systems in connection with the development of a formal disaster recovery plan for our Company and due to leasehold improvements to be made at our Omaha facility.

Net cash provided by financing activities was $91.2 million for the nine months ended September 30, 2006 primarily due to proceeds from the issuance of common stock in connection with the completion of the private placement and follow-on offering in the third quarter of 2006 for which we received aggregate net proceeds of $89.9 million. We also received proceeds from the exercise of stock options and through our Employee Stock Purchase Plan of $1.3 million. Net cash provided by financing activities was $1.2 million and $501,000 for the nine months ended September 30, 2005 and 2004, respectively, primarily due to proceeds from the issuance of common stock in connection with the exercise of stock options and purchases of stock through our Employee Stock Purchase Plan.

Through September 30, 2006, we have reserved all future tax benefits resulting from tax deductions in excess of recognized stock-based compensation expense and, accordingly, we have not reflected any such benefits in our consolidated statements of cash flows.

We have only achieved operating income in recent periods, and we have an accumulated deficit of $33.4 million as of September 30, 2006. We believe that our current cash and cash equivalents will be sufficient to fund our working capital and capital expenditure requirements for the foreseeable future. This expectation is primarily based on internal estimates of revenue growth, as well as continuing emphasis on controlling operating expenses. However, there can be no assurance that actual costs will not exceed amounts estimated, that actual revenues will equal or exceed estimated amounts, or that we will sustain profitable operations, due to significant uncertainties surrounding our estimates and expectations.

Contractual Obligations and Commitments

We do not have any special purposes entities or capital leases, and other than operating leases, which are described below, we do not engage in off-balance sheet financing arrangements.

In the ordinary course of business, we enter into various arrangements with vendors and other business partners principally for magazine production, inventory purchases, host services and bandwidth.

As of September 30, 2006, we had no material commitments for capital expenditures.

As of September 30, 2006, we had commitments under non-cancelable operating leases amounting to approximately $5.3 million.

As of September 30, 2006, other long-term liabilities of $811,000 primarily represented accruals to recognize rent expense on a straight-line basis over the respective lives of five of our operating leases under which rental payments increase over the lease periods. These accruals will be reduced as the operating lease payments, summarized in the table of contractual obligations below, are made.

Our contractual obligations as of September 30, 2006 are summarized as follows:


		Payments due by Period

	Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years

		(in thousands)
Long term debt		$	153	$	47	$	106	$	—	$	—
Operating leases			5,312		1,277		2,223		1,507		305
Purchase commitments			1,067		360		707		—		—

Total		$	6,532	$	1,684	$	3,036	$	1,507	$	305

Seasonality

We believe that the impact of the frequency of weddings from quarter to quarter results in lower registry services and merchandise revenues in the first and fourth quarters.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss that may impact the financial position, results of operations, or cash flows of the Company due to adverse changes in financial market prices, including interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks.

We are exposed to some market risk through interest rates related to the investment of our current cash, cash equivalents and short-term investments of approximately $77.7 million as of September 30, 2006. These funds are generally invested in highly liquid debt instruments. As such instruments mature and the funds are re-invested, we are exposed to changes in market interest rates. This risk is not considered material, and we manage such risk by continuing to evaluate the best investment rates available for short-term, high quality investments.

We have no activities related to derivative financial instruments or derivative commodity instruments, and we are not currently subject to any significant foreign currency exchange risk.

Item 4. Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures, as that term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act), as of September 30, 2006. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and to ensure that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2006 identified in connection with the evaluation thereof by the Company’s management, including the Chief Executive Officer and Chief Financial Officer, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On September 19, 2003, WeddingChannel.com, Inc. (“WeddingChannel”) filed a complaint against The Knot in the United States District Court for the Southern District of New York. The complaint alleged that The Knot violated U.S. Patent 6,618,753 (“Systems and Methods for Registering Gift Registries and for Purchasing Gifts”), and further alleged that certain actions of The Knot gave rise to various federal statute, state statute and common law causes of actions. WeddingChannel sought, among other things, damages and injunctive relief. This complaint was served on the Company on September 22, 2003. On September 26, 2006, the Court approved a stipulation between WeddingChannel and The Knot dismissing the case without prejudice and without costs.

