Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / /

There were 40,195,647 shares of the registrant's common stock outstanding as of April 30, 2002.

In this document, "United Online," the "Company," "we," "us" and "our" collectively refer to United Online, Inc. and its wholly-owned subsidiaries.

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

UNITED ONLINE, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS AND COMPREHENSIVE LOSS

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

UNITED ONLINE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

United Online, Inc. ("United Online" or the "Company") is a leading provider of value-priced Internet access services. The Company was incorporated in Delaware in June 2001 and was formed in connection with the merger of NetZero, Inc. ("NetZero") and Juno Online Services, Inc. ("Juno") into two of United Online's wholly-owned subsidiaries, which was consummated on September 25, 2001 (the "Merger"). The Merger was accounted for under the purchase method of accounting and NetZero was the acquiror for financial accounting purposes. As a result of the Merger, NetZero and Juno each became wholly-owned subsidiaries of United Online.

United Online, under the NetZero and Juno brands, offers consumers free and value-priced Internet access, e-mail and customizable navigation tools. The Company's services are currently available in more than 5,000 cities across the United States and Canada. In addition to offering consumers access to the Internet, United Online offers marketers the ability to deliver their messages through several online advertising channels to select users of the Company's services. United Online also offers advertisers and commerce partners a variety of additional online advertising products, including online market research and measurement services.

The condensed consolidated financial statements and notes for the nine months ended March 31, 2002 reflect the financial results of NetZero, as predecessor to United Online, prior to the Merger and the consolidated results of NetZero and Juno subsequent to the Merger. As a result, the operating results presented for the three and nine months ended March 31, 2001 exclude the results of Juno. In addition, since the operating results for the nine months ended March 31, 2002 only include Juno's results subsequent to the Merger, the results do not reflect the additional amortization expense that would have been incurred if the Merger had closed at the beginning of fiscal 2001.

The accompanying condensed consolidated financial statements are unaudited except for the balance sheet information at June 30, 2001 and include United Online and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The condensed consolidated financial statements, in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. Certain amounts in the prior period's financial statements have been reclassified to conform to the presentation of the current period. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and related notes for the year ended June 30, 2001 included in the Company's registration statement on Form S-4 filed on August 24, 2001 with the Securities and Exchange Commission (the "SEC").

At March 31, 2002, the Company had cash, cash equivalents and short-term investments of approximately $125.9 million. The Company believes its existing cash, cash equivalents and short-term investments will be adequate to fund its operating activities, capital expenditures and other obligations for at least the next twelve months. However, additional capital may be needed in order to fund the Company's operations, expand marketing activities, develop new or enhance existing services or products, to respond to competitive pressures or to acquire complementary services, businesses or technologies. If the Company's existing cash resources and cash generated from operations are insufficient, additional capital through public or private financings, strategic relationships or other

arrangements will be necessary. This additional funding might not be available on acceptable terms, or at all. Failure to raise sufficient capital when needed could have a material adverse effect on the business, results of operations and financial condition of the Company. If additional funds are raised through the issuance of equity securities, the percentage of stock owned by the then-current stockholders will be reduced. Furthermore, such equity securities might have rights, preferences or privileges senior to those of the common stockholders.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities and the reported amounts of revenues and expenses. Actual results could differ from those estimates.

In June 2001, the FASB issued Statements of Financial Accounting Standards ("SFAS") No. 141 "Business Combinations." SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations except for qualifying business combinations that were initiated prior to July 1, 2001. In addition, SFAS No. 141 further clarifies the criteria to recognize intangible assets separately from goodwill. The requirements of SFAS No. 141 are effective for any business combination accounted for by the purchase method that is completed after June 30, 2001 (i.e., the acquisition date is July 1, 2001 or later).

In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives (but with no maximum life). The amortization provisions of SFAS No. 142 apply to goodwill and indefinite-lived intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the amortization provisions do not apply until the Company applies the new accounting rules. The Company will be required to implement SFAS No. 142 in the first quarter of fiscal 2003. The Company is currently evaluating the impact of SFAS No. 142.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and portions of APB Opinion No. 30, "Reporting the Results of Operations." SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value or carrying amount. SFAS No. 144 also requires expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required. The Company will apply the new accounting rule beginning July 1, 2002 and is in process of evaluating the impact of adopting SFAS No. 144.

into the period in which the related access services are provided. Billable services also consist of technical support fees charged to users on access plans that do not include free customer support.

The Company also derives revenue from the sale of advertising, which includes banner advertisements, placements and sponsorships, referrals of users to other Web sites, performance-based agreements, e-commerce arrangements and advertising messages delivered to the Company's users via e-mail. Banner advertising and sponsorship revenues are recognized in the period in which the advertisement or sponsorship placement is displayed, based upon the lesser of impressions delivered over the total number of guaranteed impressions or ratably over the period in which the advertisement is displayed, provided that no significant Company obligations remain, fees are fixed or determinable, and collection of the related receivable is reasonably assured. The Company's obligations typically include the guarantee of a minimum number of impressions or the satisfaction of other performance criteria. Revenues from performance-based arrangements are recognized as the related performance criteria are met. Referral revenues are recognized as referrals are made to advertisers' or sponsors' Web sites, provided that no significant Company obligations remain, fees are fixed or determinable, and collection of the related receivable is reasonably assured.

The Company identifies and records impairment losses on long-lived assets, including goodwill that is not identified with an impaired asset, when events and circumstances indicate that such assets might be impaired. Events and circumstances that may indicate that an asset is impaired include significant decreases in the market value of an asset, a change in the extent or manner in which an asset is used, shifts in technology, loss of key management or personnel, changes in the operating model or strategy and competitive forces.

If events and circumstances indicate that the carrying amount of an asset may not be recoverable and the expected undiscounted future cash flows attributable to the asset is less than the carrying amount of the asset, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. Fair value is determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risk involved, quoted market prices or appraised values, depending on the nature of the assets.

On September 25, 2001, NetZero and Juno became two wholly-owned subsidiaries of United Online. Juno is a leading provider of free and value-priced Internet access. The primary reasons for the Merger were to accelerate the Company's growth in pay subscribers, leverage NetZero's and Juno's operating and cost infrastructures to create a lower cost structure for providing Internet access than competitive Internet service providers, and to create a more attractive base of users for advertising customers.

Under the terms of the merger agreement, entered into on June 7, 2001, NetZero common stockholders received 0.2000 of a share of United Online common stock for each share of NetZero common stock they owned, and Juno common stockholders received 0.3570 of a share of United Online common stock for each share of Juno common stock they owned. The Merger has been accounted for under the purchase method of accounting for business combinations. The purchase price of approximately $89.2 million, including transaction costs, was allocated to Juno's net assets based on their fair values. The excess of the purchase price over the estimated fair values of the net assets acquired, including identifiable intangible assets, was recorded as goodwill. The fair value of the United Online common stock issued was determined based on an average price per share of NetZero common stock on the dates surrounding the announcement of the execution of the merger agreement and the fair value of the Juno options assumed was determined based on the Black-Scholes option pricing

model using a weighted average expected life of five years, 0% dividend, volatility of 120%, and a risk-free interest rate of 5%. A summary of the purchase price and net assets acquired in the Merger as of March 31, 2002 is as follows:

Fair value of common stock issued	$	76,856,000
Fair value of Juno options assumed		4,410,000
Acquisition costs		7,978,000

Total purchase price	$	89,244,000

Asset Classification		Estimated Fair Value		Estimated Amortizable Life
Net tangible assets		$	19,430,000	—
Intangible assets:
	Acquired customers		53,700,000	1-4 years
	Software and technology		3,600,000	4-5 years
	Trademark / brandname		2,300,000	5-7 years
	Other miscellaneous		200,000	1 year

Total intangible assets acquired			59,800,000

Goodwill			10,014,000

Total net assets acquired		$	89,244,000

The following summary unaudited pro forma financial information for the nine months ended March 31, 2002 and 2001 assumes that the Merger and other acquisitions made during the nine months ended March 31, 2002 and 2001 had occurred at the beginning of each period presented:

	Nine months ended March 31,
	2002			2001
Net revenues	$	140,974,000		$	134,394,000
Net loss	$	(46,875,000	)	$	(233,559,000	)
Net loss per share	$	(1.21	)	$	(6.17	)

In connection with the Merger, United Online incurred the following acquisition costs, which have been capitalized and included as part of the purchase price (see Note 5):

Employee termination benefits		$	3,844,000
Investment banking, accounting and legal costs			2,301,000
Early contract termination fees			1,833,000

	Total	$	7,978,000

Immediately following the Merger, United Online reduced Juno's workforce by 49 employees and recorded employee termination benefit charges of $3.8 million. Of the 49 employees terminated, 35 were in general and administrative, 11 were in sales and marketing and the remaining three were in

product development functions. As of March 31, 2002, all of the employee termination benefits and other acquisition costs have been paid.

During the nine months ended March 31, 2002, the Company recorded approximately $3.1 million in restructuring costs, which consisted of $0.8 million in employee termination benefits and $2.3 million in lease exit costs, which includes a charge of approximately $0.8 million to write off leasehold improvements associated with our former offices in New York. In an effort to streamline our operations in response to changing market conditions, we reduced our workforce by approximately 101 employees during the nine months ended March 31, 2002. Of the 101 employees terminated, 43 were in sales and marketing, 26 were in general and administrative, 23 were in product development, six employees were at our former RocketCash subsidiary, and three were in network operations. In addition, we closed our regional offices in San Francisco and Providence, Rhode Island and combined NetZero's and Juno's New York offices into one facility.

In connection with the Company's effort to streamline its operations, the Company completed the sale of one of its subsidiaries, RocketCash Corporation, in August 2001. The sale included substantially all of the assets of RocketCash and resulted in net cash proceeds to the Company of approximately $1.2 million. During the twelve months ended June 30, 2001, RocketCash had revenues and operating losses of $0.3 and $38.3 million, respectively. Included in RocketCash's operating losses was a charge to write down goodwill and intangible assets of $21.7 million, which was incurred during the March 2001 quarter.

The Company anticipates incurring additional restructuring and merger-related charges of between $3.0 and $4.0 million over the next 12 months. These charges relate to employee stay bonuses for certain Juno employees that will be paid in March 2003 and are being expensed evenly over the period of performance, additional lease exit costs, and other fees and costs related to the early termination of certain contracts. These costs will be charged to operating expenses, primarily general and administrative, during the period in which they are incurred.

At March 31, 2002, one customer comprised approximately 20% of the accounts receivable balance. At June 30, 2001, two customers comprised approximately 36% and 12% of the consolidated accounts receivable balance. For the three and nine months ended March 31, 2002, we did not have any individual customers that comprised more than 10% of total revenues. For the three and nine months ended March 31, 2001, three customers comprised 20%, 14% and 11% of revenues, and three customers comprised 25%, 12% and 11% of revenues, respectively.

On September 25, 2001, each share of NetZero common stock issued and outstanding was converted into 0.2000 of a share of United Online common stock, and each share of Juno common stock issued and outstanding was converted into 0.3570 of a share of United Online common stock. Additionally, each outstanding stock option of NetZero and Juno was converted into an option to purchase that number of United Online common stock shares equal to the product of 0.2000 and 0.3570, respectively, multiplied by the number of shares of common stock underlying the option.

The Company has authorized 5,000,000 shares of preferred stock with a par value of $0.0001, of which 300,000 shares have been designated as Series A junior participating preferred stock. As of March 31, 2002, the Company had no shares issued and outstanding.

On November 15, 2001, the Board of Directors declared a dividend of one preferred share purchase right for each outstanding share of its common stock. The dividend was paid on November 26, 2001 to the stockholders of record at the close of business on that date. Each right entitles the registered holder to purchase from the Company one unit consisting of one one-thousandth of a share of its Series A junior participating preferred stock of the Company, at a price of $25 per unit. The rights generally will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the Company's common stock or announces a tender or exchange offer which results in a person owning 15% or more of the Company's common stock. The Company generally will be entitled to redeem the rights at $0.001 per right at any time until 10 days after a public announcement that a 15% position in the Company's common stock has been acquired or that a tender or exchange offer which would result in a person owning 15% or more of the Company's common stock has commenced. The rights expire on November 26, 2011.

The Company has authorized 300,000,000 shares of common stock with a par value of $0.0001. At March 31, 2002, the Company had 40,128,000 shares outstanding. At June 30, 2001, the Company had 25,146,000 shares outstanding.

On May 26, 2001, the Company's Board of Directors authorized a common stock repurchase program that allows United Online to repurchase, from time to time, up to $10 million of common stock over a one-year period. During the nine months ended March 31, 2002, the Company repurchased approximately 889,000 shares at an aggregate cost of approximately $3.5 million under the repurchase program.

In January 2002, the Board of Directors authorized the Company to loan each of the Company's seven executive officers up to $200,000 for the exercise of certain stock options that had been previously awarded to the officers. The principal balance of the notes accrue interest at annual rates ranging from prime plus 1% to prime plus 2%, which is payable at the end of each calendar quarter. The principal balance of the notes becomes due in full on February 5, 2007. Additionally, the entire principal balance and any accrued interest become immediately payable 90 days following the termination of employment with the Company. The notes are full recourse obligations and are secured by the underlying shares. During the three months ended March 31, 2002, the Company loaned five of the seven officers a total of $700,000, which was used to exercise approximately 380,400 stock options.

In October 2001, the Board of Directors authorized that certain previously issued restricted stock awards immediately become fully vested. As a result, approximately 165,000 shares of restricted common stock became vested and the Company recorded a stock-based charge of $1.5 million during the December 2001 quarter.

On March 28, 2002 the Board of Directors authorized the acceleration of approximately 525,000 previously unvested stock options and restricted stock awards for six employees, including four officers. In connection with this acceleration, the Company recorded a stock-based charge during the March 2002 quarter of $1.3 million.

The following table sets forth the computation of basic and diluted net loss per share:

The diluted per share computations exclude unvested common stock, warrants and options which were antidilutive. The number of antidilutive options, after application of the treasury stock method, excluded from the diluted net loss per share calculation for the three and nine months ended March 31, 2002 were 3,258,000 and 1,687,000, respectively. As of March 31, 2002, there were approximately 8.6 million options outstanding, with a weighted average exercise price of $12.52 per share. On May 7, 2002, the Board of Directors authorized the grant of approximately 1.8 million stock options with a exercise price of $8.65 per share.

Future minimum lease payments under non-cancelable capital leases are as follows:

Quarter ended June 30, 2002	$	1,297,000
Fiscal year ended June 30, 2003		3,423,000

Total minimum obligations		4,720,000
Less: amounts representing interest		(268,000	)

Present value of minimum obligations		4,452,000
Less: current portion		(4,399,000	)

Non-current portion	$	53,000

The Company leases its facilities and certain network equipment under non-cancelable operating leases expiring at various periods through 2010. The leases generally contain annual escalation provisions as well as renewal options.

