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OVERVIEW

Vertrue Incorporated and its subsidiaries ("Vertrue", the "Company", "we", "our", or "us") is a leading internet marketing services company. We operate a diverse group of marketing businesses with a unified mission: to provide every consumer with access to savings and services that improve their daily lives.

Our consumer service offerings span healthcare, personal property, security/insurance, discounts, and personals. We combine unique savings opportunities from brand-name vendors and service providers to create compelling value for consumers. To date, over 18 million consumers have enlisted our services, which represent the contributions of over 500,000 vendors.

We operate a group of businesses that have a diverse mix of product and service offerings that reach consumers through direct marketing efforts. We market our services through internet marketing, inbound call marketing, television and newspaper advertising, direct mail, and outbound telemarketing. Our internet marketing efforts have been an area of significant investment over the last three years. Virtually all of our services are now marketed online through a set of diverse internet marketing channels. These channels include portals, search advertising, affiliate network partners, and e-commerce partners. We leverage over a decade of direct marketing experience to tailor our online marketing efforts for maximum productivity. In addition to marketing online, we have significantly increased the use of the internet to deliver our programs and provide service to consumers online. Online marketing as a percentage of total marketing expenditures has increased from 13% in 2004 to 39% in 2006. Revenues driven by these marketing investments have also increased. Revenues before deferral generated through internet marketing efforts were 38% of total revenues before deferral in 2006, compared to 14% in 2004. Looking ahead to 2007, we expect the internet channel to continue to grow.

Our internet marketing services form a key component of a corporate marketing strategy. Our corporate clients use our programs to enhance market presence, strengthen customer affinity, and generate additional value to their existing products or service offerings. In addition to our client-based marketing efforts, we also market our services directly to the consumer through our proprietary internet sites. These sites enable us to refine our offerings, target a broader consumer audience, and generate additional revenue through advertising.

Vertrue continues to develop a portfolio of proprietary internet sites to market programs directly to the consumer. These sites include www.bargain.com, www.privacymatters.com, www.lavalife.com, www.beyourbest.com, www.doctorssayyes.com, and www.breastimplants4you.com. These sites combine unique content and access to services. In addition, by drawing increasing traffic to these sites we should be able to generate additional advertising revenue in the future.

Over the past three years we have successfully transformed our business into a leading internet marketing services company. Our recent growth and transformation is attributable to our sharp strategic focus on the Internet, the development of our in house expertise on how to best market on the internet, and several strategic acquisitions that have enabled us to reach a broader market both in terms of our product and service offerings and direct to consumer marketing expertise.

In April 2004, we broadened the scope of our business by acquiring Lavalife Inc. ("Lavalife"), a personals service. As a result of this acquisition, we became a leading global provider of web-based and interactive voice response ("IVR") based personals service. The acquisition of Lavalife provides us with access to a fast growing consumer category on the internet while expanding our target market. The Company cross-markets the products and services of the Company and Lavalife.

In November 2004, we completed the acquisition of certain of the assets of Bargain Network, Inc. ("Bargain"), a privately held provider of premier pricing services for homes and vehicles. We acquired Bargain in order to expand our direct to consumer marketing presence and to expand our discounted consumer offerings to include personal property.

In January 2005, we completed the acquisition of certain of the assets of My Choice Medical Holdings, Inc. ("MCM"), a privately held advertising and practice management company serving cosmetic surgeons throughout the United States. We acquired MCM in order to expand our consumer offerings to include cosmetic surgery and to capitalize on the success MCM has had in both paid and natural search marketing. We believe paid and natural search marketing could be an area of significant growth in the future.

We have three reportable business segments: Marketing Services, Personals, and Management Services. The Marketing Services business segment primarily provides discounted products and services to consumers and generates recurring, membership-based revenue. The Personals business segment provides web, phone, and mobile personals services and generates transaction-based revenue. The Management Services business segment provides advertising and practice management services to healthcare professionals throughout the United States. Revenues from the Marketing Services and Personals business segments represented 93% of our consolidated total revenues in 2006.

We were incorporated in 1989 in Delaware under the name Cardmember Publishing Corporation. On October 17, 1996, we completed an initial public offering of our stock and changed our name to MemberWorks Incorporated. On October 13, 2004, we began doing business as Vertrue Incorporated and on November 18, 2004, shareholders approved an amendment to our charter formally changing our name to Vertrue Incorporated. The name change was intended to reflect the ever-broadening base of services that we offer to our customers.