The Knot is engaged in other legal actions arising in the ordinary course of business and believes that the ultimate outcome of these actions will not have a material effect on its results of operations, financial position or cash flows.

Item 1A. Risk Factors

Risks that could have a negative impact on our business, results of operations and financial condition include without limitation, (i) The Knot’s unproven business model, (ii) The Knot’s history of significant losses, (iii) the significant fluctuation to which The Knot’s quarterly revenues and operating results are subject, (iv) the seasonality of the wedding industry and (v) other factors detailed in documents The Knot files from time to time with the Securities and Exchange Commission. A more detailed description of each of these and other risk factors can be found under the caption “Risk Factors” in our most recent Annual Report on Form 10-K, filed on March 17, 2006.

In addition, the following risks could have a negative impact on our business, results of operations and financial condition:

Risks Related to the Merger with WeddingChannel

We may not realize the anticipated benefits of acquiring WeddingChannel.

The Knot and WeddingChannel entered into the Merger Agreement in order to, among other objectives, create a combined company that will serve as a more effective marketing resource for advertisers and that will achieve cost savings and operating efficiencies. Achieving the anticipated benefits of the Merger is subject to uncertainties, including whether The Knot integrates WeddingChannel in an efficient and effective manner, and general competitive factors in the marketplace. Failure to achieve these anticipated benefits could result in increased costs, decreases in expected revenues and diversion of management’s time and energy and could materially and adversely impact The Knot’s business, financial condition and results of operations.

We may experience difficulties integrating WeddingChannel with The Knot.

Integrating WeddingChannel’s operations into The Knot’s business will be a time-consuming process that will require considerable attention on the part of our management. We may experience unanticipated difficulties or expenses in connection with the integration of editorial, information technology and customer service functions. Similarly, the process of combining sales and marketing forces, consolidating information technology, communications and administrative functions, and coordinating product and service offerings can take longer, cost more, and provide fewer benefits than initially projected. To the extent any of these events occurs, the anticipated benefits of the Merger may not be realized, or may be realized more slowly than is currently expected. In addition, any failure to integrate the two companies in a timely and efficient manner may increase the risk that the Merger will result in the loss of customers or key employees or the continued diversion of the attention of management.

The Merger may result in a loss of customers, advertisers or suppliers, or a reduction in revenues from existing customers or advertisers.

Some customers of The Knot or WeddingChannel may seek alternative sources of services or products due to, among other reasons, a desire not to do business with the combined company or perceived concerns that the combined company may not continue to support and maintain certain services or customer service standards or develop certain product lines. Difficulties in combining operations could also result in the loss of suppliers or potential disputes or litigation with customers, suppliers or others. Any steps by management to counter such potential increased customer or supplier attrition may not be effective. Failure by management to control attrition could result in worse than anticipated financial performance.

Some advertisers have historically placed ads on both The Knot’s website and WeddingChannel’s website. It is possible, following the completion of the Merger, that these advertisers will decide to reduce their overall spending with the combined company as compared to their prior advertising spending with the two websites when they were separate and run by unrelated companies. To the extent that this occurs, this may have a material adverse effect on our business, financial condition and results of operations.

The combined company will depend on a limited number of customers for some significant portion of our sales, and our financial success is linked to the success of our customers, our customers’ commitment to our services and products, and our ability to satisfy and retain our customers.

One customer would have accounted for more than 10% of our pro forma consolidated net revenues, after giving effect to the Merger, during the year ended December 31, 2005. We expect that this customer will continue to represent a significant portion of our net revenues in the future, especially with the consolidation that is occurring in the retail industry. The loss of this customer or a reduction in the amount of our net revenues generated by this customer could have a material adverse effect on our business, results of operations or financial condition.

The combined company will generate significant revenues from its registry services business, in which we will face various risks.

