##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
 For the transition period from  to
 Commission File Number: 000-50989
 INTERCHANGE CORPORATION
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    33-0849123
(IRS Employer
Identification No.)
 One Technology Drive, Building G
Irvine, CA 92618
 (949) 784-0800
 þ o
 o þ
 Number of shares outstanding at November 4, 2005:
    
    Common:
    
    
    9,130,463Preferred:
    
    
    0
 o þ




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##### Table of Contents



INTERCHANGE CORPORATION
TABLE OF CONTENTS
 PagePART I  FINANCIAL STATEMENTSItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of September 30, 2005 (Unaudited) and December 31, 2004
    
    3Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2004 (Unaudited)
    
    4Consolidated
Statements of Comprehensive Income (Loss) for the three and nine
months ended September 30, 2005 and 2004 (Unaudited)
    
    5Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004 (Unaudited)
    
    6Notes to Consolidated Financial Statements (Unaudited)
    
    7Item 2.
    
    Managements Discussion and Analysis or Plan of Operation
    
    16Item 3.
    
    Controls and Procedures
    
    31PART II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    32Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    32Item 3.
    
    Defaults Upon Senior Securities
    
    32Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    32Item 5.
    
    Other Information
    
    32Item 6.
    
    Exhibits
    
    32Signatures
    
    33Exhibits Filed with this Report
    
    34EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
 2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 INTERCHANGE CORPORATION
 
 CONSOLIDATED BALANCE SHEETS
  September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,838
    
    
    $
    24,617Restricted cash
    
    
    10
    
    
    
    13Marketable securities
    
    
    14,232
    
    
    
    10,388Accounts receivable, net of allowances of $20 and $5, respectively
    
    
    926
    
    
    
    1,313Deferred tax assets
    
    
    
    
    
    
    678Prepaid expenses and other current assets
    
    
    343
    
    
    
    260Total current assets
    
    
    18,349
    
    
    
    37,269Property and equipment, net
    
    
    2,429
    
    
    
    791Intangible assets, net
    
    
    4,353
    
    
    
    Goodwill
    
    
    12,401
    
    
    
    Long-term restricted cash
    
    
    166
    
    
    
    51Deposits
    
    
    37
    
    
    
    37Total assets
    
    $
    37,735
    
    
    $
    38,148LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,655
    
    
    $
    2,320Accrued compensation
    
    
    286
    
    
    
    323Payroll taxes payable
    
    
    17
    
    
    
    261Accrued rent
    
    
    607
    
    
    
    38Accrued royalties
    
    
    664
    
    
    
    Other accrued liabilities
    
    
    421
    
    
    
    340Deferred revenue
    
    
    407
    
    
    
    498Total current liabilities
    
    
    4,057
    
    
    
    3,780Long-term deferred tax liabilities
    
    
    
    
    
    
    151Total liabilities
    
    
    4,057
    
    
    
    3,931Minority interest
    
    
    (1
    )
    
    
    Commitments and contingenciesStockholders equity:Convertible preferred stock, $0.00001 par value; 10,000,000 shares authorized;
none issued and outstanding for all periods presented
    
    
    
    
    
    
    Common stock, $0.00001 par value; 30,000,000 shares authorized;
9,052,307 and 7,953,941 issued and outstanding, respectively
    
    
    
    
    
    
    Accumulated comprehensive loss
    
    
    (158
    )
    
    
    (36
    )Additional paid-in capital
    
    
    48,545
    
    
    
    45,497Accumulated deficit
    
    
    (14,708
    )
    
    
    (11,244
    )Stockholders equity
    
    
    33,679
    
    
    
    34,217Total liabilities and stockholders equity
    
    $
    37,735
    
    
    $
    38,148
  3




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INTERCHANGE CORPORATION
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue
    
    $
    4,058
    
    
    $
    5,375
    
    
    $
    14,722
    
    
    $
    13,101Operating expenses:Search serving
    
    
    3,044
    
    
    
    2,803
    
    
    
    8,857
    
    
    
    6,627Sales and marketing
    
    
    1,456
    
    
    
    1,058
    
    
    
    4,302
    
    
    
    2,649General and administrative
    
    
    961
    
    
    
    601
    
    
    
    2,874
    
    
    
    1,713Research and development
    
    
    654
    
    
    
    374
    
    
    
    1,669
    
    
    
    843Amortization of intangibles
    
    
    257
    
    
    
    
    
    
    
    485
    
    
    
    Non-cash equity based expense
    
    
    22
    
    
    
    2
    
    
    