MARKETING SERVICES SEGMENT

Products. Our Marketing Services segment designs membership programs that provide consumers with everyday savings, event-oriented discounts, benefits that provide consumers with peace of mind and access to information. We partner with leading, brand name merchants, and with service companies to offer members valuable packages of members-only benefits. Programs are available in English, French, and Spanish and can be customized for specific clients, customer segments, or consumer communities. Our membership programs are packaged around popular spending categories and offer potential savings greater than the program fee. Our membership programs fall into the following four consumer spending categories:

Healthcare Our health, wellness, and self-improvement programs offer savings on nearly every healthcare product and service, including prescription drugs, vitamins and supplements, eye glasses and contact lenses, hearing aides, durable medical equipment, and select consumer products. These programs also offer discounts on professional services, including medical, dental, vision, hearing, chiropractic, alternative medicine, elder care, diet, exercise, and other personal health services. These programs offer real solutions for the uninsured and underinsured.

Personal Property Our personal property programs offer consumers online access to listings of discounted homes and autos. Members also have access to complementary services such as a mortgage center, roadside assistance, lemon checker, and extended warranties.

Security and Insurance Our security and insurance programs offer discounts on products and services that enhance the consumer's sense of security and well-being. These programs provide access to services that help manage privacy and protection, including identity theft insurance, credit card registration, and credit reporting, scoring, and monitoring. Our insurance programs offer competitively priced insurance products, including life, supplemental health, accidental death, short-term and long-term disability, warranty, and identity theft insurance coverage. Our other program benefits include 24-hour protection services, roadside assistance, and financial, tax and retirement consultation services.

Discounts Our discount programs offer exclusive access to members-only savings with leading brand name merchants covering a wide range of consumer spending categories, including travel, transportation, entertainment, dining, shopping, home improvement, and small business. Savings are available both online and offline through discounted gift cards, coupons, promotion codes, and rebates.

Marketing and Distribution. We market all of our programs online through an array of internet marketing channels. These channels are more cost effective than traditional direct marketing methods and provide immediate feedback to refine marketing strategies. Our primary internet marketing channels include:

Portals Vertrue maintains strong advertising relationships with the top internet portals. Our marketing efforts with portals primarily include the placement of banner ads driving traffic to our proprietary internet sites. In 2006, we were ranked among the top 20 in online impressions as measured by Nielsen/NetRatings. Recently we have been pursuing the integration of banner ads with proprietary content to improve response rates.

Affiliate Network Partners We advertise through large promotional-based networks such as the Vendare Group and Commission Junction that drive traffic from the entire spectrum of online channels to their internet properties delivering customers and leads to advertisers. This type of advertising is a low risk, high reward channel as we pay these networks on a pay for performance basis.

E-commerce Partners We partner with leading e-commerce vendors to market our programs through post-transaction upsell opportunities. We are able to leverage our partners' brands to increase conversion rates. Our broad spectrum of product offerings and flexibility allow us to market membership programs that are complementary or attractive to the customer base of the various e-commerce vendors.

Search Advertising Vertrue also maintains strong relationships with major and second-tier search engines for sponsored marketing links. We continue to grow and optimize our marketing performance on several thousand keyword searches.

In addition to our internet marketing channels, Vertrue also employs traditional direct marketing methods to market our programs. These include inbound call marketing, newspaper and magazine advertising, television advertising, direct mail, and outbound telemarketing.

Our inbound call marketing occurs when our partners' inbound callers who meet certain criteria are offered our membership programs by the partner's service representative or by one of our membership service representatives through a call transfer. We pay the partner either a royalty for initial and renewal membership fees or a fee per marketing offer or per sale.

Our membership programs are also delivered through loyalty arrangements with our client partners. Our Marketing Services segment works with its clients to incorporate elements from one or more of the standard membership programs to design a custom program for the client. The client then either provides the customized membership program to its customers as a value-added feature or resells the customized membership program. In some cases, the client provides loyalty memberships to its customers free of charge and pays the periodic membership fee for each customer's membership. In other cases, the client charges a reduced fee to its customer. Under these loyalty programs, we do not pay for the marketing costs incurred to solicit memberships. Instead, the client offering the memberships is responsible for the marketing. Our loyalty programs provide clients with a wide range of benefits to offer or market to their customers and include stand-alone benefits, reward point accumulation and management, gift certificates, merchandise, and travel reward redemption. Our versatility in designing loyalty strategies and providing turnkey execution is essential in supporting and promoting our clients' brands.

Vendors. Our Marketing Services segment has established a large network of vendor relationships that deliver the discounts and services in each of our various membership programs. We evaluate and engage only those vendors who can deliver high quality products and services. Our participating vendors generally benefit by obtaining access to a large number of demographically attractive consumers in a cost effective manner while incurring minimal incremental marketing costs. Specifically, our vendors gain access and marketing exposure to our membership base, and in almost all cases, pursuant to contractual arrangements, provide members-only discounts on products or services. We generally do not receive payments from these vendors for rendering services to our members and, in certain cases, we pay the vendors a fee based on the number of members enrolled in the membership program or based on other agreed-upon factors.

Our contracts with vendors are generally for one year or more, with subsequent one-year renewal terms at our option. In most cases, vendors may cancel contracts only for cause and are subject to notice provisions that provide us time to locate a substitute vendor. Most of our vendor contracts are non-exclusive and require vendors to maintain the confidentiality of the contract terms.