The registry services business of the combined company is dependent on the continued use of our website by our retail partners whose registries are posted on the website. While Federated Department Stores, Inc. (“Federated”) has entered into an extension of their current registry services contract with WeddingChannel, contingent upon the closing of the Merger, various other retailers have contracts with WeddingChannel that are coming up for renewal in the near future. In the event that one or more retail partners should decide not to renew their registry services agreements with WeddingChannel following the completion of the Merger, that could materially and adversely affect our business, results of operations and financial condition.

The registry services business of the combined company is also dependent on our retail partners keeping their respective websites operational, as well as on the traffic which visits those sites. We also rely on information provided by these partners to update and integrate registry information daily. Any decline in traffic or technical difficulties experienced by these websites may negatively affect the revenues of the combined company.

The fulfillment and delivery of products purchased by customers using our registry services is administered by our retail partners and, therefore, we are dependent on our retail partners to manage inventory, process orders and distribute products to our customers in a timely manner. If our retail partners experience problems with customer fulfillment or inventory management, or if we cannot integrate our processes with those of our partners, our business, results of operations and financial condition would be harmed.

The retail services business is highly competitive. Our retail partners compete for customers, employees, locations, products and other important aspects of their businesses with many other local, regional, national and international retailers, both online and offline. We are dependent on our retail partners to manage these competitive pressures, and to the extent they are unable to do so, we may experience lower revenue and/or higher operating costs, which could materially and adversely affect our results of operations.

The services and products of the combined company may infringe on intellectual property rights of third parties and any infringement could require us to incur substantial costs and distract our management.

Although we will avoid knowingly infringing intellectual property rights of third parties, including licensed content, the combined company may be subject to claims alleging infringement of third-party proprietary rights. If we are subject to claims of infringement or are infringing the rights of third parties, we may not be able to obtain licenses to use those rights on commercially reasonable terms, if at all. In that event, we would need to undertake substantial reengineering to continue our online offerings. Any effort to undertake such reengineering might not be successful.

The combined company will be dependent on certain key personnel, and the loss of any of these persons may prevent us from implementing our combined business plan in an effective and timely manner.

Our success depends, and the success of the combined company will depend, largely upon the continued services of our executive officers and other key personnel, including operational and information technology executives. Any loss or interruption of the services of one or more of our executive officers or these key personnel could result in our inability to manage our operations effectively and/or pursue our business strategy.

The operating results of the combined company may fluctuate due to seasonality.

Seasonal and cyclical patterns may affect our revenues. Commissions from the sale of registry products and revenues from the sale of wedding-related merchandise are generally higher in the second and third quarters of each year. As a result of these factors, we may experience fluctuations in our revenues from quarter to quarter.

The Merger may adversely affect our financial results.

We are accounting for the Merger using purchase accounting. As a result, we expect to take a charge against our earnings for amortization of intangibles with a finite life, and we may be required to take other non-recurring charges, including writedowns of significant amounts of intangible assets with indefinite lives or goodwill. Our business, results of operations and financial condition may be harmed by such charges.

Future sales of shares of our common stock, or the perception that these shares might be sold, could cause the market price of our common stock to drop significantly.

Following the completion of our recent follow-on offering, we have 30,972,265 shares of our common stock outstanding (which includes 2,750,000 shares of common stock issued in connection with our July 2006 private placement). Only certain of these shares are subject to lock-up restrictions with the underwriters of the follow-on offering, and these lock-up restrictions will expire 90 days following the date of the pricing of the follow-on offering. In addition, we issued 1,149,876 shares of our common stock as part of the consideration paid to stockholders of WeddingChannel upon the completion of the Merger, and most of those shares are freely tradable.

On July 20, 2006, we filed a shelf registration statement covering resales of the 2,750,000 shares of common stock by the institutional investors who purchased shares in the private placement. This registration statement was declared effective on August 14, 2006. These shares are freely tradable.

