1314475--3/13/2006--SPARK_NETWORKS

related topics

{system, service, information}

{interest, director, officer}

{stock, price, share}

{capital, credit, financial}

{acquisition, growth, future}

{operation, international, foreign}

{financial, litigation, operation}

{product, liability, claim}

{product, market, service}

{cost, operation, labor}

{stock, price, operating}

{regulation, change, law}

{operation, natural, condition}

{personnel, key, retain}

{property, intellectual, protect}

{provision, law, control}

{control, financial, internal}

{competitive, industry, competition}

If our efforts to attract a large number of members, convert members into paying subscribers and retain our paying subscribers are not successful, our revenues and operating results would suffer. Our subscriber acquisition costs vary depending upon prevailing market conditions and may increase significantly in the future. Competition presents an ongoing threat to the performance of our business. Our efforts to capitalize upon opportunities to expand into new vertical affinity markets may fail and could result in a loss of capital and other valuable resources. If we fail to keep pace with rapid technological change, our competitive position will suffer. Our business depends on establishing and maintaining strong brands and if we are not able to maintain and enhance our brands, we may be unable to expand or maintain our member and paying subscriber bases. We may have potential liability under California state and federal securities laws with respect to the grant of share options to certain of our employees, directors and consultants and the exercise of these options. If we are unable to attract, retain and motivate key personnel or hire qualified personnel, or such personnel do not work well together, our growth prospects and profitability will be harmed. Our inability to effectively manage our growth could have a materially adverse effect on our profitability. We expect our growth rates to decline and our operating margins could deteriorate. Our business depends on our server and network hardware and software and our ability to obtain network capacity; our current safeguard systems may be inadequate to prevent an interruption in the availability of our services. The failure to establish and maintain affiliate agreements and relationships could limit the growth of our business. We rely on a number of third-party providers and their failure or unwillingness to continue to perform could harm us. If we fail to develop or maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, current and potential shareholders could lose confidence in our financial reporting, which would harm the value of our shares. We face risks related to our recent accounting restatements, which could result in costly litigation or regulatory proceedings against us. Acquisitions could result in operating difficulties, dilution and other harmful consequences. We may not be effective in protecting our Internet domain names or proprietary rights upon which our business relies or in avoiding claims that we infringe upon the proprietary rights of others. We may face potential liability, loss of users and damage to our reputation for violation of our privacy policy or privacy laws and regulations. We may be liable as a result of information retrieved from or transmitted over the Internet. Our quarterly results may fluctuate because of many factors and, as a result, investors should not rely on quarterly operating results as indicative of future results. We may need additional capital to finance our growth or to compete, which may cause dilution to existing shareholders or limit our flexibility in conducting our business activities. Our limited experience outside the United States increases the risk that our international expansion efforts and operations will not be effective. Our international operations subject us to risks associated with currency fluctuations. Our business could be significantly impacted by the occurrence of natural disasters and other catastrophic events. We hold a fixed amount of insurance coverage, and if we were found liable for an uninsured claim, or claim in excess of our insurance limits, we may be forced to expend a significant capital to resolve the uninsured claim. Our services are not well-suited to many alternate Web access devices, and as a result the growth of our business could be negatively affected. Risks Related to Our Industry The percentage of canceling paying subscribers in comparison to other subscription businesses requires that we continuously seek new paying subscribers to maintain or increase our current level of revenue. Our network is vulnerable to security breaches and inappropriate use by Internet users, which could disrupt or deter future use of our services. We face certain risks related to the physical and emotional safety of our members and paying subscribers. We face risks of litigation and regulatory actions if we are deemed a dating service as opposed to an online personals service. We are exposed to risks associated with credit card fraud and credit payment, which, if not properly addressed, could increase our operating expenses. We face risks associated with our dependence on computer and telecommunications infrastructure. Our business depends, in part, on the growth and maintenance of the Internet, and our ability to provide services to our members and paying subscribers may be limited by outages, interruptions and diminished capacity in the Internet. We are subject to burdensome government regulations and legal uncertainties affecting the Internet that could adversely affect our business. Risks Related to Owning Our Securities The price of our ADSs may be volatile, and if an active trading market for our ADSs does not develop, the price of our ADSs may suffer and decline. Our principal shareholders can exercise significant influence over us, and, as a result, may be able to delay, deter or prevent a change of control or other business combination. Our largest shareholder, Great Hill, also possesses a significant amount of voting power and an ability to elect a director of our company. We have entered into a standstill agreement pursuant to which Great Hill and its affiliates are permitted to acquire additional voting securities of our company in the future and may initiate and participate in any tender, takeover or exchange offer, other business combination or other transaction, such as taking our company private, any of which may be to the detriment of our shareholders. Most of our ordinary shares and ordinary shares issuable upon the exercise of our warrants and options are eligible for sale, which results in dilution and may cause the price of our ADSs to decrease. You may not be able to exercise your right to vote the ordinary shares underlying your ADSs. Your right or ability to transfer your ADSs may be limited in a number of circumstances. Our ordinary shares in the form of ADSs or GDSs are traded on more than one market and this may result in price variations. If we offer any subscription rights to our shareholders, your right or ability to perform a sale, deposit, cancellation or transfer of any ADSs issued after exercise of rights might be restricted. Investors may be subject to both United States and United Kingdom taxes. If you hold shares in the form of ADSs, you may have less access to information about our company and less opportunity to exercise your rights as a shareholder than if you held ordinary shares. Your rights as a shareholder will be governed by English law and will differ from and may be inferior to the rights of shareholders under U.S. law. You may have difficulty in effecting service of process or enforcing judgments obtained in the United States against one of our directors named in this report who is not a resident of the United States.

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1314475--3/13/2006--SPARK_NETWORKS_PLC