Clients. Our membership programs are marketed, in many cases, through arrangements with our clients, which include banks and other financial institutions, e-commerce companies, direct response television companies, catalog companies, retailers, and other organizations with large numbers of individual customers. These companies have outsourced the implementation of membership programs to providers, such as us, that are able to apply advanced database systems to capture, process, and store consumer and market information, use their experience to provide effective membership programs, and realize economies of scale. In addition, businesses that outsource their membership programs demand that the program provider have the expertise to continue to introduce innovative new programs and have resources, such as extensive vendor networks and an experienced management team, to launch membership programs quickly and successfully. Our clients receive royalty payments in exchange for providing us with new members or access to potential members.

Our Marketing Services segment's clients supply substantially all the information for marketing efforts in accordance with strict consumer privacy safeguards. As a result, our ability to market a new program to an existing customer base or an existing program to a new customer base may depend on first obtaining our client's approval.

Our contracts with our clients typically grant us the right to indefinitely continue to provide membership services directly to the clients' account holders, even if our client terminates its contract. Many of our client contracts may be terminated by the client upon 30 to 90 days notice without cause and without penalty.

In 2006 and 2005, our largest client, West Corporation, accounted for 12% and 14%, respectively, of our total revenues. In 2004, our largest clients, West Corporation and Citibank, N.A (and its affiliates), accounted for 18% and 12%, respectively, of total revenues. The loss of our major clients could have a material effect on our results of operations. The decrease in the concentration of revenue with these clients demonstrates our efforts over the past several years to diversify our business model and increase our direct to consumer marketing thereby diminishing our reliance on key client partners.

Program Enrollment and Billing. When consumers agree to enroll in a program, they generally receive a trial membership. During this time, the member may use the program's services without obligation, as outlined in the marketing solicitation. Membership materials, which include a membership brochure and a membership card with a membership identification number, are either mailed or emailed to the member during the trial period. The brochure outlines in detail the benefits offered and contains a toll-free number and a web site address, which may be used to access membership benefits and information. In the event that a member elects not to participate in the membership program, he or she can call a toll-free number or log on to the web site during the trial period to cancel the service without incurring any additional charges. Trial memberships are generally for a period ranging from 7 to 30 days and there are no conditions with respect to the ability of the consumer to terminate a trial membership.

If the membership is not canceled during the trial period, the member is charged the annual or monthly membership fee, depending upon the applicable payment plan offered. Annual members who do not cancel their memberships after the initial one year membership term receive a renewal notice in advance of each membership year and are charged for the succeeding year's membership fee. During the course of an initial annual membership term or renewal term, a member may cancel his or her membership in the program generally for a pro rata refund of the membership fee based on the remaining portion of the membership period at the time of the cancellation. Monthly members are billed each month after the trial period ends and continue to be billed each month until the membership is cancelled. During 2006, 91% of our Marketing Services segments' new member enrollments were in a monthly payment program. Membership fees vary depending upon the particular services offered in the membership program. Our Marketing Services segment had approximately 5.8 million members as of June 30, 2006 compared to 5.7 million members as of June 30, 2005.

Member Service. Providing high quality service to our members is an extremely important factor in retaining our members and strengthening the affinity of our clients' customers. Currently, our membership call centers are located in Montreal, Canada, Houston, Texas, Omaha, Nebraska, and Chicago, Illinois, with a total of over 1,400 membership service representatives. All of our new membership service representatives are required to attend on-the-job training. Through our training programs, systems and software, we seek to provide members with friendly, rapid and effective answers to their questions. Our members can access their benefits 24 hours a day via the program's web site or automated telephone response technology. We also work closely with our clients' customer service personnel to ensure that their representatives are knowledgeable in matters relating to the membership programs.

Technology. We have invested substantially in new technology, including data warehousing, data mining, and various Internet applications that allow us to effectively and efficiently market our services to potential members. Over the last 12 months, we have specifically invested in further upgrading our marketing applications to state-of-the-art technology platforms, completing deployment of a new internet marketing development plan and deployment platform with advanced marketing optimization capabilities.

We continue to apply substantial resources to plan, develop, and deploy a new Member Management platform based on state-of-the-art technology, including advanced rules engine capabilities. As a new member enrolls on the internet, membership information is immediately interfaced and maintained on a Member Management platform that drives information constantly to the customer service platforms ("CRM") and web sites, as well as to the fulfillment, billing, and data warehousing systems. This approach allows for rapid fulfillment of member information via e-mail or mail, immediate access to benefits such as coupons, credit reports, and discounted gift cards, while facilitating responsive targeted call center and web site interactions. If a member contacts us by phone, the Member Management System interacts with our advanced call routing system to display the member's profile information prior to an employee answering the call. This allows our membership service representatives to access the best possible information prior to serving a given member. Telecommunications systems also monitor the performance quality of the membership service representatives and other aspects of the business through sophisticated reporting capabilities.