    102
    
    
    
    11Total operating expenses
    
    
    6,394
    
    
    
    4,838
    
    
    
    18,289
    
    
    
    11,843Operating income (loss)
    
    
    (2,336
    )
    
    
    537
    
    
    
    (3,567
    )
    
    
    1,258Interest and other income (expense)
    
    
    83
    
    
    
    (239
    )
    
    
    623
    
    
    
    (843
    )Income (loss) before income taxes
    
    
    (2,253
    )
    
    
    298
    
    
    
    (2,944
    )
    
    
    415Provision for income taxes
    
    
    514
    
    
    
    10
    
    
    
    520
    
    
    
    29Net income (loss)
    
    $
    (2,767
    )
    
    $
    288
    
    
    $
    (3,464
    )
    
    $
    386Per share data:Basic net income (loss) per share
    
    $
    (0.31
    )
    
    $
    0.15
    
    
    $
    (0.42
    )
    
    $
    0.20Diluted net income (loss) per share
    
    $
    (0.31
    )
    
    $
    0.06
    
    
    $
    (0.42
    )
    
    $
    0.09Basic weighted average shares outstanding
    
    
    8,959,076
    
    
    
    1,922,964
    
    
    
    8,280,887
    
    
    
    1,922,599Diluted weighted average shares
outstanding
    
    
    8,959,076
    
    
    
    4,444,170
    
    
    
    8,280,887
    
    
    
    4,443,805
  4




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INTERCHANGE CORPORATION
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss)
    
    $
    (2,767
    )
    
    $
    288
    
    
    $
    (3,464
    )
    
    $
    386Other comprehensive loss:Foreign currency translation adjustments
    
    
    2
    
    
    
    
    
    
    
    (4
    )
    
    
    Unrealized gain (loss) on marketable
securities
    
    
    (51
    )
    
    
    
    
    
    
    (118
    )
    
    
    Total comprehensive income (loss)
    
    $
    (2,816
    )
    
    $
    288
    
    
    $
    (3,586
    )
    
    $
    386
  5




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##### Table of Contents



INTERCHANGE CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 Nine months endedSeptember 30,2005
    
    
    2004Cash flows from operating activities:Net income (loss)
    
    $
    (3,464
    )
    
    $
    386Adjustments to reconcile net income (loss) to cash (used in) provided
by operating activities:Depreciation and amortization
    
    
    1,000
    
    
    
    156Provision for doubtful accounts
    
    
    19
    
    
    
    7Non-cash equity based expense related to stock option and warrant
issuances
    
    
    102
    
    
    
    11Non-cash interest expense
    
    
    
    
    
    
    73Non-cash interest income
    
    
    (12
    )
    
    
    Loss on disposal of property and equipment
    
    
    54
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    425
    
    
    
    (361
    )Prepaid expenses and other
    
    
    (56
    )
    
    
    (263
    )Deferred tax assets
    
    
    678
    
    
    
    Accounts payable and accrued liabilities
    
    
    (439
    )
    
    
    695Deferred revenue
    
    
    (102
    )
    
    
    133Net cash (used in) provided by operating activities
    
    
    (1,795
    )
    
    
    837Cash flows from investing activities:Capital expenditures
    
    
    (2,828
    )
    
    
    (173
    )Purchases of marketable securities
    
    
    (6,982
    )
    
    
    Proceeds from sales of marketable securities
    
    
    3,032
    
    
    
    Decrease (increase) in restricted cash
    
    
    (112
    )
    
    
    16Decrease in minority interest
    
    
    (1
    )
    
    
    Acquisition, net of cash acquired
    
    
    (15,285
    )
    
    
    Net cash used in investing activities
    
    
    (22,176
    )
    
    
    (157
    )Cash flows from financing activities:Proceeds from issuance of common stock from exercise of options
    
    
    1,267
    
    
    
    Proceeds from issuance of common stock from exercise of warrants
    
    
    1,103
    
    
    
    Payment of notes payable
    
    
    
    
    
    
    (20
    )Payment of financing related costs
    
    
    (174
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    2,196
    
    
    
    (20
    )Effect of currency changes on cash
    
    
    (4
    )
    
    
    Net (decrease) increase in cash and cash equivalents
    
    
    (21,779
    )
    
    
    660Cash and cash equivalents, beginning of period
    
    
    24,617
    
    
    
    699Cash and cash equivalents, end of period
    
    $
    2,838
    
    
    $
    1,359Supplemental cash flow information:Interest paid
    
    $
    
    
    