	Year Ended June 30,
2003		3,022,000
2004		1,876,000
2005		1,929,000
2006		1,780,000
Thereafter		4,294,000

Total	$	12,901,000

Under the terms of several multi-year telecommunications services agreements with various service providers, the Company is currently contractually committed to purchase approximately $18.3 million, $10.3 million and $4.5 million in telecommunications services for the fiscal years ended June 30, 2003, 2004 and 2005, respectively.

In April 2001, NetZero and certain of its officers and directors were served with a complaint alleging violations of the federal securities laws. A number of other complaints have since been filed and/or served containing similar allegations. These complaints were brought as purported stockholder class actions under Sections 11 and 15 of the Securities Act of 1933, as amended. The complaints generally allege that the prospectus through which NetZero conducted its initial public offering in September 1999 was materially false and misleading because it failed to disclose, among other things, that (i) the underwriters of NetZero's initial public offering had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of the restricted number of NetZero shares issued in connection with initial public offering; and (ii) the underwriters had entered into agreements with customers whereby they agreed to allocate NetZero shares to those customers in the initial public offering in exchange for which the customers agreed to purchase additional NetZero shares in the aftermarket at pre-determined prices.

The pending lawsuits involve complex questions of fact and law and likely will require the expenditure of significant funds and the diversion of other resources to defend. Although the Company believes the outcome of the above outstanding legal proceedings, claims and litigation will not have a material adverse effect on its business, results of operations or financial position, the results of litigation are inherently uncertain. The Company is unable to estimate the range of possible loss from outstanding litigation, and no amounts have been provided for such matters in the accompanying unaudited condensed consolidated financial statements.

Juno entered into subscriber referral agreements with two former providers of free Internet access, WorldSpy and Freewwweb, under which Juno is obligated to pay certain amounts based on the number of "Qualified Referred Subscribers" generated by referral activities specified in the agreements. A new Juno subscriber referred to Juno by WorldSpy or Freewwweb is a Qualified Referred Subscriber if he or she meets certain qualification criteria defined in the relevant subscriber referral agreement. Under the terms of these agreements, Juno has the right to settle the liabilities incurred in connection with acquiring the Qualified Referred Subscribers through the issuance of shares of its common stock. Freewwweb has filed a claim against Juno asserting that Juno is obligated to pay Freewwweb an amount in excess of $80 million under the terms of its subscriber referral agreement with Juno. The Company believes that Freewwweb's assertions are entirely without merit, that Freewwweb is not

entitled to the additional consideration it seeks and that the likelihood that Freewwweb will be awarded any material compensation is remote. Juno has requested that the court rule on this issue, and is seeking unspecified monetary damages against Freewwweb. At March 31, 2002, the Company had liabilities recorded of approximately $4.0 million as an estimate of the remaining amounts owed under the agreements, which may be settled through the issuance of its common stock or the payment of cash. While the Company believes that the amount it has reserved is sufficient to pay the contractual Freewwweb liabilities, we cannot assure you that the outcome of the litigation will be positive or that the Company will not be required to pay Freewwweb an amount in excess of the amount currently reserved.

The Company is subject to various other legal proceeding and claims, which arise in the ordinary course of business. The Company believes the amount, and ultimate liability, if any, with respect to these actions will not materially affect the financial position, results of operations or cash flows of the Company. We cannot assure you, however, that such actions will not be material or adversely affect the financial position, results of operations or cash flows of the Company.

In April 2002, the Company sold its Simpli.com, Inc. subsidiary ("Simpli") for a 9.9% equity interest in the acquiring company. For the nine months ended March 31, 2002, Simpli had no revenues and operating losses of $3.5 million, which included stock-based charges of $2.0 million.

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

This report contains forward-looking statements based on our current expectations, estimates and projections about our operations, industry, financial condition and liquidity. Words such as "anticipates," "expects," "intends," "plans," "believes," "may," "will" or similar expressions are intended to identify forward-looking statements. These forward looking statements include, but are not limited to, statements about our cash position, user base, revenues, expenses and capital requirements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Such statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors. The sections entitled "Risk Factors" in this Form 10-Q, our Registration Statement on Form S-4 as filed with the SEC on August 24, 2001, and our other filings with the SEC set forth some of the important risk factors that may affect our business, results of operations and financial condition. We undertake no obligation to revise or update publicly any forward-looking statements, other than as required by law.

United Online was incorporated in June 2001 and, on September 25, 2001, commenced operations following the Merger of NetZero and Juno into two of its wholly-owned subsidiaries. The Merger was accounted for under the purchase method of accounting for business combinations as an acquisition of Juno by NetZero, which is considered the predecessor company to United Online. Under the purchase method of accounting, the estimated cost of approximately $89.2 million, including transaction costs, has been allocated to the underlying net assets of Juno based on their estimated fair values. The excess of the purchase price over the estimated fair value of net assets acquired has been recorded as goodwill. The financial results of Juno have been included in United Online's results since the date of the Merger.

We are a leading value-priced Internet Service Provider (ISP) offering Internet access in more than 5,000 cities across the United States and Canada. In addition to offering consumers access to the Internet, we offer marketers targeting capabilities through numerous online advertising channels. We also offer advertisers and commerce partners a variety of additional services, including referring our users to partners' Web sites and providing online market research and measurement services. We had approximately 1.6 million subscribers to our billable service plans at March 31, 2002 and approximately 5.2 million active users during the month of March 2002, including pay users. An "active" user is one who is a pay user or a free user that has logged onto our services during the preceding 31 day period.

Juno launched its first service, a free dial-up email service, in April 1996. NetZero launched its free Internet access service in October 1998. Both Juno's and NetZero's free services were predicated on generating advertising revenues to fund their operations. Due to a variety of factors, including reductions in online advertising rates, both NetZero and Juno have taken various measures to limit the cost of providing free services and may take additional measures to further reduce such costs in the future.

Juno started offering fee-based Internet services in 1998, and NetZero started offering fee-based Internet services in January 2001. Our current fee-based Internet services, NetZero and Juno Platinum, are offered through various pricing plans, and differ from our free services in that hourly and other limitations set for the free services do not apply and the services feature small toolbars without a persistent on-screen advertising banner.

We currently offer billable Internet access services under a number of pricing plans, generally ranging from $4.95 to $29.95 per month. Currently, the most common pricing plan for our fee-based access services is $9.95 per month. However, we continually experiment with the use of a variety of pricing plans both in connection with offers extended to some of our existing subscribers and through external marketing channels. We intend to continue testing a variety of pricing plans in the future to determine their impact on profitability, pay user acquisition, conversion rates of free users to pay, and pay user retention rates. We continually evaluate the desirability and effectiveness of our pricing plans, and may in the future make changes to these plans. We may also offer promotions such as a free month of service or a discounted rate for an initial or prepaid period, as well as a wide range of discounted flat-rate plans. Future changes in our pricing plans and promotional discounts may adversely impact the number of pay users and the amount of billable services revenues we receive from such users.

As of March 31, 2002, approximately 1.6 million pay users were subscribed to our various billable service plans. In October 2001, we reduced the number of hours per month that a household can use the NetZero free service from 40 to no less than 10 and eliminated the free service in certain geographical areas where telecommunications costs make the offering cost prohibitive. As a result we experienced a significant increase in pay users during the month of October and a decrease in our active free user base. We may experience periodic fluctuations in our pay user base in the future as a result of a number of factors including, but not limited to, the imposition of additional limitations on our free services; changes in our free user base; promotional free trial periods of our pay services; increases or decreases in our marketing expenditures; acquisitions; competitive factors, including competition in the value-priced segment of the ISP market; the effects of customer churn and seasonality; and changes in the prices of our billable services plans.

We previously operated a broadband service, Juno Express. However, due to a variety of factors including the failure of several providers of the high-speed services, this broadband service was terminated. Juno previously entered into an agreement with AOL Time Warner to utilize their cable network to offer cable broadband services, but there are numerous operational and other issues that could impact whether Juno will offer these services over AOL Time Warner's cable systems in the near term, or at all. Furthermore, the agreement with AOL Time Warner is subject to termination by either party and is also subject to the approval of the Federal Trade Commission. In February 2002, we signed an agreement with Comcast Cable Communications Inc. to offer high-speed Internet service over Comcast's cable systems. We intend to offer this service in two markets in the near term. We do not anticipate significant costs or capital expenditures to launch this service, however we cannot assure you that there will not be unanticipated costs associated with offering this service. We also cannot assure you that we will be able to implement the service successfully, that the service will be offered on other than a limited basis or that we will generate a significant number of subscribers to the service.

Billable services revenues are recognized in the period in which the fees are fixed or determinable, the related products or services are provided to the user and, in circumstances where payment is not received in advance, collectibility is reasonably assured. Billable services revenue consists primarily of subscription fees that we receive from users of our fee-based Internet access services. We generally require that our subscribers pre-pay for their service, which results in the deferral of certain revenues into the period in which the related access services are provided. Deferred revenues may be impacted between periods by the mix in pay users on prepaid multi-month plans versus pay users on prepaid monthly plans and the related timing of their prepayments. Billable services also consist of technical support fees charged to users on access plans that do not include free customer support.

Our advertising and commerce revenues generally consist of fees from the placement of media, direct marketing agreements, referring our users to partners' Web sites, enabling customer registrations for partners, and fees from electronic commerce transactions. We also generate revenues from our online market research and measurement services.

Banner advertising and sponsorship revenues are recognized in the periods in which the advertisement or sponsorship placement is displayed, based upon the lesser of impressions delivered over the total number of guaranteed impressions or ratably over the period in which the advertisement is displayed, provided that no significant Company obligations remain, fees are fixed or determinable, and collection of the related receivable is reasonably assured. The Company's obligations typically include the guarantee of a minimum number of impressions or the satisfaction of other performance criteria. Revenues from performance-based arrangements are recognized as the related performance criteria are met. Referral revenues are recognized as referrals are made to advertisers' or sponsors' Web sites, provided that no significant Company obligations remain, fees are fixed or determinable, and collection of the related receivable is reasonably assured. In some cases, we require prepayment of fees for advertising services, which results in the deferral of certain revenues into the period in which the related services are provided. Deferred revenue balances may be impacted between periods by the mix of advertisers prepaying for our advertising services and the timing of their prepayments.

Advertising on the Internet, particularly the products and services we offer, is a relatively new and changing industry, and there is no assurance that the products and services we offer now, or in the future, will meet with commercial acceptance. Internet advertising rates have declined significantly, and it is possible that rates will continue to decline. Many of the purchasers of Internet advertising have been companies with Internet-based business models. Certain of these companies have come under financial pressure and have not been able to access the capital markets to fund their operations. This trend has impacted our ability to generate advertising and commerce revenues and could continue to do so in the future. This trend could also result in increased allowances for doubtful accounts.

Due to market forces and other factors, our advertising and commerce revenues have historically, and may continue to fluctuate from period to period. We have experienced numerous sequential quarters of decreased advertising and commerce revenues, and we cannot assure you that we will not experience decreased revenues in sequential quarters in future periods. Factors impacting our advertising and commerce revenues include, but are not limited to, the state of the online advertising market, increases and decreases in our user base and reductions in advertising inventory available for sale.

We have entered into barter transactions on an extremely limited basis. There is no barter revenue in the historical or pro forma revenues for the three and nine months ended March 31, 2002. In the historical results for the three and nine months ended March 31, 2001, barter revenue was less than 1% of advertising and commerce revenue. In the pro forma results for the three and nine months ended March 31, 2001, barter revenue was approximately 3% and 4%, respectively of advertising and commerce revenues.

Cost of billable services includes direct costs that have been allocated to our billable services based on the aggregate hourly usage of our pay users as a percentage of total hourly usage of both our free and pay users. Allocated costs consist primarily of telecommunications costs, personnel and related overhead costs associated with operating our network and data centers and depreciation of network computers and equipment. In addition, cost of billable services includes direct costs incurred in providing technical and customer support and costs associated with providing customer billing and billing support.

We have expended significant funds on our network infrastructure. While we may expend significant additional funds on capital expenditures in the future, such expenditures are dependent upon our expectation of user growth and usage patterns, the need to upgrade our existing network infrastructure, as well as needs associated with acquired businesses and new products. Telecommunications costs for network access are expensed as incurred. Our failure to accurately forecast usage could result in significant overcapacity, which would adversely impact our results of operations. Conversely, under-forecasting usage could adversely impact the ability of users to receive adequate service and adversely impact our reputation and our ability to maintain or increase our user base. We cannot assure you that we will be able to accurately forecast user requirements in the future.

Cost of free services includes direct costs that have been allocated to our free services based on the aggregate hourly usage of our free users as a percentage of total hourly usage of both our free and pay users. Allocated costs consist primarily of telecommunications costs, personnel and related overhead costs associated with operating our network and data centers, and depreciation of network equipment. In addition, cost of free services includes certain direct costs incurred in providing technical and customer support to our free users and certain costs associated with delivering advertising to our free users.

Sales and marketing expenses include advertising and promotion expenses, salaries, sales commissions, employee benefits, travel and related expenses for our direct sales force, customer services costs incurred to acquire new users, and sales support functions. We have expended significant amounts on sales and marketing, including national branding campaigns comprised of television, radio and print advertising, sponsorships and a variety of other promotions. Due to the timing of these promotions, amounts expended have varied significantly from period to period. Marketing costs may fluctuate significantly from quarter-to-quarter. Marketing and advertising costs to promote our products and services are expensed in the period incurred.

Product development expenses include expenses for the development of new or improved technologies and products, including salaries and related expenses for the software development and product management departments, as well as costs for contracted services, facilities and equipment.

General and administrative expenses include salaries, employee benefits and expenses for executive, finance, legal, human resources and internal customer support personnel. In addition, general and administrative expenses include fees for professional services, non-income taxes, permits and licenses, bad debt expense, and occupancy and other overhead-related costs.

Restructuring costs consist of severance costs, lease exit costs and the write-off of leasehold improvements associated with terminated leases.

Amortization of goodwill and intangible assets includes amortization of goodwill, acquired customers, purchased technologies and other identifiable intangible assets associated with our various acquisitions. At March 31, 2002, we had approximately $10.0 million in goodwill and $51.9 million in

intangible assets primarily resulting from our acquisition of Juno on September 25, 2001. We expect to incur significant amortization expense in connection with the intangible assets in future periods. Since our acquisition of Juno was completed after June 30, 2001, we are not amortizing the goodwill acquired as a result of that acquisition in accordance with SFAS No. 142.