To provide the highest quality service to our members, we have deployed a new, more advanced technology platform that offers increased capabilities for members to access their membership benefits via the web sites. In addition, the Marketing Services segment has increased its use of the data warehousing capabilities to review, analyze, and model the membership base, in order to optimize service and market additional products that are most appropriate for each member.

Competition. We believe that the ability to identify, develop, and offer innovative programs, the quality and breadth of programs offered, competitive prices, and in-house marketing expertise are the principal competitive factors in the marketing services industry. Our competitors offer programs which provide services similar to or that compete directly with those we offer. Some of our competitors have substantially larger customer bases and greater financial and other resources. To date, we have effectively competed with our competitors. However, there can be no assurance that our competitors will not increase their emphasis on programs similar to ours, provide programs comparable or superior to ours at lower membership prices, or adapt more quickly to evolving industry trends or changing market requirements, or that new competitors will not enter the market or that clients and vendors will not introduce competing programs of their own. Such increased competition may result in price reductions, reduced marketing margins or loss of market share, any of which could materially adversely affect our business, financial condition and results of operations. Additionally, because contracts between clients and program providers are often exclusive with respect to a particular service, potential clients may be prohibited from contracting with us to promote a program if our services are similar to or overlap with the services provided by an existing program of a competitor.

PERSONALS SEGMENT The Personals segment consists of our Lavalife Inc. ("Lavalife") business. Lavalife customers can choose to connect with other singles through three distinct offerings - web, phone, and mobile. Lavalife's open-minded approach to dating allows customers to choose how they want to "click with other singles" by offering different dating communities including dating, relationships, and intimate encounters. Our interactive services allow customers who want to enhance their social lives, to search for a date, or meet new people to communicate with other customers in a real time, "Anywhere," "Anytime," and "Anyhow" environment. Customers can interact with each other from anywhere in real time by phone, email, instant message, video, or text chat.

We rely on our innovative products, marketing relationships with major media groups, advertising campaigns in large markets, a widely recognized brand name, and an advanced technology infrastructure to acquire new users and to retain our existing customers. In 2006, our marketing initiative with several leading mobile phone carriers generated strong results. To further develop brand loyalty and to encourage return visits, we continue to add features and functionality to our existing service offerings and to introduce new innovative interactive products.

We employ a transactional business model, in which customers buy non-refundable credits up front and spend those credits only when they want to interact with other customers. Our competitors generally employ a subscription-based business model, in which customers pay a fixed periodic fee. We believe a transactional model is more attractive to new customers, who will join due to the lower initial cost and the ability to easily control their spending. Our customers determine when to use their credits to communicate with other customers. Furthermore, once a customer has an account balance, the customer has a strong financial incentive to return to use their remaining credits.

Technology. We utilize an integrated network to support our phone, web, and mobile operations. Our infrastructure is built on state of the art, industry standard, high capacity technology designed to support the significant level of member interaction and a quality experience. The phone-based IVR systems are all voice over internet protocol platform based, and this technology supports such high demand features as live chat, and voice messaging. The network operations center, located in Toronto, Canada, allows the personals business to scale its web, phone, and mobile operations with full remote management capabilities for all services.

Competition. The personals industry is very competitive and highly fragmented. Our primary competitors include numerous online and offline dating and matchmaking services (both free and paid), some of which operate nationwide and some of which operate locally, and the personals sections of newspapers and magazines. In addition to broad-based personals services, there are numerous niche web sites and offline personals services that cater to specific demographic groups.

MANAGEMENT SERVICES SEGMENT The Management Services segment consists of our My Choice Medical Holdings, Inc. business, which provides advertising and practice management services to a network of cosmetic physicians throughout the United States. Consultants assist consumers with locating board certified physicians nearby, schedule initial consultations, offer pre-negotiated fee schedules that are up to 60 percent less than the usual and customary charges, and provide financing, if needed.