Upon the closing of the Merger, The Knot granted Federated registration rights for as long as it owns at least 5% of the outstanding common stock of The Knot, which rights will be exercisable commencing one year from the date on which the Merger was consummated. Certain future holders may be granted rights to participate in, or require us to file, registration statements with the SEC for resales of common stock.

We cannot predict the effect, if any, that future sales of shares of our common stock into the market, or the availability of shares of common stock for future sale, will have on the market price of our common stock. Sales of substantial amounts of common stock (including shares issued upon the exercise of outstanding stock options), or the perception that such sales could occur, may materially and adversely affect prevailing market prices for our common stock.

Risks Related to the Securities Markets

Our stock price has been highly volatile and is likely to experience significant price and volume fluctuations in the future, which could result in substantial losses for our stockholders and subject us to litigation.

The equity trading markets may experience periods of volatility, which could result in highly variable and unpredictable pricing of equity securities. The market price of our common stock could change in ways that may or may not be related to our business, our industry or our operating performance and financial condition. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. Our common stock has experienced significant volume and price fluctuations in the past. For example, from October 1, 2005 through September 30, 2006, the market price of our common stock nearly doubled, increasing from $11.33 to $22.13. Our current market price and valuation may not be sustainable. If the market price of our common stock declines significantly, you may be unable to resell your common stock at or above your purchase price. In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were to become the subject of securities class action litigation, we could face substantial costs and be negatively affected by diversion of our management’s attention and resources. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly, including a decline below your purchase price, in the future. In addition, the stock markets in general can experience considerable price and volume fluctuations, which could result in substantial losses for our stockholders.

Provisions in our articles of incorporation, bylaws and Delaware law may make it more difficult to effect a change in control, which could adversely affect the price of our common stock.

Provisions of our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. We may issue shares of preferred stock in the future without stockholder approval and upon such terms as our board of directors may determine. Our issuance of this preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding stock and potentially prevent the payment of a premium to stockholders in an acquisition. In addition, our certificate of incorporation includes provisions giving the board the exclusive right to fill all board vacancies, providing for a classified board of directors and permitting removal of directors only for cause and with a super-majority vote of the stockholders.

These provisions also could discourage proxy contests and make it more difficult for you and other stockholders to elect directors and take other corporate actions. As a result, these provisions could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders, and may limit the price that investors are willing to pay in the future for shares of our common stock.

We are also subject to provisions of the Delaware General Corporation Law that prohibit business combinations with persons owning 15% or more of the voting shares of a corporation’s outstanding stock for three years following the date that person became an interested stockholder, unless the combination is approved by the board of directors prior to the person owning 15% or more of the stock, after which the business combination would be subject to special stockholder approval requirements. This provision could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or may otherwise discourage a potential acquiror from attempting to obtain control from us, which in turn could have a material adverse effect on the market price of our common stock.

We have not paid cash dividends on our common stock and do not anticipate paying any dividends on our common stock in the foreseeable future.

We anticipate that we will retain all future earnings and other cash resources for the future operation and development of our business. As a result, we do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. Payment of any future dividends will be at the discretion of our board of directors after taking into account many factors, including our operating results, financial conditions, current and anticipated cash needs and plans for expansion. Accordingly, investors must rely on sales of their common stock after price appreciation, which may not occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

Our executive officers, directors and principal stockholders exercise significant control over all matters requiring a stockholder vote.

As of September 30, 2006, our executive officers and directors and 5% stockholders, and their affiliates, in the aggregate, beneficially owned approximately 41% of our outstanding common stock. As a result, if some or all of these stockholders act as a group, they would be able to exercise control over all matters requiring approval by our stockholders, including the election of directors and approval of significant corporate transactions. This concentration of ownership could also have the effect of delaying or preventing a change in control.

Item 6. Exhibits


	31.1	Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1	Certification of Chairman and Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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


Date: November 14, 2006	THE KNOT, INC.

	By:	/s/ Richard Szefc

		Richard Szefc
		Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer)

EXHIBIT INDEX


Number	Description


31.1	Certification of Chairman and Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certification of Chairman and Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.