We recorded deferred stock-based charges in connection with the grant of stock options and restricted stock to employees, the imposition of restrictions on shares of stock held by founders and the issuance of restricted shares of stock in connection with prior acquisitions, which are being amortized over the vesting period of the applicable shares. We do not expect to incur significant amortization of stock-based charges in future periods.

We have experienced significant growth in our billable services revenues and pay users as a result of the launch of the NetZero Platinum billable service plan during the March 2001 quarter and the acquisition of Juno in the September 2001 quarter. Growth in pay users has been positively impacted by, among other things, limitations imposed on our free services. While we believe that we will continue to grow our pay user base and billable services revenues, we do not expect that we will maintain the same rate of growth that we have recently experienced. We have also experienced declining advertising and commerce revenues over several quarters due to the loss of a number of significant advertising agreements and decreased advertising inventory as a result of limitations imposed on our free services. While we believe that pricing in the online advertising market has begun to stabilize, we anticipate slightly lower advertising and commerce revenues in the June 2002 quarter due to reduced usage of our free services as a result of seasonality.

We expect average monthly revenue per user in the June 2002 quarter to be between $9.60 and $9.70 per month, which is consistent with the amount reported in the March 2002 quarter. Average monthly revenue per user is calculated by dividing billable services revenues for a period by the average number of billable subscribers for that period, calculated based on the number of billable subscribers at the beginning and end of such period. Fluctuations in the number of billable subscribers early or late in a period can cause average monthly revenue per user to be skewed higher or lower.

We have recently experienced a decrease in the cost of billable services as a percentage of billable services revenues, and we expect cost of billable services as a percentage of billable services revenues to decrease modestly in the June 2002 quarter, primarily as a result of a full quarter of anticipated cost savings gained through the consolidation of NetZero's and Juno's billing and customer relationship management functions. Also, we have recently experienced a significant decline in the cost of free services. The limitations imposed on our free services have resulted in a decline in our telecommunications expense related to free uses and a decline in our active free user base. We anticipate that the active users of our free services may continue to decline and that, as a result, the cost of free services may also continue to decrease.

We have significantly reduced our level of spending on marketing and promotion of our services over the last twelve months. Our future marketing and promotion spend may vary significantly from quarter-to-quarter and may impact our ability to grow our pay user base. Our ability to grow our pay user base will be impacted by a number of factors including, but not limited to, our ability to continue to attract new users to our services and successfully migrate our free users to billable services, the effects of competition and the success of our marketing efforts based on current levels of expenditure.

We have significantly reduced our employee base over the last nine months, which has favorably impacted our personnel-related expenses associated with our sales and marketing, product development and general and administrative functions. In addition, we sold substantially all of the assets of our

RocketCash subsidiary in August 2001 and our Simpli subsidiary in April 2002. Also, we have consolidated and closed various regional offices, which has favorably impacted our occupancy costs. As a result of these initiatives, we have reduced significantly our product development and general and administrative expenses. We currently anticipate that during the June 2002 quarter such expenses will remain approximately at the level of expenses incurred during the March 2002 quarter.

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 our estimates, including those related to revenue recognition, uncollectible receivables, intangible and other long-lived assets and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements: revenue recognition; valuation allowances, specifically the allowance for doubtful accounts; impairment of long-lived assets; accounting for business combinations; and litigation contingencies.

We apply the provisions of SEC Staff Accounting Bulletin ("SAB") No. 101. "Revenue Recognition," which provides guidance on the recognition, presentation and disclosure of revenue in the financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. In June 2000, the SEC issued SAB 101B, which required the implementation of SAB 101 no later than June 30, 2001. The SEC issued additional guidance in the form of its Frequently Asked Questions and Answers document in October 2000.

We recognize billable services revenues in the period in which fees are fixed or determinable and the related products or services are provided to the user. Our pay users generally pay in advance for their service by credit card, check or money order and revenue is then recognized ratably over the period in which the related services are provided. In circumstances where payment is not received in advance, revenue is only recognized if collectibility is reasonably assured. A small percentage of our pay users are currently on payment plans that allow them to pay their outstanding balance by check or money order. We invoice these users on their sign-up or renewal date and typically allow them up to 60 days to pay their outstanding account balance. If we do not receive payment from these users within 60 days, their account is inactivated until their balance is paid. Based on historical collections activity for these users, we estimate the number of users for which collectibility is unlikely. For those users that we determine collection is unlikely, we do not recognize revenue until cash has been collected and their account is re-activated.

Advertising and commerce revenues include targeted and non-targeted banner advertisements, placements and sponsorships, referrals of users to other Web-sites, performance-based agreements and advertising messages delivered to our users via e-mail. We recognize banner advertising and sponsorship revenues in the periods in which the advertisement or sponsorship placement is displayed, based upon the lesser of impressions delivered over the total number of guaranteed impressions or

ratably over the period in which the advertisement is displayed, provided that no significant obligations remain on our part, fees are fixed or determinable, and collection of the related receivable is reasonably assured. Our obligations typically include the guarantee of a minimum number of impressions or the satisfaction of other performance criteria. We recognize revenues from performance- based arrangements as the related performance criteria are met. We recognize referral revenues as referrals are made to advertisers' or sponsors' Web sites, provided that no significant obligations remain, fees are fixed or determinable, and collection of the related receivable is reasonably assured. In determining whether an arrangement exists, we ensure that a binding contract is in place, such as our standard insertion order or a fully executed customer specific agreement. We assess whether performance criteria have been met and whether our fees are fixed or determinable based on a reconciliation of the performance criteria and the payment terms associated with the transaction. Our reconciliation of the performance criteria includes a comparison of internally tracked performance data to the contractual performance obligation and to third party or customer performance data in circumstances where that data is available. We assess collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. If we determine that collection is not reasonably assured, we do not recognize the revenues until collection becomes reasonably assured, which is generally upon receipt of cash.

Many of our advertising customers are Internet-based companies who are generating losses and do not have access to the capital markets. We often run advertising for such companies and determine that collectibility is not reasonably assured. In these instances we do not recognize revenues until the cash has been collected. Our estimate for the allowance for doubtful accounts related to other customers is based on two methods. The amounts calculated from each of these methods are combined to determine the total amount reserved. First, we evaluate specific accounts where we have information that the customer may have an inability to meet its financial obligations. In these cases, we use our judgment, based on the best available facts and circumstances, and record a specific reserve for that customer against amounts due to reduce the receivable to the amount that is expected to be collected. These specific reserves are reevaluated and adjusted as additional information is received that impacts the amount reserved. Second, a general reserve is established for all customers based on the aging of the receivables. If circumstances change (e.g. higher than expected defaults or an unexpected material adverse change in a major customer's ability to meet its financial obligation to us), our estimates of the recoverability of amounts due to us could be reduced by a material amount.

The companies that we have acquired in the last two years have all been accounted for as purchase transactions. Under the purchase method of accounting, the cost, including transaction costs, are allocated to the underlying net assets, based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

The judgments made in determining the estimated fair value and expected useful lives assigned to each class of assets and liabilities acquired can significantly impact net income. For example, different classes of assets will have useful lives that differ (i.e., the useful life of users may not be the same as the useful life of acquired technologies). Consequently, to the extent a longer-lived asset is ascribed greater value under the purchase method than a shorter-lived asset, there may be less amortization recorded in a given period.

Determining the fair value of certain assets and liabilities acquired is judgmental in nature and often involves the use of significant estimates and assumptions. As provided by the accounting rules, we use the one-year period following the consummation of acquisitions to finalize estimates of the fair value of assets and liabilities acquired. One of the areas that requires more judgment in determining

fair values and useful lives is intangible assets. To assist in this process, we have obtained appraisals from third party valuation firms for certain intangible assets. While there were a number of different methods used in estimating the value of the intangibles acquired, we used two approaches primarily, the discounted cash flow and market comparison approaches. Some of the more significant estimates and assumptions inherent in the two approaches include: projected future cash flows (including timing); discount rate reflecting the risk inherent in the future cash flows; perpetual growth rate; determination of appropriate market comparables; and the determination of whether a premium or a discount should be applied to comparables. Most of the above assumptions were made based on available historical information.

The value of our intangible and other long-lived assets, including goodwill, is exposed to future adverse changes if we experience declines in operating results or experience significant negative industry or economic trends or if future performance is below historical trends. We periodically review intangible assets and goodwill for impairment using the guidance in the appropriate accounting literature. We continually review the events and circumstances related to our financial performance and economic environment for factors that would provide evidence of the impairment of goodwill.

We assess the impairment of identifiable intangibles, long-lived assets and related goodwill and enterprise level goodwill whenever events or changes in circumstances indicate that such assets might be impaired and the carrying value may not be recoverable. Events and circumstances that may indicate that an asset is impaired include significant decreases in the market value of an asset, a change in the extent or manner in which an asset is used, shifts in technology, loss of key management or personnel, changes in our operating model or strategy and competitive forces. If events and circumstances indicate that an asset may not be recoverable and the expected undiscounted future cash flows attributable to the asset is less than the carrying amount of the asset, an impairment loss equal to the excess of the asset's carrying value over its fair value is recorded. Fair value is determined based on the present value of estimated expected future cash flows using a discount rate commensurate with the risk involved, quoted market prices or appraised values, depending on the nature of the assets.

Factors we consider important which could trigger an impairment review include significant underperformance relative to expected historical or projected future operating results, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends, significant declines in our stock price for a sustained period, and our market capitalization relative to net book value. When we determine that the carrying value of intangibles, long-lived assets and related goodwill and enterprise level goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model.

We are currently involved in certain legal proceedings, as discussed in Note 10 to our condensed consolidated financial statements. We record liabilities related to pending litigation when an unfavorable outcome is likely and our management can estimate the probable amount of loss. We have not recorded liabilities for some of our pending litigation because of the uncertainties related to assessing both the amount and the probable outcome of those claims. As additional information becomes available, we continually assess the potential liability related to all of our pending litigation. We currently believe that the liabilities recorded on our balance sheet are sufficient to cover pending litigation for which an unfavorable outcome is probable and for which we can estimate the loss.

We do not currently anticipate that inflation will have a material impact on our results of operations.

The historical consolidated results of operations reflect only the operating results of NetZero prior to September 25, 2001 as predecessor to United Online. Due to the Merger, many of the historical comparisons to the prior year are less meaningful and the trends indicated by such comparisons may not be indicative of the currently existing trends in the business. Accordingly, in order to improve comparisons, the following discussion of results of operations includes pro forma consolidated results of operations for the quarter ended March 31, 2001 and the nine months ended March 31, 2002 and 2001. These results reflect the combined results of NetZero and Juno as if the Merger had occurred at the beginning of each of the periods presented and include certain reclassifications of each company's historical operating results to conform to United Online's financial statement presentation.

Historical Three Months and Pro Forma Nine Months Ended March 31, 2002 Compared to
the Pro Forma Three and Nine Months Ended March 31, 2001

The pro forma results for the quarter ended March 31, 2001 and the pro forma nine months ended March 31, 2002 and 2001 reflect the combined results of NetZero and Juno as if the Merger had occurred at the beginning of each of the periods presented and include certain reclassifications of each company's historical operating results to conform with United Online's financial statement presentation. In order to assess better the underlying operating trends, management believes that the results of operations for each period should be analyzed after excluding the effects of certain items that management believes to be non-recurring or merger-related. These items are included in merger-related costs and are discussed in more detail herein. Certain amounts in the prior period's financial statements have been reclassified to conform to the presentation of the current period.

The following table sets forth the historical selected unaudited consolidated statement of operations data (in thousands) for the three months ended March 31, 2002 and selected unaudited pro

forma consolidated statements of operations data (in thousands) for the three months ended March 31, 2001 and the nine months ended March 31, 2002 and 2001:

Billable services revenues for the three months ended March 31, 2002 were $44.4 million, which represented an increase of $19.7 million, or 79.8%, from pro forma $24.7 million for the three months ended March 31, 2001. Pro forma billable services revenues for the nine months ended March 31, 2002 were $118.0 million, which represented an increase of $54.0 million, or 84.4%, from $64.0 million for the nine months ended March 31, 2001. The increase in revenues is attributable to a 600,000, or 60%, increase in total billable subscribers from 1.0 million at March 31, 2001 to 1.6 million at March 31, 2002, and an increase in average monthly revenue per subscriber. The increase in billable subscribers was primarily due to the introduction of the NetZero Platinum billable service plan during the March 2001 quarter and limitations imposed on our free services. During the three and nine months ended March 31, 2002, average monthly revenue per user was approximately $9.69 and $9.74, respectively, compared to $9.01 and $8.29 for the three and nine months ended March 31, 2001, respectively. The increase in average monthly revenue per user is attributable to the introduction of new pay service plans during the nine months ended March 31, 2002 that resulted in higher average monthly revenue per user, the implementation of fee-based technical support and fluctuations in the number of beginning and ending pay subscribers during the periods.

Advertising and commerce revenues for the three months ended March 31, 2002 were $6.5 million, which represented a decrease of $10.3 million, or 61.3%, from pro forma $16.8 million for the three months ended March 31, 2001. Pro forma advertising and commerce revenues for the nine months ended March 31, 2002 were $22.9 million, which represented a decrease of $47.5 million, or 67.5%, from $70.4 million for the nine months ended March 31, 2001. The decrease in revenues is attributable to the termination of several significant advertising agreements during 2001, the most significant of which were LookSmart Ltd. in January 2001 and Cisco in August 2001. During the three and nine months ended March 31, 2001 we generated approximately $3.3 million and $16.2 million of advertising and commerce revenues from LookSmart and Cisco combined. The remaining decrease in advertising and commerce revenues is attributable to decreased advertising inventory as a result of limitations imposed on our free services, decreased barter revenues from Juno and overall softness in the online advertising market including significant declines in advertising rates and the number of advertisers on our services. During the three and nine months ended March 31, 2002, we did not recognize any barter revenue compared to $0.5 million and $2.9 million in the three and nine months ended March 31, 2001.

Cost of billable services for the three months ended March 31, 2002 was $22.0 million, which represented an increase of $4.5 million, or 25.7%, from pro forma $17.5 million for the three months ended March 31, 2001. Pro forma cost of billable services for the nine months ended March 31, 2002 was $64.3 million, which represented an increase of $23.4 million, or 57.2%, from $40.9 million for the nine months ended March 31, 2001. The increase in cost of billable services is attributable to the increase in billable subscribers from 1.0 million at March 31, 2001 to 1.6 million at March 31, 2002. The increase in billable subscribers resulted in increased customer service and billing-related costs and increased telecommunications costs, partially offset by a decrease in average hourly telecommunications costs. Average hourly telecommunications cost decreased over 15% and 20% in the three and nine months ended March 31, 2002, respectively, compared to the three and nine months ended March 31, 2001, respectively. Cost of billable services as a percentage of billable services revenue improved to 49.6% and 54.5% for the three and nine months ended March 31, 2002, respectively, from 70.8% and 63.9% for the three and nine months ended March 31, 2001, respectively. The improvement is due to higher average monthly revenue per pay user, lower average hourly telecommunication costs as result of operating efficiencies gained through the consolidation of NetZero's and Juno's telecommunications networks, lower average monthly usage per pay user, decreased customer support and billing costs per pay user, partially offset by increased depreciation, personnel and overhead costs allocated to billable services due to the increase in pay users as a percentage of total active free and pay users.