GOVERNMENT REGULATION We market our products and services through various distribution channels including internet marketing, inbound call marketing, television and newspaper advertising, direct mail and telemarketing. These channels are regulated at both the state and federal levels and we believe that these marketing methods may increasingly be subject to such regulation, particularly in the area of consumer privacy. Regulations may limit our ability to solicit new members or to offer one or more products or services to existing members. The telemarketing industry has become subject to an increasing amount of federal and state regulation. For example, the Federal Telephone Consumer Protection Act of 1991 limits the hours during which telemarketers may call consumers and prohibits the use of automated telephone dialing equipment to call certain telephone numbers. Additionally, the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 and Federal Trade Commission ("FTC") regulations, including the Telemarketing Sales Rule, as amended, promulgated thereunder, prohibit deceptive, unfair or abusive practices in telemarketing sales. Both the FTC and state attorneys general have authority to prevent marketing activities deemed by them to be "unfair or deceptive acts or practices." Further, some states have enacted laws and others are considering enacting laws targeted directly at regulating telemarketing and/or internet marketing practices, and there can be no assurance that any such laws, if enacted, will not adversely affect or limit our current or future operations. Compliance with these regulations is generally our responsibility and we could be subject to a variety of enforcement and/or private actions for any failure to comply with such regulations. Our provision of products and services requires us to comply with certain state regulations, changes in which could materially increase our operating costs associated with complying with such regulations. Noncompliance with any rules and regulations enforced by a federal or state consumer protection authority may subject us or our management to fines or various forms of civil or criminal prosecution, any of which could have a material adverse affect on our business, financial condition and results of operations. Also, the media often publicizes perceived noncompliance with consumer protection regulations and violations of notions of fair dealing with consumers that make the membership programs industry susceptible to peremptory charges of regulatory noncompliance and unfair dealing by the media.

We currently maintain rigorous security and quality controls that are intended to ensure that all of our marketing practices meet or exceed industry standards and all applicable state and federal laws and regulations. We only collect and maintain customer data that is necessary to administer our business activities, such as a customer's name, address and encrypted billing information and only public information is used for marketing and modeling purposes, such as demographic, neighborhood, and lifestyle data.

FINANCIAL INFORMATION ABOUT SEGMENTS AND GEOGRAPHIC AREAS See Note 17 to the consolidated financial statements in Item 8 of this report for financial information about our segments and geographic areas.

EMPLOYEES As of June 30, 2006, we employed 1,603 persons on a full-time basis and 768 on a part-time basis. Our employees are not represented by a labor union. We believe our employee relations are good.

AVAILABLE INFORMATION Our Internet address is http://www.vertrue.com. Information on our web site is not a part of this report.

We make available, free of charge through our web site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Section 16 filings, Code of Conduct, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission ("SEC"). You may read and copy any document filed with the SEC on its web site, http://www.sec.gov, or at its Public Reference Room at 100 F Street, N.E., Washington, D.C. 20459. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room.

Item 1A. Risk Factors ------------

The statements in this section describe the major risks to our business and constitute our cautionary statements under the Private Securities Litigation Reform Act of 1995. These risks discussed below and elsewhere in this 2006 Form 10-K should be considered carefully when evaluating our business operations and strategies. Additionally, there may be risks and uncertainties that we are not aware of or that we currently deem immaterial, which may become material factors affecting our operations and business success. Many of the factors are not within our control.

Our disclosure and analysis in this 2006 Form 10-K contain some forward-looking statements. From time to time, we also provide forward-looking statements in other materials we release to the public. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements. Such statements give our current expectations or forecasts of future events and they do not relate strictly to historical or current facts. We have generally identified such statements by using words such as "anticipate," "estimate," "project," "intend," "plan," "believe," "will," "target," "forecast" and similar expressions in connection with any discussion of future operating or financial performance. All statements that address activities, events or developments that we intend, expect or believe may occur in the future are forward-looking statements. In particular, these include statements relating to future actions, future performance or results of current and anticipated revenues, expenses, interest rates, foreign exchange rates, the outcome of contingencies, such as legal proceedings, and financial results.

We cannot guarantee that any forward-looking statement will be realized. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated, or projected. You should bear this in mind as you consider forward-looking statements.

We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Form 10-Q and Form 8-K reports to the SEC. The risks that follow, individually or in the aggregate, are those that we think could cause our actual results to differ materially from those stated or implied in forward-looking statements. It may not be possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties.

Our long-term profitability depends on our ability to replace the members of our membership programs or customers of our personals services that we lose in the ordinary course of business, and, if we fail to do so, our member or customer base and consequently our revenue will decline. We lose a significant number of members of our membership programs and customers of our personals and management services segments each year in the ordinary course of business. The loss of such members or customers may occur as a result of numerous factors including:

o changing consumer preferences; o competitive price pressures; o general economic conditions; o customer dissatisfaction; and o credit or debit card holder turnover.

Failure to obtain new members or customers who produce revenue at least equivalent to the revenue from the lost members or customers would result in a decrease in the number of our members or customers and, consequently, in a reduction of our revenue. There can be no assurance that we can successfully replace the lost members or customers.

In addition, even if we are successful in adding new members and customers to replace lost revenue, our profitability and cash flow may still decline since we generally incur losses and negative cash flow during the initial stages of an individual membership program and customer procurement, as compared with renewal periods, due primarily to higher marketing costs associated with initial membership and customer procurement.