Cost of free services for the three months ended March 31, 2002 was $6.8 million, which represented a decrease of $22.1 million, or 76.5%, from pro forma $28.9 million for the three months ended March 31, 2001. Pro forma cost of free services for the nine months ended March 31, 2002 was $31.5 million, which represented a decrease of $61.6 million, or 66.2%, from $93.1 million for the nine months ended March 31, 2001. The decrease in cost of free services is due to a decrease in average monthly usage per free user as a result of usage limitations imposed on users of our free services, a decrease of approximately 3.1 million active free users, or 46.3%, from 6.7 million as of March 31, 2001 to 3.6 million as of March 31, 2002, a decrease in average hourly telecommunications costs, a decrease in customer support costs for free users and a decrease in personnel and overhead costs allocated to free services due to the decrease in free users as a percentage of total active free and pay users. Free users have decreased as a result of usage and geographical limitations imposed on our free services as

well as the reduced emphasis we have undertaken in marketing and promoting our free service relative to our pay service.

Sales and marketing expenses for the three months ended March 31, 2002 were $10.8 million, which represented a decrease of $8.1 million, or 42.9%, from pro forma $18.9 million for the three months ended March 31, 2001. Pro forma sales and marketing expenses for the nine months ended March 31, 2002 were $28.9 million, which represented a decrease of $47.9 million, or 62.4%, from $76.8 million for the nine months ended March 31, 2001. Advertising and promotion expenses decreased by approximately $4.0 million and $37.2 million for the three and nine months ended March 31, 2002 compared to the three and nine months ended March 31, 2001. These decreases are due to reductions in direct mail campaigns as well as other marketing activities including television, radio, and outdoor and other advertising campaigns. The remaining decreases in sales and marketing expenses for the three and nine months ended March 31, 2002 were due to a decrease in personnel-related expenses as a result of headcount reductions in the sales and marketing departments at both NetZero and Juno during 2001, a decrease in telemarketing expenses related to subscriber acquisition and retention activities, a decrease in costs related to NetZero's former RocketCash subsidiary which was sold in August 2001, and reduced sales commissions as a result of lower advertising and commerce revenue.

Product development expenses for the three months ended March 31, 2002 were $5.9 million, which represented a decrease of $2.7 million, or 31.4%, from pro forma $8.6 million for the three months ended March 31, 2001. Pro forma product development expenses for the nine months ended March 31, 2002 were $19.7 million, which represented a decrease of $5.6 million, or 22.1%, from $25.3 million for the nine months ended March 31, 2001. The decreases in product development expenses for the three and nine months ended March 31, 2002 were due to a $1.3 million and $3.2 million decrease in personnel-related expenses as a result of headcount reductions, a $0.7 million and $1.6 million decrease in costs related to NetZero's former RocketCash subsidiary which was sold in August 2001, and a $0.2 million and $0.5 million decrease in hardware and software maintenance expense.

General and administrative expenses for the three months ended March 31, 2002 were $5.9 million, which represented a decrease of $5.4 million, or 47.8%, from pro forma $11.3 million for the three months ended March 31, 2001. Pro forma general and administrative expenses for the nine months ended March 31, 2002 were $22.7 million, which represented a decrease of $10.6 million, or 31.8%, from $33.3 million for the nine months ended March 31, 2001. The decreases in the three and nine months ended March 31, 2002 were due to a $1.9 million and $6.3 million decrease in occupancy costs and other overhead expenses as a result of headcount reductions and office consolidations during 2001, a $1.2 million and $2.5 million decrease in bad debt expense, a $1.2 million and $0.8 million decrease in personnel-related expenses as a result of headcount reductions in the accounting, legal, human resource and other administrative departments at both Juno and NetZero during 2001, a $0.6 million and $0.7 million decrease in accounting, legal and other consulting expenses, and a $0.4 million and $0.5 million decrease in general and administrative costs as a result of the sale of RocketCash in August 2001.

Stock-based charges are attributable to the following operating expense line items:

Amortization of stock-based charges for the three months ended March 31, 2002 were $2.2 million, which represented a decrease of $2.6 million, or 54.2%, from pro forma $4.8 million for the three months ended March 31, 2001. Pro forma amortization of stock-based charges for the nine months ended March 31, 2002 were $5.8 million, which represented a decrease of $19.2 million, or 76.8%, from $25.0 million for the nine months ended March 31, 2001. The decrease in amortization of stock-based charges is a result of the sale of our RocketCash subsidiary in August 2001, the cancellation or forfeiture of issued securities that were previously being amortized over their vesting period and decreased stock-based charges associated with our acquisition of Simpli.com in August 2000. Also, during the nine months ended March 31, 2001, Juno recorded $9.1 million in stock-based charges in connection with the issuance of common stock to acquire subscribers. These decreases were partially offset by increased stock-based charges in connection with the accelerated vesting of certain previously granted stock options and restricted stock awards that occurred in October 2001 and March 2002. We do not currently anticipate significant stock-based charges in the future.

Amortization of goodwill and intangible assets for the three months ended March 31, 2002 and 2001 were $4.7 million and pro forma $11.1 million, respectively. Pro forma amortization of goodwill and intangible assets for the nine months ended March 31, 2002 and 2001 were $14.1 million and $30.5 million, respectively. The decreases in 2002 were due to the write-down of goodwill and intangible assets totaling $48.6 million that was recorded during the March 2001 quarter, which reflected the amount by which the carrying amount of the intangible assets exceeded their respective fair market values. The write-down consisted of $33.5 million for goodwill and $15.1 million of other acquired intangible assets and other assets. These decreases were partially offset by an increase in amortization of intangible assets resulting from our acquisition of Juno in the September 2001 quarter. In connection with this acquisition, we recorded $59.8 million in other intangible assets and $10.0 million in goodwill. The intangible assets are being amortized over periods ranging from one to seven years and we are not amortizing the goodwill associated with our acquisition of Juno in accordance with SFAS No. 142.

marketing, 26 were in general and administrative, 23 were in product development, six employees were at RocketCash, and three were in network operations. In addition, we closed our regional offices in San Francisco and Providence and combined NetZero's and Juno's New York offices into one facility. We did not record any restructuring costs in the nine months ended March 31, 2001.

During the nine months ended March 31, 2002, we incurred merger-related costs of $3.1 million. The merger-related costs include certain legal, banking and accounting fees incurred by Juno in connection with the merger that were not capitalized in connection with the acquisition, consulting fees for the integration of Juno and NetZero's operations, and bonuses paid to employees, including employee stay bonuses for certain key Juno employees which we anticipate paying in March 2003. We may incur additional restructuring and merger-related charges of between $3.0 and $4.0 million over the next 12 months. These charges relate to the employee stay bonuses for certain Juno employees that will be paid in March 2003 and are being expensed evenly over the period of performance, additional lease exit costs, and other fees and costs related to the early termination of certain contracts. These charges will be expensed during the period in which they are incurred. We did not record any merger-related costs in the nine months ended March 31, 2001.

Interest income, net for the three months ended March 31, 2002 was $1.1 million, which represented a decrease of $1.5 million, or 57.7%, from $2.6 million for the three months ended March 31, 2001. Pro forma interest income, net for the nine months ended March 31, 2002 was $4.4 million, which represented a decrease of $6.8 million, or 60.7%, from pro forma $11.2 million for the nine months ended March 31, 2001. These decreases in interest income, net were a result of lower average cash balances and lower interest rates, partially offset by reduced interest expense as a result of decreases in capital lease and notes payable balances. Interest income consists of earnings on our cash and cash equivalents, short-term investments and restricted cash. Interest expense consists of interest expense on capital leases and notes payable.

Other income (expense), net for the nine months ended March 31, 2002 was $1.1 million. During the quarter ended September 30, 2001, we sold substantially all of the assets of RocketCash and recognized a gain of approximately $1.0 million.

As a result of operating losses and our inability to recognize a benefit from our deferred tax assets, we have not recorded a benefit for income taxes for the quarters and nine months ended March 31, 2002 and 2001.

Historical Three and Nine months ended March 31, 2002 Compared to
The Historical Three and Nine months ended March 31, 2001

The Merger was accounted for under the purchase method of accounting for business combinations. As such, the historical results reflect only the financial impact of the Merger subsequent to September 25, 2001 and prior to that date reflect the results of operations of NetZero only. The

following table sets forth, for the periods presented, selected unaudited historical statements of operations data (in thousands):

Billable services revenues for the three months ended March 31, 2002 were $44.4 million, which represented an increase of $42.6 million compared to the three months ended March 31, 2001. Billable services revenues for the nine months ended March 31, 2002 were $93.1 million, which represented an increase of $90.8 million compared to the nine months ended March 31, 2001. Billable services revenue increased as a result of the launch of the NetZero Platinum billable service plan during the March 2001 quarter and the acquisition of Juno in the September 2001 quarter, which added over 875,000 pay users to our billable services. As of March 31, 2002 we had approximately 1.6 million pay users compared 75,000 at March 31, 2001. The NetZero Platinum billable service plan has benefited from limitations imposed on our free services during 2001, which resulted in a number of free subscribers converting to our billable services, and advertising expenditures promoting our billable services.

Advertising and commerce revenues for the three months ended March 31, 2002 were $6.5 million, which represented a decrease of $4.5 million, or 40.9%, from $11.0 million for the three months ended March 31, 2001. Advertising and commerce revenues for the nine months ended March 31, 2002 were $19.9 million, which represented a decrease of $23.0 million, or 53.6%, from $42.9 million for the nine months ended March 31, 2001. Advertising and commerce revenues decreased as a result of the

termination of several significant advertising agreements during 2001, the most significant of which were LookSmart and Cisco, decreased advertising inventory as a result of usage limitations imposed on our free services and continued overall softness in the online advertising market, including significant declines in advertising rates and the number of advertisers on our services. During the three and nine months ended March 31, 2001 we generated approximately $3.3 million and $16.2 million of advertising and commerce revenues from LookSmart and Cisco combined.

Cost of billable services for the three months ended March 31, 2002 were $22.0 million, which represented an increase of $19.2 million, from $2.8 million for the three months ended March 31, 2001. Cost of billable services for the nine months ended March 31, 2002 were $53.5 million, which represented an increase of $50.5 million from $3.0 million for the nine months ended March 31, 2001. Cost of billable services increased over the prior year periods as a result of the launch of the NetZero Platinum billable service plan during the March 2001 quarter and the acquisition of Juno in the September 2001 quarter, which added over 875,000 pay users to our billable services. As of March 31, 2002 we had approximately 1.6 million pay users compared to approximately 75,000 as of March 31, 2001.

Cost of free services for the three months ended March 31, 2002 were $6.8 million, which represented a decrease of $15.3 million, or 69.2%, from $22.1 million for the three months ended March 31, 2001. Cost of free services for the nine months ended March 31, 2002 were $28.7 million, which represented a decrease of $33.4 million, or 53.8%, from $62.1 million for the nine months ended March 31, 2001. Cost of free services decreased as a result of decreased telecommunications costs as a result of hourly and geographical limitations imposed on our free users, a decrease in average hourly usage of our free services, a decrease in the average hourly cost of telecommunications services purchased, a decrease in customer support costs associated with our free users, a decrease in personnel and overhead costs allocated to free services due to the decrease in free users as a percentage of total active free and pay users. These decreases were partially offset by the addition of the Juno free user base as a result of the Merger. At March 31, 2002, we had approximately 3.6 million active free users of our service compared to 3.8 million active free users as of March 31, 2001.

Sales and marketing expenses for the three months ended March 31, 2002 were $10.8 million, which represented a decrease of $0.2 million, or 1.8%, from $11.0 million for the three months ended March 31, 2001. Sales and marketing expenses for the nine months ended March 31, 2002 were $25.0 million, which represented a decrease of $14.6 million, or 36.9%, from $39.6 million for the nine months ended March 31, 2001. Sales and marketing expenses for three months ended March 31, 2002 decreased as a result of a $1.3 million decrease in sales and marketing costs directly related to NetZero's former RocketCash subsidiary and a decrease of $0.3 million in rent costs associated with regional sales offices, partially offset by a $1.2 million increase in customer acquisition costs and $0.3 million increase personnel-related expenses as a result of our acquisition of Juno. Sales and marketing expenses for the nine months ended March 31, 2002 decreased as a result of a $13.2 million decrease in advertising and promotion expenses and a $2.4 million decrease in sales and marketing costs directly related to NetZero's former RocketCash subsidiary, partially offset by a $0.7 million increase in personnel-related costs as a result of our acquisition of Juno.

Product development expenses for the three months ended March 31, 2002 were $5.9 million, which represented an increase of $0.7 million, or 13.5%, from $5.2 million for the three months ended March 31, 2001. Product development expenses for the nine months ended March 31, 2002 were $17.1 million, which represented an increase of $1.8 million, or 11.8%, from $15.3 million for the nine months ended March 31, 2001. Product development expenses for the three months ended March 31, 2002 increased as a result of a $1.6 million increase in personnel-related expenses as a result of our acquisition of Juno, which was partially offset by a $0.7 million decrease in product development costs directly related to NetZero's former RocketCash subsidiary and a $0.2 million decrease is hardware and software maintenance expense. Product development expenses for the nine months March 31, 2002 increased as a result of a $3.7 million increase in personnel-related expenses and a $0.2 million increase in depreciation expense as a result of our acquisition of Juno, which were partially offset by a $1.6 million decrease in product development costs directly related to NetZero's former RocketCash subsidiary and a $0.5 million decrease is hardware and software maintenance expense.

General and administrative expenses for the three months ended March 31, 2002 were $5.9 million, which represented an increase of $0.7 million, or 13.5%, from $5.2 million for the three months ended March 31, 2001. General and administrative expenses for the nine months ended March 31, 2002 were $18.6 million, which represented an increase of $2.5 million, or 15.5%, from $16.1 million for the three months ended March 31, 2001. General and administrative expenses for the three months ended March 31, 2002 increased as a result of a $0.5 million increase in personnel-related expenses, a $0.5 million increase in rent and other occupancy-related expenses and a $0.4 million net increase in overhead and administrative expenses as a result of our acquisition of Juno, which were partially offset by a $0.4 million decrease in general and administrative expenses directly related to NetZero's former RocketCash subsidiary and a $0.3 million decrease in bad debt expense. General and administrative expenses for the nine months ended March 31, 2002 increased as a result of a $1.8 million increase in personnel-related expenses, a $1.9 million increase in rent and other occupancy related expenses and a $0.1 million net increase in overhead and administrative expenses as a result of our acquisition of Juno, which were partially offset by a $0.5 million decrease in general and administrative expenses directly related to NetZero's former RocketCash subsidiary and a $0.8 million decrease in bad debt expense.

Stock-based charges are attributable to the following operating expense line items:

Amortization of stock-based charges for the three months ended March 31, 2002 were $2.2 million, which represented a decrease of $2.4 million, or 52.2%, from $4.6 million for the three months ended March 31, 2001. Amortization of stock-based charges for the nine months ended March 31, 2002 were

$5.8 million, which represented a decrease of $9.9 million, or 63.1%, from $15.7 million for the nine months ended March 31, 2001. The decrease in amortization of stock-based charges is a result of the sale of our RocketCash subsidiary in the September 2001 quarter, the cancellation or forfeiture of issued securities that were previously being amortized over their vesting period and decreased stock-based charges associated with our acquisition of Simpli.com in August 2000. These decreases were partially offset by increased stock-based charges in connection with the accelerated vesting of certain previously granted stock options and restricted stock awards that occurred in October 2001 and March 2002.

Amortization of goodwill and intangible assets for the three months ended March 31, 2002 and 2001 were $4.7 million and $6.5 million, respectively. Amortization of goodwill and intangible assets for the nine months ended March 31, 2002 and 2001 were $9.5 million and $16.7 million, respectively. These decreases in 2002 were due to the write-down of goodwill and intangible assets totaling $48.6 million that was recorded during the March 2001 quarter, which reflected the amount by which the carrying amount of the intangible assets exceeded their respective fair market values. The write-down consisted of $33.5 million for goodwill and $15.1 million of other acquired intangible assets and other assets. These decreases were partially offset by an increase in amortization of intangible assets resulting from our acquisition of Juno in the September 2001 quarter. In connection with this acquisition, we recorded $59.8 million in other intangible assets and $10.0 million in goodwill. The intangible assets are being amortized over periods ranging from one to seven years and we are not amortizing the goodwill associated with our acquisition of Juno in accordance with SFAS No. 142.

During the nine months ended March 31, 2002, we recorded approximately $3.1 million in restructuring costs, which consisted of $0.8 million in employee termination benefits and $2.3 million in lease exit costs, which includes a charge of approximately $0.8 million to write-off leasehold improvements associated with our former offices in New York. In an effort to streamline our operations in response to changing market conditions, we reduced our workforce by approximately 101 employees during the nine months ended March 31, 2002. Of the 101 employees terminated, 43 were in sales and marketing, 26 were in general and administrative, 23 were in product development, six employees were at RocketCash, and three were in network operations. In addition, we closed our regional offices in San Francisco and Providence and combined NetZero's and Juno's New York offices into one facility. We did not record any restructuring costs in the nine months ended March 31, 2001.

During the nine months ended March 31, 2002 we incurred merger-related costs of $2.1 million. The merger-related costs include consulting fees incurred for the integration of Juno and NetZero's operations and bonuses paid to employees, including employee stay bonuses for certain key Juno employees which we anticipate paying in March 2003. We may incur additional restructuring and merger-related charges of between $3.0 and $4.0 million over the next 12 months. These charges relate to the employee stay bonuses for certain Juno employees that will be paid in March 2003 and are being expensed evenly over the period of performance, additional lease exit costs, and other fees and costs related to the early termination of certain contracts. These charges will be expensed during the period in which they are incurred. We did not record any merger-related costs in the nine months ended March 31, 2001.

Interest income, net for the three months ended March 31, 2002 was $1.1 million, which represented a decrease of $0.9 million, or 45.0%, from $2.0 million for the three months ended March 31, 2001. Interest income, net for the nine months ended March 31, 2002 was $4.0 million, which represented a decrease of $4.4 million, or 52.4%, from $8.4 million for the nine months ended March 31, 2001. These decreases in interest income, net were a result of lower average cash balances and lower interest rates, partially offset by reduced interest expense as a result of decreases in capital lease and notes payable balances. Interest income consists of earnings on our cash and cash equivalents, short-term investments and restricted cash. Interest expense consists of interest expense on capital leases and notes payable.

As a result of operating losses and our inability to recognize a benefit from our deferred tax assets, we have not recorded a benefit for income taxes for the three and nine months ended March 31, 2002 and 2001.

From inception to March 31, 2002, our operations have been financed primarily through the sale of equity securities and, to a lesser extent, cash generated from our billable services and advertising and commerce revenues, net cash acquired from acquisitions, and equipment lease financing. At March 31, 2002, we had approximately $125.9 million in cash, cash equivalents and short-term investments and approximately $6.4 million in restricted cash.

For the nine months ended March 31, 2002, net cash used for operating activities was $17.0 million consisting primarily of operating losses and a decrease in accounts payable and accrued expenses, partially offset by depreciation and amortization, stock-based charges, reductions in restricted cash, accounts receivable and other assets, and an increase in deferred revenue. For the nine months ended March 31, 2001, net cash used for operating activities was $68.4 million which consisted of operating losses and increases in restricted cash and other assets, partially offset by an impairment charge for goodwill and intangible assets, depreciation and amortization, stock-based charges, a decrease in accounts receivable and increases in accounts payable, accrued expenses and deferred revenue.

For the nine months ended March 31, 2002, net cash provided by investing activities was $34.9 million, of which $32.3 million represented the net cash acquired from the acquisition of Juno, and $2.2 million net proceeds from sales and maturities of short-term investments. For the nine months ended March 31, 2001, cash used for investing activities of $58.1 million consisted of net purchases of short-term investments for $45.1 and the balance was for acquisitions and capital expenditures.

Net cash used for financing activities was $8.3 million for the nine months ended March 31, 2002, and related to payments on capital lease and notes payable obligations, and common stock repurchases, partially offset by proceeds from the exercise of stock options. In the nine months ended March 31, 2001 cash used for financing activities was $6.3 million and related primarily to payments on capital lease and notes payable obligations.

Our original business model of offering free Internet access was predicated on deriving revenues from a variety of advertising and online commerce-related arrangements. However, softness in the

advertising market and reduced Internet advertising rates have resulted in declining advertising revenues. We currently believe that online advertising rates have stabilized, however, they may continue to decrease. We have taken steps to address our declining advertising revenues by focusing our efforts on billable services and implementing restrictions designed to decrease the costs of our free services. In addition, we have implemented limitations on operating expenses, particularly with regard to our marketing expenses. We have substantially built out our network infrastructure and, in the near term, do not foresee the need for the same level of capital expenditures we have experienced in the past. In order to generate positive cash flow, we must continue to maintain or increase revenues while controlling telecommunications costs, operating expenses and capital expenditures. Many factors will impact our ability to grow revenues including, but not limited to, the number of new pay users, the rate at which existing pay users cancel their services, the growth or reduction in our free user base, the Internet advertising market, and our ability to sell our existing products and develop new revenue-generating products. We cannot assure you that we will be able to maintain or grow our pay users. In addition, as a result of implementing limitations on our free services, limited marketing of our free services and users of the free services ceasing to use their accounts, we anticipate that our active free user base may continue to decline. We cannot assure you that we will be able to effectively manage our business to decrease our cash flow deficit.

We are continuing to integrate the operations of NetZero and Juno and, as a result, we expect to pay between $3.0 and $4.0 million in restructuring and merger-related costs over the next twelve months. We anticipate that we will realize further synergies in the future particularly in the areas of customer support and billing. However, we cannot assure you that we will be able to successfully integrate all of the operations of NetZero and Juno and realize all such synergies.

We have invested significantly in our network infrastructure, software licenses, furniture, fixtures and equipment and may need to make further investments in the future. The actual amount of capital expenditures will depend on the rate of growth or reduction in our user base, which is difficult to predict and could change dramatically over time. Technological advances may also require us to make capital expenditures to develop or acquire new equipment or technology in order to replace aging or technologically obsolete equipment. We intend to use cash to fund our future operating losses, repurchase outstanding common stock on a limited basis and, in combination with capital lease financing, fund any necessary future capital expenditures. However, we cannot assure you that lease financing will be available on favorable terms, if at all. If lease financing it is not available, we would be required to use a greater portion of cash to fund any capital expenditures.

We currently anticipate that our existing cash, cash equivalents and short-term investments will be sufficient to fund our operating activities, capital expenditures and other obligations for at least the next twelve months. However, if we are not successful in generating sufficient cash flow from operations, we may need to raise additional capital for a variety of reasons including, without limitation, to fund our operations, expand our marketing activities, develop new or enhance existing services or products to respond to competitive pressures or to acquire complementary services, businesses or technologies. We may need to raise additional capital through public or private financings, strategic relationships or other arrangements. This additional funding, if needed, might not be available to us on acceptable terms, or at all. Our failure to raise sufficient capital when needed could have a material adverse effect on the business, results of operations and financial condition. If additional funds were raised through the issuance of equity securities, the percentage of stock owned by the then-current stockholders would be reduced. Furthermore, such equity securities might have rights, preferences or privileges senior to holders of our common stock.

Future minimum lease payments under non-cancelable capital leases are as follows:

Quarter ended June 30, 2002	$	1,297,000
Fiscal year ended June, 30 2003		3,423,000

Total minimum obligations		4,720,000
Less: amounts representing interest		(268,000	)

Present value of minimum obligations		4,452,000
Less: current portion		(4,399,000	)

Non-current portion	$	53,000

We lease our facilities and certain network equipment under non-cancelable operating leases expiring at various periods through 2010. The leases generally contain annual escalation provisions as well as renewal options.

	Year Ended June 30,
2003		3,022,000
2004		1,876,000
2005		1,929,000
2006		1,780,000
Thereafter		4,294,000

Total	$	12,901,000

Under the terms of several multi-year telecommunications services agreements with various service providers, we are currently contractually committed to purchase approximately $18.3 million, $10.3 million and $4.5 million in telecommunications services for the fiscal years ended June 30, 2003, 2004 and 2005, respectively.

with no maximum life). The amortization provisions of SFAS No. 142 apply to goodwill and indefinite-lived intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the amortization provisions do not apply until the Company applies the new accounting rules. The Company will be required to implement SFAS No. 142 in the first quarter of fiscal 2003. The Company is currently evaluating the impact of SFAS No. 142.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which is applicable to financial statements issued for fiscal years beginning after December 15, 2001. The FASB's new rules on asset impairment supersede SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and portions of APB Opinion No. 30, "Reporting the Results of Operations." SFAS No. 144 provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. SFAS No. 144 also requires expected future operating losses from discontinued operations to be displayed in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required. The Company will apply the new accounting rule beginning July 1, 2002 and is in process of evaluating the impact of adopting SFAS No. 144.

Our operating results may fluctuate substantially in the future as a result of a variety of factors, many of which are outside of our control, including those discussed elsewhere in this Form 10-Q. While we currently intend to control our operating expenses and realize the synergies of integrating the operations of NetZero and Juno, we may increase our operating expenses and capital expenditures for a variety of reasons including, without limitation, unanticipated growth in our user base, expansion of our sales and marketing efforts, enhancement of the features and functionality of our services, the development of new services and products, costs associated with integrating acquired companies, upgrading our internal network infrastructure, pursuing new distribution channels and hiring new personnel across all levels of the organization. Expenditures in each of these categories may vary significantly from period to period. While some expenses are fixed in the short-term, significant amounts of our operating expenses are determined on the basis of anticipated growth in revenues. There are risks associated with the timing and achievement of revenue targets due to a variety of factors, and we cannot assure you that revenues will increase commensurately with expenses. As a result of these and other factors, operating results may vary substantially from quarter-to-quarter.

Seasonal trends could affect both costs and revenues generated. To the extent that expenses depend significantly on the amount of usage by subscribers, any seasonal fluctuations in Internet usage could affect expenses during such periods of fluctuation. We anticipate that the summer and year-end vacation and holiday periods will impact user traffic levels. Moreover, the rate at which new users sign up for our service may be related to gifts or purchases of personal computers, which typically increase during the fourth calendar quarter because of the holiday season and may decline during other periods. As a result, billable subscriber registration may be subject to seasonality. However, because our business model has changed and our operating history is limited, it is difficult to accurately predict these trends and plan accordingly. Since operating expenses are based on expectations of future revenues, it is possible that seasonal fluctuations could materially and adversely affect our business, results of operations and financial condition.

In addition to seasonality, there are several other factors that may cause our quarter-to-quarter revenues to fluctuate significantly, including demand for online advertising, changes in advertising rates, increases or decreases in the pricing of our pay services, promotional discounts, fluctuations in our user count, and termination of material contracts. These and other factors may cause significant fluctuations in our quarter-to-quarter revenues.

The timing of implementation of any further limitations on our free services may impact billable subscriber registrations as well as the number of active subscribers on our free services. In October 2001, we implemented additional limitations on NetZero's free service. This resulted in a substantial increase in sign-ups for our billable services in October and a decrease in the number of active free users. Quarterly fluctuations in our subscriber base, both free and pay, may not be indicative of an ongoing trend.

Our billable services revenues and financial results are dependent on the number of pay users on our service. Each month, a significant number of our pay users cancel their service for a variety of reasons. Since the inception of our billable services, the number of new pay users signing up for our services has exceeded the number of users canceling their service, in part as a result of limitations imposed on our free services. Increasing our pay user base involves two components: converting our free service users to our billable services and gaining new pay users who have not previously used our free service. We have experienced, and may in the future experience, decreases in our free user base, which we believe will cause us to rely more heavily on signing up more pay users who have not previously used our free service. In addition, as our pay user base grows, we are required to obtain an increasing number of pay users to replace the users who cancel their service. We are competing directly with other billable service offerings and there is no assurance we will achieve success in signing up new pay users. The average cost to acquire a new pay user in our industry is significantly higher than we anticipate spending, and there is no assurance that we will be able to acquire new pay users at a reasonable acquisition cost. If we experience decreases in the number of new pay users signing up for our billable services, our pay user base is likely to decrease, and our business, results of operations and financial position will be adversely impacted.