Increased cancellations could impair our financial condition, results of operations and cash flows. Monthly members of our membership programs are billed each month after their trial period until they cancel their membership. Annual members who cancel their membership at any time during the membership period generally receive a pro rata refund of the membership fee based on the remaining portion of the membership period. Increased cancellations could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

The success of our business depends on the introduction of popular new programs or services or the enhancement of existing membership programs or personals services. Our business is substantially dependent on our ability to develop and successfully introduce popular new membership programs or to provide enhancements to existing membership programs which generate consumer loyalty. Failure to introduce new membership programs in a timely manner could result in our competitors acquiring additional market share. In addition, the introduction or announcement of new innovative membership programs or personals services by us or by others could render existing membership programs or personals services obsolete or result in a delay or decrease in orders for existing membership programs or personals services as customers evaluate new membership programs or personals services. Therefore, the announcement or introduction of new innovative membership programs by us or others, or our failure to introduce new membership programs which generate broad consumer appeal, or our inability to refine our service offerings or introduce new services in our personals business could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We may need to spend more money to advertise to generate the same revenue. We believe that advertising spending on the Internet, as in traditional media, fluctuates significantly with economic conditions. Because a majority of our revenues are derived as a result of our advertising efforts, fluctuations in our advertising spending generally, or with respect to our Internet-based spending specifically, could have an adverse impact on our revenue and our profitability.

We depend on payment processors to process revenue and obtain payments for us. We depend on payment processors to obtain payments for us. The payment processors operate pursuant to agreements that may be terminated with limited prior notice. In the event a payment processor ceases operations or terminates its agreement with us, there can be no assurance a replacement payment processor could be retained on a timely basis, if at all. Any service interruptions, processing cost increases, delays or quality problems could result in delays in collecting payments, decreased revenue and/or increased expense which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We depend in part on the communication channels through which we market and service our products and services such as telephone, internet, and the United States Postal Service. An interruption of, or an increase in the billing rate for, such services could adversely affect our business. We market and service our programs by various communication channels, including telephone, internet, and direct mail. Accordingly, our business is dependent on the quality of the postal and telephone services provided by the U.S. Post Office and various local and long distance telephone companies. Any significant interruption of such services or any limitations in their ability to provide us with increased capacity could adversely impact our business, financial condition, and results of operation. In addition, rate increases imposed by providers would increase our and our marketing partners' operating expenses and could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We depend on third-party vendors to supply the products and services that we market. The failure of these vendors to provide such products or services could result in customer dissatisfaction and could harm our business. We depend on third-party vendors to provide most of the products and services included in the membership programs and services that we market. The third-party vendors generally operate pursuant to non-exclusive agreements with us that may be terminated by the vendor with limited prior notice. There can be no assurance that, in the event a vendor ceases operations, terminates, breaches, or chooses not to renew its agreement with us, a replacement vendor could be retained on a timely basis, if at all. In addition, our third-party vendors are independent contractors and the level and quality of services they provide is outside our control. Any product or service interruptions, delays, or quality problems could result in customer dissatisfaction and membership cancellations and/or termination of marketing partners' relationships with us, which could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

Our business is highly dependent on our existing computer, billing, communications, and other technological systems. Any temporary or permanent loss of any of our systems could have a negative effect on our business, financial condition, and results of operations. Our business depends upon ongoing investments in advanced computer database and telecommunications technology as well as upon our ability to protect our telecommunications and information technology systems against damage or system interruptions from natural disasters, technical failures, and other events beyond our control. In order to compete effectively and to meet the needs of our clients, members, and customers, we must maintain our systems as well as invest in improved technology. A temporary or permanent loss of any of our systems or networks could cause significant damage to our reputation and could result in a loss of revenue.

In addition, we receive credit data electronically, and this delivery method is susceptible to damage, delay, or inaccuracy. A significant portion of our business involves telephonic customer service as well as mailings, both of which depend upon the data generated from our computer systems. Unanticipated problems with our telecommunications and information technology systems may result in a significant system outage or data loss, which could interrupt our operations. Our infrastructure may also be vulnerable to computer viruses, hackers, or other disruptions entering our systems from the credit reporting agencies, our marketing partners, members, customers, or other authorized or unauthorized sources. Any damage to our telecommunications and information technology systems, failure of communication links, or other loss that causes interruption in, or damage to, our operations could have a material adverse effect on our business, financial condition, results of operations, and cash flows.

We rely on our clients to provide customer information to us for certain marketing purposes and to approve our marketing materials. If our clients make significant changes to the materials that decrease our results or if they limit the information that they provide to us, our ability to generate new customers may be adversely affected. Certain of our marketing efforts depend in part on limited customer information being made available to us by our clients. There can be no assurance that our clients will continue to provide us with the use of such customer information.

Our marketing efforts are largely dependent on obtaining approval of the solicitation materials from our clients. We market our programs and services based on tested marketing materials, and any significant changes to those materials that are required by our clients could have a negative impact on our results. The material terms of each marketing campaign must be mutually agreed upon by the parties. There can be no assurance that we will obtain approvals of our marketing materials from our clients, and the failure to do so could have a material adverse impact on our business, financial condition, results of operations, and cash flows.