We have previously experienced reductions in advertising and commerce revenues from material customers and may experience additional reductions in the future. Our advertising agreement with LookSmart was terminated on January 19, 2001. After the termination of the LookSmart agreement, we experienced a significant decline in revenues derived from search functionality on our start page and we do not anticipate generating the amount of revenue from our start page that we historically experienced. In addition, we derived approximately 5% of our revenues for the quarter ended March 31, 2002 from our agreement with General Motors Corporation. While we have a long-term relationship with General Motors Corporation, they historically have been provided with reductions in their advertising obligations and may be provided additional reductions in the future. We can give no assurance that we will continue to derive the amount of anticipated revenues from General Motors. The termination or renegotiation of material agreements, as well as the timing of orders under material agreements, may cause significant fluctuations in our quarterly advertising and commerce revenues. Our business, results of operations and financial condition will be materially and adversely affected if we are unable either to maintain or renew our material agreements or to replace such agreements with similar agreements with new customers.

Before deciding to invest in our Company or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information in this report and our other filings with the SEC. The risks and uncertainties described below are not the only ones facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations. If any of these risks actually occur, our business, financial condition or results of operations could be seriously harmed. In that event, the market price of our common stock could decline and you may lose all or part of your investment.

The Merger was completed on September 25, 2001. The success of the Merger will depend, in part, on our ability to realize the anticipated synergies from combining the businesses of NetZero and Juno. To realize the anticipated benefits of this combination, members of our management team must implement a business plan that, in addition to addressing the risks discussed elsewhere in this document, will:

If we cannot achieve these objectives, the anticipated benefits of the Merger may not be realized. In particular, the anticipated cost and other synergies may not materialize, which would adversely affect our results of operations and financial condition and harm the market price of shares of our common stock.

We have paid approximately $14.2 million in restructuring and merger-related costs in connection with the Merger and the integration of NetZero's and Juno's operations and anticipate paying additional costs over the next twelve months. Costs that have yet to be paid include additional employee termination benefits, early contract and lease termination costs, employee stay bonuses and other exit costs. While these additional costs are estimated to be between $3.0 million and $4.0 million, we cannot assure you that actual costs will not exceed estimated amounts.

We cannot predict our success because our business model is unproven and changing.

Juno began offering email services in April 1996 and NetZero began offering Internet services in October 1998. Each company has made significant changes to its business model to address changes in the market as well as other factors. We may make additional changes to each company's business model in the future. These factors make it difficult to evaluate or predict our performance. We cannot assure you that our current business model will be successful, that we will not make significant changes to our model or that any changes we make to our model will be successful.

NetZero and Juno have a history of losses and we expect additional losses; our stock price could fall as a result of future losses and negative cash flow.

Both NetZero and Juno have a history of losses and there is no assurance that we will ever become profitable. NetZero incurred net losses of approximately $334.5 million from its inception in July 1997 through September 30, 2001. Juno incurred net losses of approximately $191.3 million from its inception in June 1995 through September 30, 2001. In the quarter ended March 31, 2002, United Online incurred net losses of approximately $7.3 million. Although our strategy is to increase revenues and maximize the profitability of both companies, we cannot assure you that we will be successful in

doing so, or that we will achieve profitability. We may never be successful in implementing our business strategies or in addressing the risks and uncertainties facing our company. Were we to achieve profitability for any particular period, we cannot assure you that we would be able to sustain or increase profitability on a quarterly or annual basis thereafter. If we fail to achieve and maintain profitability, the market price for our common stock would suffer.

Our business is subject to fluctuations that may negatively impact the price of our common stock.

NetZero's and Juno's revenues, expenses and operating results have varied in the past and ours may fluctuate significantly in the future due to a variety of factors including, without limitation, fluctuations in our pay and free user base, changes in the number of hours subscribers use our services, changes in our business model and service offerings, changes in the market for Internet advertising, the effect of material contracts with advertisers and vendors and fluctuations in marketing and telecommunications expenses. In addition, our operating expenses are based on our expectations of our future revenues and are relatively fixed in the short term. We cannot assure you that the expectations or projections made by our management will be achieved by us. Furthermore, we may be unable to adjust spending quickly enough to offset any revenue shortfall, which may cause our business and financial results to suffer.

Due to all of the above factors and the other risks discussed in this section, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of future performance. It is possible that in some future periods our results of operations may be below the projections of our management and expectations of public market analysts and investors. In this event, the price of our common stock is likely to fall.

Our market share and revenues will suffer if we are unable to compete effectively with established and new providers of Internet access services.

Competition for users of Internet access services is intense. We compete for users with established online service and content providers, such as AOL Time Warner, CompuServe and The Microsoft Network; independent national Internet service providers, such as EarthLink and Prodigy; and national long-distance carriers, such as AT&T WorldNet, Verizon and MCI WorldCom. We also compete with local telephone companies and regional and local commercial Internet service providers.

We also face competition from companies that provide broadband Internet access. We do not currently offer broadband services. Juno entered an agreement with AOL Time Warner to utilize their cable network to offer services, but there are numerous operational and other issues that could impact whether Juno will offer these services over AOL Time Warner's Cable systems in the near term, or at all. Furthermore, the agreement with AOL Time Warner is subject to termination by either party and is also subject to approval of the Federal Trade Commission. We expect to offer cable broadband services in the near future pursuant to our agreement with Comcast. We cannot assure you, however, that we will be able to implement such a service successfully, that the service will be offered on other than a limited basis or that we will generate a significant number of subscribers to the service. It is uncertain whether we will offer broadband services on a significant scale. Our failure to offer competitive broadband services on a significant scale will adversely impact our ability to compete for new users.

We expect competition to continue to intensify. Many of our competitors have significantly greater resources and larger marketing budgets, more advanced features and services and lower cost structures that may allow them to profitably offer competing services at a lower price. While many of our competitors price their standard services above our standard offering price, there are other competitors with lower pricing and there is no assurance that we will be price competitive.

There is no assurance that we will be able to compete successfully. Our inability to effectively compete could require us to make significant revisions to our strategies and business model, and would

likely result in increased costs, decreased revenues and the loss of users, all of which could materially and adversely impact our business, financial position and results of operations.

Restrictions on our free services may result in significant reductions in our free user base.

NetZero and Juno have from time to time implemented restrictions and limitations on their free services. As a result of these measures and other factors, we have experienced a decline in our free user base and a decrease in the number of new users registering for our free services.

These measures may adversely impact our reputation as a provider of free services and make it more difficult to recruit new free users. Since a portion of our strategy is to increase our pay user base by converting free users to pay users, reductions in our free user base may adversely impact this strategy in the long-term. We cannot assure you that these measures will not adversely impact our business.

If we are unable to grow our pay user base, we may not be able to generate revenues.

Growth in our pay user base will be critical to our future success. Increasing our pay user base involves two components: converting our free service users to our pay service and gaining new pay users who have not previously used our free service. We have experienced, and may experience in the future, decreases in our free user base, which we believe will cause us to rely more heavily on signing up more pay users who have not previously used our free service. In addition, as our pay user base grows, we are required to obtain an increasing number of pay users to replace the users who cancel their service. We are competing directly with other pay service offerings and there is no assurance we will achieve success in signing up new pay users. The average cost to acquire a pay subscriber in our industry is significantly higher than we anticipate spending, and there is no assurance that we will be able to acquire new pay users at a reasonable acquisition cost. If we experience decreases in our pay user base, our business, results of operations and financial position will be adversely impacted.

We are relying on the migration of free users to pay users as a major source of subscribers to our pay services. Since July 1998, Juno has advertised to its free users encouraging them to upgrade and NetZero initiated a similar campaign in March 2001. There is a risk that repeated exposure to their advertisements may cause their effectiveness to decline. Furthermore, to the extent that our number of active free subscribers declines, we will have a smaller pool of free subscribers to solicit, further reducing the absolute number of potential migrations to our pay services. The rate at which users of the free service upgrade to our pay services has from time to time declined and may continue to decline, which would adversely impact our ability to retain or grow our pay user base.

If we are unable to retain subscribers, our business and financial results will suffer.

Our business and financial results are dependent on the number of subscribers to our services. Our number of active subscribers has a significant impact on our ability to attract advertisers, the number of advertising impressions we have available to sell, and on how many billable service subscribers we can potentially acquire by soliciting users of our free service. Our number of billable service subscribers is critical to our ability to generate revenues. Each month, a significant number of subscribers cancel their service or become inactive and the vast majority of registered users are not actively using our services. This is due to competition, the imposition of limitations on free services, changes in pricing plans and other factors. In addition, there may be significant overlap between NetZero's and Juno's active free user bases, so the actual combined active user base may be less than anticipated.

We anticipate further significant reductions in our free user base if we implement additional restrictions on our free services. We may also in the future make additional changes to the terms or prices of our billable services, which may result in additional billable subscriber attrition. If these or other factors result in the loss of a significant number of subscribers, our business and financial results

will suffer. There is no assurance that we will be able to effectively retain subscribers or generate enough new subscribers to make up for lost subscribers.

Federal Trade Commission action could impact our financial results and marketing practices.

The FTC has been investigating the advertising, billing and cancellation practices of various Internet-related companies, including Juno. As a result of this investigation, Juno and the FTC entered into a consent agreement, which was approved by the FTC on June 29, 2001, after a public comment period. The consent agreement provides for redress payments and specific disclosures or notices regarding, among other things, the cost of its Internet access services, its cancellation terms and local versus long-distance charges, as well as the requirement to provide adequate customer support to process subscriber cancellations. The compensatory payments made to date pursuant to the agreement have not been material. There can be no certainty as to what impact the FTC order, or any other action that may be taken by the FTC, will have on our business.

If we fail to generate significant revenues and derive a profit from our pay services, we may not be able to support our operations.

Our ability to generate significant revenues from our pay services will be critical to our future success. Generating pay revenues includes both increasing our pay user base as well as maintaining or increasing our pricing. Juno has offered a variety of pricing programs and has, in certain cases, increased the pricing to certain users based on their usage. Juno's monthly prices have ranged from $4.95 to $29.95 per month. A significant number of users who have experienced price increases have discontinued their service, which adversely impacts revenues.

Our ability to offer a value-priced pay service will be adversely impacted if subscribers to our pay service use the Internet excessively. We price our standard offering based on the expectation that users will access the Internet for only a limited number of hours each month. If the average monthly usage for our pay subscribers exceeds our expectations, or if our average hourly telecommunications cost increases, we may not be able to operate our value priced pay service profitably. We may have to impose hourly limits on our pay services or increase our standard pricing, either of which could adversely impact our ability to attract and retain users to our pay services or compete effectively.

Advertising revenues are intended to be an important component of our strategy and revenue base going forward. Our revenues from advertising have, from time to time, decreased from quarter to quarter due to a variety of factors, including the deterioration of the online advertising market and the decrease in capital available to Internet companies. We have experienced a number of situations where our advertising arrangements are terminated early, are not renewed, are renewed at significantly lower rates or are repriced during the term of the arrangement. Our success may depend on our ability to effectively target users based on demographic and other information. We may encounter technical, legal and other limitations on this ability.

Competition for Internet-based advertising revenues is intense and the demand for advertising space has been declining. These and other factors are causing Internet advertising rates to decline, and it is possible that rates will continue to decline in the future. Many of our advertising competitors have longer operating histories, greater name recognition, larger user bases, significantly greater financial, technical, sales, development and marketing resources and more established relationships with advertisers than we do. We must also compete with television, radio, cable and print media for a share of advertisers' total advertising budgets. Advertisers may be reluctant to devote a significant portion of their advertising budget to Internet advertising if they perceive the Internet to be a limited or ineffective advertising medium.

In light of these factors, we cannot assure you that we will be able to maintain or grow advertising revenues.

If we are unable to successfully integrate acquisitions into our operations, then we may not realize the benefits associated with such acquisitions and our financial condition and results of operations may be adversely affected.

We may acquire other companies or undertake other business combinations that can complement our current or planned business activities. We are currently evaluating the possibility of acquiring and integrating additional Internet service providers offering pay services. Acquisitions may not be available at the times or on terms acceptable to us, or at all. In addition, acquiring a business involves many risks, including:

We cannot assure you that we will make any further acquisitions, that we will be able to obtain additional financing for such acquisitions, if necessary, or that any acquisitions will be successful.

We also may not realize the benefits associated with our intangible assets, including those associated with acquisitions. For example, during the quarter ended March 31, 2001, NetZero determined the carrying value of its goodwill and other intangible assets was impaired using the undiscounted cash flow method and the market comparison method. An impairment charge relating to goodwill, intangible assets and other assets totaling approximately $48.6 million was recorded during the quarter, reflecting the amount by which the carrying amount of the assets exceeded their respective fair values. The impairment consisted of approximately $33.5 million for goodwill and approximately $15.1 million for other acquired intangible assets and other assets. We cannot assure you that we will not experience similar impairment losses related to the Merger or otherwise in the future. Any such loss could adversely and materially impact our results of operations and financial condition.

We face numerous costs, operational and legal risks, and other uncertainties associated with our provision of free Internet access to consumers. These risks include risks that our paying subscribers will cancel their subscription and switch to our free service and risks that the number of hours our free service users use, and the costs of providing the service, will not decrease, and may increase.

If the number of our subscribers who remain on, or return to, the free service is significant, our business and financial results may suffer. As users of the service spend more time connected, the costs we incur to provide the service increase. If aggregate hours of connection time associated with our free services increase or do not continue to decline, our business and financial results may suffer.

We may not be able to grow or retain our user base if we are unsuccessful in maintaining our brands and marketing our services.

If we are unsuccessful in maintaining and continuing to market the NetZero and Juno brands, we may not be able to grow or retain our user base. Promotion of our brands will depend on our success in providing high-quality Internet products and services. If our users and advertisers do not perceive our existing products and services as high quality, or if we introduce new products or services or enter into new business ventures that are not favorably received by our users and advertisers, then we may be unsuccessful in building brand recognition and brand loyalty in the marketplace.

Our marketing activities may be insufficient to increase or maintain the size of our subscriber base and may be insufficient to develop or maintain awareness of our services. NetZero and Juno have relied on a variety of cash-intensive subscriber acquisition activities in the past, including the distribution of CDs, the acquisition of competitors, fee-based referral agreements and extensive advertising. These activities have been reduced and may be curtailed further in the future, although there is no assurance that subscriber acquisition costs will decrease. If we incur costs in implementing marketing campaigns without generating sufficient new subscribers to our services, or if capital limitations or other factors prevent us from implementing marketing campaigns, or if marketing campaigns undertaken by competitors cause attrition in our subscriber base, our business and financial results will suffer.

Our advertising and commerce revenues would significantly decrease if we lose key marketing and advertising relationships.

We have entered into a number of strategic marketing alliances with third parties. The number of terminations or nonrenewals of various types of advertising contracts by our partners has increased. In particular, Internet companies have scaled back the resources devoted to advertising. In light of the concentration of our advertisers within the Internet industry, we expect that we will continue to experience a significant number of terminations or nonrenewals in the future.

A small number of customers have accounted for, and may in the future account for, a significant portion of our advertising and commerce revenues. Each of NetZero and Juno has previously experienced reductions in revenues from material customers. For example, LookSmart, General Motors and Cisco have been material customers of NetZero. The LookSmart agreement was terminated in January 2001 and the Cisco agreement was terminated in August 2001. NetZero was not able to replace either agreement with a comparable arrangement. While the relationship with General Motors Corporation is long-term, they were recently provided reductions in their advertising obligations and may be provided additional reductions in the future. We can give no assurance that we will continue to derive the amount of anticipated revenues from General Motors.

The termination or renegotiation of significant agreements, as well as the timing of orders under such agreements, has caused, and may in the future cause, significant fluctuations in our quarterly results. Our business, results of operations and financial condition will be materially and adversely affected if we are unable either to maintain or renew our significant agreements or to replace such agreements with similar agreements with new customers.

Our business is dependent on a small number of telecommunications carriers and our inability to maintain agreements at attractive rates with such carriers may negatively impact our business.

Our business substantially depends on the capacity, affordability, reliability and security of our telecommunications networks. Only a small number of telecommunications providers offer the network services we require, and the majority of our telecommunications services are currently purchased from Level3 Communications LLC and UUNET Technologies, Inc., a WorldCom company. Several vendors have ceased operations or ceased offering the services we require, causing us to switch vendors. In

addition, several vendors are experiencing significant financial difficulties and may be unable to perform satisfactorily or to continue to offer their service. The loss of vendors has resulted, and may in the future result, in increased costs, decreased service quality and the loss of users. In particular, the failure of Level3 Communications or UUNET Technologies to continue to provide the scope, quality and pricing of services currently provided could materially and adversely affect our business. Certain of our telecommunications services are provided pursuant to short-term agreements that the providers can terminate or elect not to renew. In addition, each of our telecommunications carriers provides network access to some of our competitors, and could choose to grant those competitors preferential network access or pricing. Many of our telecommunications providers compete, or have announced an intention to compete, with us in the market to provide consumer Internet access. As a result, any or all of our current telecommunications service providers could discontinue providing us with service at rates acceptable to us, or at all, which could materially and adversely affect our business, results of operations and financial condition.

Our business will suffer if the scope or quality of service from our telecommunications carriers is inadequate.

If our third-party telecommunications service providers deliver unacceptable service, the quality of our Internet access service would suffer. In this event, we would likely lose users who are dissatisfied with our service. Since we do not have direct control over our telecommunications carriers' network reliability and the quality of their service, we cannot assure you that we will be able to provide consistently reliable Internet access for our users.

We do not offer Internet access in all areas. Many potential subscribers may be unable to access our services through a point of presence that is within their local calling area. These subscribers may be particularly reluctant to use our service to access the Web, either through our free service or through a billable service, due to the telecommunications charges that they would incur. We cannot be sure if or when additional infrastructure developments by our telecommunications providers will establish points of presence that cover these areas at costs acceptable to us.

If we fail to manage our telecommunications or our internal network capacities, our service levels may suffer or we may experience increased per-user costs.

We will have to accurately anticipate our future telecommunications capacity needs within lead-time requirements. If we fail to procure sufficient quantities of telecommunications services, we may be unable to provide our users with acceptable service levels. We also run the risk of purchasing excessive amounts of telecommunications services. In that event, we would be required to bear the costs of excess telecommunications capacity without commensurate increases in revenues or subscriber usage. NetZero and Juno have recently experienced decreases in telecommunications usage in excess of the amounts anticipated when entering into certain agreements for telecommunications services. This has resulted in significant excess capacity in the near term, which may result in increased costs per user on an hourly basis if we are not able to implement the synergies contemplated by the Merger. Our failure to effectively manage telecommunications costs would likely have a material adverse effect on our business, results of operations, financial position and cash flow.

In addition, we may from time to time experience increases in our telecommunications usage, which exceed our then-available telecommunications capacity and the capacity of our internal servers. As a result, users may be unable to register or log on to our service, may experience a general slow-down in their Internet access or may be disconnected from their sessions. Excessive user demand could also result in system failures of our internal server networks, which would prevent us from generating advertising revenues. Inaccessibility, interruptions or other limitations on the ability to access our service due to excessive user demand, or any failure of our servers to handle user traffic, could have a material adverse effect on our reputation and our revenues.

We may not successfully develop and market new products in a timely or cost-effective manner; consumers or advertisers may not accept our new products.

We may not be able to compete effectively if we are not able to adapt to changes in technology and industry standards, and to develop and introduce new and enhanced products and service offerings. New products may be dependent on our obtaining needed technology or services from third parties. We also believe that our ability to compete successfully will also depend upon the continued compatibility of our services with products offered by various vendors.

We have expended, and may in the future expend, significant resources developing and implementing new products. Product development involves a number of uncertainties, including unanticipated delays and expenses. New products may have technological problems or may not be accepted by our users or advertisers. Several of the new products we have offered, or intend to offer, are intended to generate additional revenues for us. There is no assurance that such products will provide us with any meaningful revenue. In particular, the expansion of a broadband service offering, including a cable offering, could result in significant expenses without a commensurate increase in revenues.

We may not be able to compete effectively if we are not able to protect our proprietary rights.

If we are not able to protect our proprietary rights, we may not be able to compete effectively. We principally rely upon patent, copyright, trade secret and contract laws to protect our proprietary technology. We cannot be certain that we have taken adequate steps to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technologies. In addition, since we provide our Internet access software for free, we are extremely susceptible to various forms of unauthorized use of our software. These actions could adversely affect our brand names.

In addition, both Juno and NetZero have engaged in lawsuits and expended significant resources attempting to enforce their proprietary rights. We may attempt to enforce our proprietary rights in the future, which could result in significant costs without a corresponding economic or competitive benefit.

We may incur substantial costs and diversion of management resources if we are accused of infringing upon the proprietary rights of others.

Third parties may assert claims against us for infringement of their proprietary rights and these claims may be successful. In addition, a number of third-party owners of patents have claimed to hold patents that cover various forms of online transactions or online technology. As with other online service providers, patent claims could be asserted against us based upon our services or technologies. NetZero and Juno have had claims asserted against them in the past although they do not believe that any claims to date are material to their businesses.

We could incur substantial costs and diversion of management resources in the defense of any claims relating to proprietary rights. Parties making these claims could secure a judgment awarding substantial damages as well as injunctive or other equitable relief that could effectively block our ability to use our products in the United States or abroad. If a third party asserts a claim relating to proprietary technology or information against us, we may seek licenses to the intellectual property from the third party. We cannot be certain, however, that third parties will extend licenses to us on commercially reasonable terms, or at all. If we fail to obtain the necessary licenses or other rights, it could materially and adversely affect our ability to operate our business.

A security breach, virus or inappropriate use by Internet users could disrupt our service.

The future success of our business will depend on the security of our network and, in part, on the security of the network infrastructures of our third-party telecommunications service providers. In addition, the sending of "spam" through our network could result in third parties asserting claims against us. Unauthorized or inappropriate access to our computer systems, including by current or former employees, could potentially jeopardize the security of confidential information, including credit card information, and that could cause losses to our users or us. Users or third parties may also potentially expose us to liability by "identity theft." Users or others may assert claims of liability against us as a result of any failure by us to prevent these network malfunctions and security breaches. Although we intend to use industry-standard security measures, such measures have been circumvented in the past, and we cannot assure you that these measures will not be circumvented in the future. We also cannot assure you that the security measures of our third-party network providers, providers of billing or customer services or other vendors will be adequate. In addition to potential legal liability as a result of computer viruses or other inappropriate uses or security breaches, we may have to interrupt, delay, or temporarily cease service to our users, which could have a material adverse effect on our revenues and could also result in increased user turnover.

If our software or hardware contains errors, or if we encounter difficulties integrating our systems and technologies, our business could be seriously harmed.

The software and hardware used to operate and provide our services is complex and may contain undetected errors or failures. We have in the past encountered, and may in the future encounter, errors in the software or hardware used to operate our business and provide our services. This has resulted in, and may in the future result in, a number of adverse consequences, which have included or may include:

We have experienced some technical and customer support issues associated with our products and software releases. These issues have resulted in users discontinuing our service and have adversely impacted our revenues. A number of NetZero's and Juno's material technologies and systems, including their software client systems, billing systems, ad-serving technologies and customer relationship management systems, are based on different platforms or are sourced from different vendors. To the extent we attempt to integrate these technologies and systems, we may experience a number of difficulties, errors, failures and unanticipated costs. In addition, virtually every aspect of NetZero's internal operations is dependent upon software provided by Oracle and any significant failure of this software could materially and adversely affect our business. We cannot assure you that we will not experience significant problems in the future.

We are dependent on third parties for technical and customer service support and our business may suffer if they are unable to provide these services, cannot expand to meet our needs, or terminate their relationships with us.

Our business and financial results depend, in part, on the availability and quality of live technical and customer service support services. We outsource most of these functions from ClientLogic Corporation pursuant to an agreement that terminates in June 2003. As a result, we maintain only a small number of internal customer service personnel. We are not equipped to provide the necessary range of customer service functions in the event that ClientLogic becomes unable or unwilling to offer

these services to us. At times, Juno's subscribers have experienced lengthy waiting periods to reach representatives trained to provide the technical or customer support they require. Maintaining desired customer support levels may require significantly more support personnel than are currently available to us, or significantly greater expense than we feel it is appropriate, or than we are able, to incur. If our relationship with ClientLogic terminates and we are unable to enter into a comparable arrangement with a replacement vendor, if our current vendor is unable to provide the quality and quantity of service required, or if we are unable to develop internally the additional customer service and technical support capacity we expect to need, our business and financial results will suffer.

We are dependent on third-party software to accurately bill subscribers to our various pay services.

The operation of our pay services requires the accurate operation of third party billing software and the implementation of internal control policies and procedures to reduce the incidence of credit card fraud and chargebacks. If errors, defects or malfunctions occur in the operation of our billing system, we could erroneously overcharge customers or under-collect revenue, either of which could adversely affect our business and financial results.

We cannot predict our future capital needs and we may not be able to secure additional financing.

We may need to raise substantial additional funds in the future to fund our operations. Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or not available when required in sufficient amounts or on acceptable terms, we may not be able to devote sufficient cash resources to continue to provide our services in their current form, acquire additional subscribers, enhance or expand our services, respond to competitive pressures or take advantage of perceived opportunities, and our business and financial results may suffer, or we could be forced to cease our operations entirely.

If we are unable to successfully defend against legal actions against us, we could face substantial liabilities.

NetZero and Juno are currently parties to pending legal actions against them. Defending against these lawsuits may involve significant expense and diversion of management's attention and resources from other matters. Due to the inherent uncertainties of litigation, we may not prevail in these actions. In addition, our ongoing operations may continue to subject us to significant litigation and costs in the future. Both the costs of defending lawsuits and any settlements or judgments against us could adversely affect our financial position and results of operations.

Our business could be shut down or severely impacted if a natural disaster occurs.

Our computer equipment and the telecommunications infrastructure of our third-party network providers are vulnerable to damage from fire, earthquakes, power loss, telecommunications failures, and similar events. NetZero has experienced situations where power loss and telecommunications failures have adversely impacted service, although to date such failures have not been material to its operations. A significant portion of our computer equipment, including critical equipment dedicated to our Internet access services, is located at our headquarters in Westlake Village and at facilities in Los Angeles and San Jose, California; Cambridge, Massachusetts; and Jersey City, New Jersey. A natural disaster or other unanticipated problems at our headquarters or at a network hub, or within a third-party network provider's network, could cause interruptions in the services that we provide. Our systems are not fully redundant. Any prolonged disruption of our services due to system failure could result in user turnover and decreased revenues.

Our ability to operate our business could be seriously harmed if we lose members of our senior management team and other key employees.

Our business is largely dependent on the personal efforts and abilities of our senior management, particularly Mark Goldston, our chairman, chief executive officer and president, and other key personnel. Any of our officers or employees can terminate his or her employment relationship at any time. The loss of these key employees or our inability to attract or retain other qualified employees could seriously harm our business and prospects. We do not carry key man life insurance on any of our employees.

We will not be able to grow our business if we are not able to retain or hire additional personnel.

Our future success also depends on our ability to attract, retain and motivate highly skilled technical, managerial, editorial, merchandising, sales, marketing and user service personnel. Competition for such personnel is intense, particularly in the Internet and high technology industry. As a result, we may be unable to successfully attract, assimilate or retain qualified personnel.

Any staff attrition we experience, whether initiated by the departing employees or by us, could place a significant strain on our managerial, operational, financial and other resources. We cannot assure you that we will be able to identify and hire adequate replacement staff promptly, or at all. Both Juno and NetZero have engaged in significant staffing reductions and additional staffing reductions may take place. These reductions may make it more difficult for us to integrate the businesses of NetZero and Juno, manage existing, or establish new, relationships with advertisers, vendors and other parties, or to integrate, expand and improve our service offerings. Our business and financial results could suffer as a result of the staff reductions undertaken to date and from any future staff reductions and attrition that might occur.

Changes in government regulation of the provision of Internet services could decrease our revenues and increase our costs.

Changes in the regulatory environment regarding the Internet could decrease our revenues and increase our costs. As a provider of Internet access services, we are not currently subject to direct regulation by the Federal Communications Commission. However, some telecommunications carriers have sought to have communications over the Internet regulated by the FCC in the same manner as other more traditional telecommunications services. Local telephone carriers have also petitioned the FCC to regulate Internet service providers in a manner similar to long distance telephone carriers and to impose access fees on these providers and some developments suggest that they may be successful in obtaining the treatment they seek. In addition, we operate our services throughout the United States, and regulatory authorities at the state level may seek to regulate aspects of our activities as telecommunications services. As a result, we could become subject to FCC and state regulation as Internet services and telecommunications services converge.

Changes in, or interpretations of, laws regarding consumer protection could subject us to liability or cause us to change our practices.

Consumer protection laws and enforcement actions regarding advertising and user privacy, especially relating to children, are becoming more prevalent. The FTC has conducted investigations into the privacy practices of companies that collect information about individuals on the Internet and has also investigated a variety of Internet service providers, including Juno, in connection with marketing and disclosure practices. Various state agencies as well as individuals have also asserted claims against, or instituted inquiries into, Internet service providers, including Juno and NetZero, in connection with marketing and disclosure practices. There is no assurance that our services and business practices, or changes to our services and business practices, will not subject us to claims and

liability. The enactment of any additional laws or regulations in this area, increased enforcement activity of existing laws and regulations, or claims by individuals could significantly impact our costs or the manner in which we conduct business, all of which could cause our business to suffer and adversely impact our results of operations.

We could be exposed to liability for defamation, negligence and infringement.