The loss of key clients could have a material adverse effect on our results of operations. The loss of key clients could have a material adverse effect on our results of operations. Membership programs marketed through one of these clients, West Corporation, accounted for approximately 12% of our total revenue for the fiscal year ended June 30, 2006. Though the status of members that have already joined our membership programs through existing clients would not be affected, a loss of key clients or a decline in their respective businesses would result in the loss of our ability to draw new customers to our membership programs marketed through these clients and could have a material adverse effect on our financial condition, results of operations, and cash flows. There can be no assurance that one or more of our clients will not terminate its relationship with us or suffer a decline in its business.

We market certain of our membership programs through credit card issuers. A downturn in the credit card industry or changes in the marketing techniques of credit card issuers could adversely affect us. Our success is dependent in large part on continued demand for our membership programs within our clients' industries. Certain of our membership programs are marketed through our credit card issuer clients. A significant downturn in the credit card industry or a trend in that industry to reduce or eliminate its use of membership programs could adversely affect our business.

Our failure to protect private data could damage our reputation and cause us to expend capital and other resources to protect against future security breaches and could harm our business. Certain of our services are based upon the collection, distribution, and protection of sensitive private data. Unauthorized users might access that data, and human error or technological failures might cause the wrongful dissemination of that data. If we experience a security breach, the integrity of certain of our services may be affected and such a breach could violate certain of our marketing partner agreements, which could give our marketing partners the right to terminate such agreements with us. We have incurred, and may incur in the future, significant costs to protect against the threat of a security breach. We may also incur significant costs to solve problems that may be caused by future breaches or to prevent such breaches. Any breach or perceived breach could subject us to legal claims from our marketing partners or customers and/or regulatory or law enforcement entities under laws that govern the protection of non-public personal information. Moreover, any public perception that we have engaged in the unauthorized release of, or have failed to adequately protect, private information could adversely affect our ability to attract and retain members and customers. In addition, unauthorized third parties might alter information in our databases, which would adversely affect both our ability to market our services and the credibility of our information.

We depend on key executive and marketing personnel. We are dependent on certain key members of our management and marketing staff, particularly our Chief Executive Officer, Gary Johnson. In addition, we believe that our future success will depend in part upon our ability to attract and retain highly skilled managerial and marketing personnel. We face significant competition for such personnel, and we may be unsuccessful in hiring or retaining the personnel we require. The failure to hire and retain such personnel could have a material adverse effect on our business, financial condition and results of operations.

The industries in which we operate are highly competitive. We may be unable to compete effectively with other companies in our industries that have financial or other advantages and increased competition could lead to reduced market share, a decrease in margins and a decrease in revenue. We believe that the principal competitive factors in the industries in which we operate include the ability to identify, develop, and offer innovative programs and services, the quality and breadth of programs and services offered, competitive pricing and in-house marketing expertise. Our competitors offer programs and services which are similar to, or which compete directly with, those provided by us. In addition, in our Marketing Services segment, we could face competition if our current clients or other companies were to introduce their own in-house programs or services similar to ours.

Some of the existing and potential competitors to our Marketing Services and Personals businesses have substantially larger customer bases and greater financial and other resources than we do. There can be no assurance that:

o our competitors will not increase their emphasis on programs or services similar to those we offer; o our competitors will not provide programs or services comparable or superior to those we provide at lower costs; o our competitors will not adapt more quickly than us to evolving industry trends or changing market requirements; o new competitors will not enter the market; or o other businesses (including our current marketing partners) will not themselves introduce in-house programs or services similar to those we offer.

In order to compete effectively with our competitors, we must be able to provide superior programs and services at competitive prices. In addition, we must be able to adapt quickly to evolving industry trends, a changing market and increased regulatory requirements. Our ability to grow our business may depend on our ability to develop new programs and services that generate consumer interest. Failure to do so could result in our competitors acquiring additional market share in areas of consumer interest. Any increase in competition could result in price reductions, reduced gross margin, and loss of market share, any of which could have a material adverse impact on our business, financial condition, and results of operations.

Additionally, because contracts between clients and program providers in our Marketing Services business are often exclusive with respect to a particular program, potential clients may be prohibited from contracting with us to promote a new program if the products and services provided by our program are similar to, or overlap with, the products and services provided by an existing program of a competitor.

Our industry is increasingly subject to U.S. state, federal, and foreign government regulation, which could impede our ability to market our programs and services and reduce our profitability. We market our membership programs and services through various distribution channels, including internet marketing, inbound call marketing, television and newspaper advertising, direct mail, and telemarketing. These channels are regulated at the state, federal, and foreign levels and we believe that these channels will be subject to increasing regulation, particularly in the area of consumer privacy. Such regulation may limit our ability to solicit new members or customers or to offer products or services to existing members or customers.