Because users download and redistribute materials that are cached or replicated by us in connection with our Internet services, claims could be made against us for defamation, negligence, copyright or trademark infringement, or other theories based on the nature and content of such materials. While we have attempted to obtain safe harbor protection against claims of copyright infringement under the Digital Millennium Copyright Act of 1998, there can be no guarantee that we will prevail in any such claims. We also could be exposed to liability because of third-party content that may be accessible through our services, including links to Web sites maintained by our users or other third parties, or posted directly to our Web site and subsequently retrieved by a third party through our services.

Seasonal trends in Internet usage and advertising sales may negatively affect our business.

Seasonal trends could affect the advertising revenues we generate from operating our Internet services. To the extent that our advertising revenues depend on the amount of usage by our users, seasonal fluctuations in Internet usage could affect our advertising revenues during these periods of fluctuation. In addition, the rate at which new users sign up for our services may vary during certain seasons and holiday periods. Because our operating history is so limited, it is difficult for us to accurately predict these trends and plan accordingly. Since our operating expenses are based on our expectations of future revenues, it is possible that seasonal fluctuations could materially and adversely affect our revenues and our operating results.

NetZero's and Juno's stock prices have been highly volatile; our stock price may be highly volatile and may cause limitations on the trading market for our stock.

The market price of NetZero's and Juno's common stock fluctuated significantly in the past. The market price of our common stock has fluctuated significantly since our stock began trading on the Nasdaq National Market in September and it is likely to continue to be volatile with extreme volume fluctuations. The Nasdaq National Market, where most publicly held Internet companies are traded, has experienced substantial price and volume fluctuations. These broad market and industry factors may harm the market price of our common stock, regardless of our actual operating performance, and for this or other reasons we could continue to suffer significant declines in the market price of our common stock.

Approximately 40 million shares are currently outstanding and available for resale, subject to volume and manner of sale limitations applicable to affiliates under Rule 144. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, or the perception that such sales could occur. These sales also might make it more difficult for us to sell equity securities in the future at a price that we think is appropriate, or at all.

We may issue common stock resulting in dilution to our stockholders, and the dilutive effect of these issuances would increase to the extent that our stock price declines.

Juno entered into a number of relationships in which it may use its common stock to compensate third parties for services, including subscriber referral services, and we may enter into additional such relationships in the future. If the price of our common stock should decline, our electing to pay with common stock would entail issuing a relatively larger number of shares, increasing the dilutive effect on our stockholders, and potentially impairing our ability to execute financing transactions. Additionally, the third parties to whom we issue common stock will generally have registration rights that require us to register these shares of common stock for resale in the public markets. The market price of our common stock could decline as a result of sales of these shares in the market, or the perception that such sales could occur. If we raise additional funds, acquire assets, or obtain goods or services through the issuance of equity securities, stockholders may experience significant dilution of their ownership interest and the newly issued securities may have rights superior to those of our common stock. The dilutive effect of these issuances will be increased to the extent our share price declines.

Our directors will have the ability to exercise significant influence over us.

Our executive officers, directors, and persons and entities affiliated with our executive officers or directors, own in the aggregate approximately 20% of our outstanding common stock. As a result of this concentration of ownership, our executive officers and directors will be able to exercise significant influence over 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 of the Company that may adversely impact stockholders by preventing them from realizing a premium price for their stock in connection with a sale of the Company.

We have anti-takeover provisions which may make it difficult for a third party to acquire us.

Provisions of our certificate of incorporation, our bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders because of a premium price offered by a potential acquiror. In addition, our board of directors adopted a stockholder rights plan on November 15, 2001, which is an anti-takeover measure that will cause substantial dilution to a person who attempts to acquire the company on terms not approved by our board of directors.

We do not plan to pay dividends in the foreseeable future and, as a result, you will need to sell your shares in order to realize a near-term return on your investment.

We intend to retain any future earnings to finance the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Consequently, stockholders will need to sell shares of common stock in order to realize a return on their investment, if any.

We maintain a short-term investment portfolio consisting of commercial paper, U.S. Government or U.S. Government Agency obligations and money market funds. The minimum long-term rating is AA and if a long term rating is not available we require a short-term credit rating of A1 and P1. Increases and decreases in short-term interest rates could have a material impact on interest income from our investment portfolio.

There have been no material developments in the legal proceedings discussed in our Quarterly Report on Form 10-Q filed with the SEC on November 14, 2001 and, as of the date of this Report, there are no new material legal proceedings to report.

No.		Exhibit
3.1*		Amended and Restated Certificate of Incorporation
3.2*		Amended and Restated Bylaws
3.3**		Certificate of Designation for Series A Junior Participating Preferred Stock (included in exhibit 4.1 below).
4.1**		Rights Agreement, dated as of November 15, 2001, between the Company and U.S. Stock Transfer Corporation, which includes the form of Certificate of Designation for the Series A junior participating preferred stock as Exhibit A, and the form of Rights Certificate as Exhibit B
10.1⁺		Amended and Restated Registration Rights Agreement
10.2⁺		Lease Agreement between Westlake Gardens and Registrant
10.3		2001 Employee Stock Purchase Plan
10.4⁺		2001 Stock Incentive Plan
10.5⁺		2001 Supplemental Stock Incentive Plan
10.6⁺		Employment Agreement between the Registrant and Mark R. Goldston
10.7⁺		Amendment to Employment Agreement between the Registrant and Mark R. Goldston
10.8⁺		Stock Pledge Agreement between Registrant and Mark R. Goldston
10.9⁺		Note Secured by Stock Pledge Agreement made by Mark R. Goldston in favor of Registrant
10.10⁺		Employment Agreement between the Registrant and Charles S. Hilliard

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

Delaware		77-0575839
(State or other jurisdiction of incorporation or organization)		(I.R.S Employer Identification No.)
2555 Townsgate Road, Westlake Village, California (Address of principal executive office)		91361 (Zip Code)

PART I. Financial Information
Item 1.	Condensed Consolidated Balance Sheets at March 31, 2002 (unaudited) and June 30, 2001	3
	Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended March 31, 2002 and 2001	4
	Unaudited Condensed Consolidated Statements of Cash Flow for the nine months ended March 31, 2002 and 2001	5
	Notes to the Unaudited Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
PART II. Other Information
Item 1.	Legal Proceedings	51
Item 2.	Changes in Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Submission of Matters to a Vote of Security Holders	51
Item 5.	Other Information	51
Item 6.	Exhibits and Reports on Form 8-K	51
Signatures		53

			March 31, 2002			June 30, 2001
			(unaudited)
Assets
Current assets:
	Cash and cash equivalents		$	69,766,000		$	60,087,000
	Short-term investments			56,136,000			59,129,000
	Restricted cash			6,102,000			13,524,000
	Accounts receivable, net of allowance for doubtful accounts of $395,000 and $354,000 at March 31, 2002 and June 30, 2001			10,321,000			9,027,000
	Other current assets			4,515,000			5,823,000

		Total current assets		146,840,000			147,590,000
Property and equipment, net				20,823,000			28,877,000
Restricted cash				306,000			2,253,000
Goodwill				10,014,000			—
Intangible assets				51,865,000			1,466,000
Other assets				1,363,000			3,677,000

		Total assets	$	231,211,000		$	183,863,000

Liabilities and Stockholders' Equity
Current liabilities:
	Accounts payable		$	24,458,000		$	24,870,000
	Accrued liabilities			9,848,000			5,756,000
	Deferred revenue			14,723,000			4,404,000
	Current portion of notes payable			—			1,710,000
	Current portion of capital leases			4,399,000			4,852,000

		Total current liabilities		53,428,000			41,592,000
Notes payable, less current portion				—			433,000
Capital leases, less current portion				53,000			2,881,000
Commitments and contingencies (Note 10)
Stockholders' equity (Note 8):
	Common stock			4,000			3,000
	Additional paid-in capital			541,019,000			460,991,000
	Treasury stock			(3,512,000	)		—
	Notes receivable from officers			(1,562,000	)		(829,000	)
	Deferred stock-based charges			(763,000	)		(9,708,000	)
	Accumulated other comprehensive income			44,000			867,000
	Accumulated deficit			(357,500,000	)		(312,367,000	)

		Total stockholders' equity		177,730,000			138,957,000

		Total liabilities and stockholders' equity	$	231,211,000		$	183,863,000

		Three Months Ended March 31,						Nine Months Ended March 31,
		2002			2001			2002			2001
Revenues
	Billable services	$	44,419,000		$	1,778,000		$	93,117,000		$	2,316,000
	Advertising and commerce		6,492,000			10,992,000			19,949,000			42,929,000

	Total revenues		50,911,000			12,770,000			113,066,000			45,245,000

Operating expenses
	Cost of billable services (including stock-based charges of $27,000 and $— for the quarters ended March 31, 2002 and 2001, and $96,000 and $— for the nine months ended March 31, 2002 and 2001, respectively)		22,073,000			2,810,000			53,615,000			3,035,000
	Cost of free services (including stock-based charges of $— and $80,000 for the quarters ended March 31, 2002 and 2001, and $60,000 and $319,000 for the nine months ended March 31, 2002 and 2001, respectively)		6,786,000			22,227,000			28,764,000			62,379,000
	Sales and marketing (including stock-based charges of $694,000 and $1,461,000 for the quarters ended March 31, 2002 and 2001, and $539,000 and $4,050,000 for the nine months ended March 31, 2002 and 2001, respectively)		11,578,000			12,490,000			25,576,000			43,667,000
	Product development (including stock-based charges of $283,000 and $1,548,000 for the quarters ended March 31, 2002 and 2001, and $1,175,000 and $5,071,000 for the nine months ended March 31, 2002 and 2001, respectively)		6,378,000			6,760,000			18,459,000			20,394,000
	General and administrative (including stock-based charges of $1,194,000 and $1,515,000 for the quarters ended March 31, 2002 and 2001, and $3,892,000 and $6,303,000 for the nine months ended March 31, 2002 and 2001, respectively)		7,125,000			6,706,000			24,289,000			22,413,000
	Restructuring costs		680,000			—			3,115,000			—
	Amortization of goodwill and intangible assets		4,685,000			6,539,000			9,471,000			16,737,000
	Impairment of goodwill and intangible assets		—			48,622,000			—			48,622,000

	Total operating expenses		59,305,000			106,154,000			163,289,000			217,247,000

Loss from operations			(8,394,000	)		(93,384,000	)		(50,223,000	)		(172,002,000	)

Interest income, net			1,082,000			1,996,000			4,025,000			8,394,000
Other income, net			58,000			—			1,065,000			—

Net loss		$	(7,254,000	)	$	(91,388,000	)	$	(45,133,000	)	$	(163,608,000	)

Unrealized gain (loss) on short-term investments			(468,000	)		395,000			(823,000	)		395,000
Comprehensive loss		$	(7,722,000	)	$	(90,993,000	)	$	(45,956,000	)	$	(163,213,000	)

Basic and diluted net loss per share		$	(0.19	)	$	(3.95	)	$	(1.32	)	$	(7.27	)

Shares used to calculate basic and diluted net loss per share			38,951,000			23,142,000			34,142,000			22,499,000

				Nine Months Ended March 31,
				2002			2001
Cash flows from operating activities:
	Net loss			$	(45,133,000	)	$	(163,608,000	)
	Adjustments to reconcile net loss to net cash used for operating activities:
		Depreciation and amortization			23,679,000			28,653,000
		Impairment of goodwill and intangible assets			—			48,622,000
		Loss (gain) on sale of assets			(198,000	)		71,000
		Allowance for doubtful accounts			41,000			129,000
		Stock-based charges, net			5,761,000			15,743,000
		Other			(81,000	)		(21,000	)
		Changes in operating assets and liabilities (excluding the effects of acquisitions):
			Restricted cash		9,369,000			(2,499,000	)
			Accounts receivable		3,148,000			5,677,000
			Other assets		3,063,000			(4,176,000	)
			Accounts payable and accrued expenses		(17,160,000	)		1,967,000
			Deferred revenue		534,000			1,000,000

		Net cash used for operating activities			(16,977,000	)		(68,442,000	)

Cash flows from investing activities:
	Purchases of property and equipment				(871,000	)		(4,919,000	)
	Purchase of patent rights				(18,000	)		(408,000	)
	Purchase of short-term investments				(46,587,000	)		(97,799,000	)
	Proceeds from sales and maturities of short-term investments				48,756,000			52,702,000
	Proceeds from sale of assets				1,362,000			—
	Cash paid for acquisitions, net of cash acquired				32,307,000			(7,721,000	)

		Net cash provided by (used for) investing activities			34,949,000			(58,145,000	)

Cash flows from financing activities:
	Payments on capital leases				(3,950,000	)		(5,314,000	)
	Payments on notes payable				(2,143,000	)		(1,208,000	)
	Proceeds from exercise of stock options				1,231,000			81,000
	Proceeds from employee stock purchase plan				111,000			233,000
	Common stock repurchases				(3,542,000	)		(59,000	)

		Net cash used for financing activities			(8,293,000	)		(6,267,000	)

Change in cash and cash equivalents					9,679,000			(132,854,000	)
Cash and cash equivalents, beginning of period					60,087,000			201,512,000

Cash and cash equivalents, end of period				$	69,766,000		$	68,658,000

Supplemental disclosure of non-cash investing and financing activities:
	Stock issued for acquisitions			$	76,856,000		$	49,802,000

	Notes receivable from officers in connection with the exercise of stock options			$	700,000		$	—

10.11⁺		Amendment to Employment Agreement between the Registrant and Charles S. Hilliard
10.12⁺		Stock Pledge Agreement between Registrant and Charles S. Hilliard
10.13⁺		Note Secured by Stock Pledge Agreement made by Charles S. Hilliard in favor of Registrant
10.14⁺		Employment Agreement between the Registrant and Frederic A. Randall, Jr.
10.15⁺		Amendment to Employment Agreement between the Registrant and Frederic A. Randall, Jr.
10.16⁺		Employment Agreement between the Registrant and Brian Woods
10.17⁺		Amendment to Employment Agreement between the Registrant and Brian Woods
10.18⁺⁺		Form of Note Secured by Stock Pledge Agreement made by certain officers of the Company in favor of Registrant
10.19⁺⁺		Form of Stock Pledge Agreement between Registrant and certain officers of the Company
10.20⁺⁺		Form of Restricted Stock Purchase Agreement between Registrant and certain officers of the Company

	UNITED ONLINE, INC. (REGISTRANT)
Dated: May 13, 2002	By:	/s/ CHARLES S. HILLIARD Charles S. Hilliard Executive Vice President, Finance and Chief Financial Officer
Dated: May 13, 2002	By:	/s/ NEIL P. EDWARDS Neil P. Edwards Vice President, Finance, Treasurer and Chief Accounting Officer