Our Membership Services segment is subject to extensive regulation and oversight by the FTC, the Federal Communications Commission (the "FCC"), state attorneys general and other state regulatory agencies, including state insurance regulators and various foreign regulatory entities. Our programs and services involve the use of nonpublic personal information that is subject to federal consumer privacy laws, such as the federal Gramm Leach Bliley Act, and various federal and state telemarketing regulations, including the FTC's Telemarketing Sales Rule, the FCC's Telephone Consumer Protection Act and implementing regulations, as well as various state telemarketing laws and regulations. While we do not believe that the laws and regulations passed to date will have a material impact on our business, additional federal, state or foreign laws and/or regulations, including subsequent amendments to existing laws and regulations, could cause a material adverse impact on our business, financial condition, results of operations, and cash flows.

Compliance with these laws and regulations is generally our responsibility, and we could be subject to a variety of enforcement and/or private actions for any failure to comply such laws and regulations. Any changes to these laws and regulations could materially increase our compliance costs. Noncompliance with any laws and regulations enforced by a state, federal, or foreign consumer protection authority may subject us or our management to fines or various forms of civil or criminal prosecution, any of which could have a material adverse effect on our business, financial condition and results of operations. Also, the media often publicizes perceived noncompliance with consumer protection laws and regulations and violations of notions of fair dealing with consumers and the membership services industry is susceptible to peremptory charges by the media of regulatory noncompliance and unfair dealing.

We are subject to legal actions that could have a negative impact on our financial condition, results of operations, cash flows or reputation. We are involved in claims, legal proceedings, and governmental inquiries related to employment matters, contract disputes, business practices, trademark and copyright infringement claims, and other commercial matters. While we cannot predict the outcome of pending suits, claims, investigations, and inquiries, the cost of responding to and defending such suits, as well as the ultimate resolution of any of these matters, could have a material adverse effect on our business, financial condition, results of operations, cash flows, or reputation.

We may experience operational and financial risks in connection with acquisitions. In addition, some of the businesses acquired by us may incur significant losses from operations or experience impairment of carrying value. Our future growth may depend, in part, on acquisitions. We may experience operational and financial risks in connection with acquisitions. To the extent that we grow through acquisitions, we will need to:

o retain senior management and other key personnel at acquired businesses; and o successfully manage acquisition-related strain on our management, operations, and financial resources and on the management, operations, and financial resources of the acquired company.

We may not be successful in addressing these challenges or any other problems encountered in connection with historical and future acquisitions, and, the failure to do so, could adversely affect our business, financial condition, and results of operations. In addition, we may not achieve the operational synergies and cost savings anticipated in connection with any such acquisition. The failure to realize anticipated benefits of one or more of our acquisitions and the undertaking of future acquisitions could result in potentially diluted issuances of equity securities, additional contingent liabilities, or the impairment of goodwill and/or other intangible assets, any of which could adversely affect our business, financial condition, and results of operations.

We may need to raise additional capital in the future to fund liquidity and capital requirements, which may not be available to us on favorable terms or at all. Our future liquidity and capital requirements will depend upon numerous factors, including the success of our membership programs and other product and service offerings, market developments, potential acquisitions and additional repurchases of our common stock. We may need to raise additional funds to support expansion, develop new products or services, respond to competitive pressures, acquire complementary businesses or take advantage of unanticipated opportunities. The indenture governing our senior secured credit facility and our Senior Notes contain covenants that may restrict our ability to finance operations or capital needs. We cannot be certain that we will be able to obtain adequate financing on favorable terms or at all.

Our quarterly operating results are volatile and may adversely affect the market price of our securities. Our quarterly revenues, expenses, and operating results have varied significantly in the past and may vary significantly from quarter to quarter in the future. Factors which could cause our financial results to fluctuate include:

o increased or decreased cancellation of member enrollments; o the rate of renewal by existing members; o increased default on notes receivables; o our ability to introduce new programs or products or to enhance existing programs or products on a timely basis and the introduction of programs or products by our competitors; o the mix of our client base; o seasonality of the businesses of our clients; o market acceptance and demand for our and our clients' membership programs generally; o the mix of programs we offer and the price points of such programs; o increased commission rates and other compensation required by our clients;

o the mix of our marketing channels; o unanticipated service interruptions; o movement in foreign exchange rates; o adverse outcomes of litigation or regulatory matters; o the availability of vendors to support programs we offer; o the level of enthusiasm for health and fitness, travel, entertainment and leisure activities, and other lifestyle elements underlying our membership programs; and o competitive pressures on selling prices.

Many of these factors are beyond our control. Operating results would be adversely affected if projected revenues for a given quarter are not achieved. In addition, any future acquisitions by us could have a material adverse effect on our results of operations, particularly in quarters immediately following consummation of such transactions, while the operations of the acquired business are being integrated into our operations.

Item 1B. Unresolved Staff Comments -------------------------

Not Applicable.

I