    $
    100Income taxes paid
    
    $
    19
    
    
    $
    12Non-cash investing and financing transactions:Common stock issued for asset purchase
    
    $
    750Leasehold improvements
    
    $
    547Common stock issued in satisfaction of liabilities
    
    
    
    
    
    $
    200Insurance financing
    
    
    
    
    
    $
    17Capital lease
    
    
    
    
    
    $
    20
  6




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INTERCHANGE CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  1. Basis of presentation
  2. Significant accounting policies
 Principles of consolidation
  Foreign currency translation
  Intangible assets
     Goodwill and Other Intangible Assets
 7




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Stock-based compensation
 Accounting for Stock Issued to
Employees Accounting for
Stock-Based Compensation Accounting for Stock-Based Compensation  Transition and Disclosure
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net income (loss), as reported
    
    $
    (2,767
    )
    
    $
    288
    
    
    $
    (3,464
    )
    
    $
    386Add: Stock-based compensation expense
recorded in accordance with APB No. 25
    
    
    22
    
    
    
    2
    
    
    
    102
    
    
    
    11Deduct: Additional stock-based employee
compensation expense determined under fair
value based method for all award, net of
tax effects
    
    
    (1,214
    )
    
    
    (102
    )
    
    
    (3,486
    )
    
    
    (333
    )Pro forma net loss
    
    $
    (3,959
    )
    
    $
    188
    
    
    $
    (6,848
    )
    
    $
    64Net income (loss) per share:Basic  as reported
    
    $
    (0.31
    )
    
    $
    0.15
    
    
    $
    (0.42
    )
    
    $
    0.20Basic  pro forma
    
    $
    (0.44
    )
    
    $
    0.10
    
    
    $
    (0.83
    )
    
    $
    0.03Net income (loss) per share:Diluted  as reported
    
    $
    (0.31
    )
    
    $
    0.06
    
    
    $
    (0.42
    )
    
    $
    0.09Diluted  pro forma
    
    $
    (0.44
    )
    
    $
    0.04
    
    
    $
    (0.83
    )
    
    $
    0.01
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Risk-free interest rate
    
    
    4.63
    %
    
    
    4.85
    %
    
    
    4.63
    %
    
    
    4.85
    %Expected lives (in years)
    
    
    9.6
    
    
    
    10
    
    
    
    9.6
    
    
    
    10Expected dividend yield
    
    None
    
    None
    
    None
    
    NoneExpected volatility
    
    
    55.79
    %
    
    
    25
    %
    
    
    55.79
    %
    
    
    25
    %
 Net income (loss) per share
 Earnings per Share
  8




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##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Net income (loss)
    
    $
    (2,767
    )
    
    $
    288
    
    
    $
    (3,464
    )
    
    $
    386Denominator:Denominator for basic calculation
weighted average shares
    
    
    8,959
    
    
    
    1,923
    
    
    
    8,281
    
    
    
    1,923Dilutive common stock equivalents:Options
    
    
    
    
    
    
    649
    
    
    
    
    
    
    
    649Warrants
    
    
    
    
    
    
    702
    
    
    
    
    
    
    
    702Convertible preferred stock
    
    
    
    
    
    
    1,170
    
    
    
    
    
    
    
    1,170Denominator for diluted
calculation weighted average
shares
    
    
    8,959
    
    
    
    4,444
    
    
    
    8,281
    
    
    
    4,444Net income (loss) per share:Basic net income (loss) per share
    
    $
    (0.31
    )
    
    $
    0.15
    
    
    $
    (0.42
    )
    
    $
    0.20Diluted net income (loss) per share
    
    $
    (0.31
    )
    
    $
    0.06
    
    
    $
    (0.42
    )
    
    $
    0.09
 New accounting pronouncements
 Share-Based
Payment Stock-based compensation
 9




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##### Table of Contents



3. Composition of certain balance sheet and statement of operations captions
  September 30,
    
    
    December 31,2005
    
    
    2004Furniture and fixtures
    
    $
    188
    
    
    $
    193Office equipment
    
    
    94
    
    
    
    55Computer equipment
    
    
    1,730
    
    
    
    592Computer software
    
    
    560
    
    
    
    315Leasehold improvements
    
    
    587
    
    
    
    Idle assets (not depreciated)
    
    
    
    
    
    
    93,159
    
    
    
    1,164Less accumulated depreciation and amortization
    
    
    (730
    )
    
    
    (373
    )Property and equipment, net
    
    $
    2,429
    
    
    $
    791
  September 30,
    
    
    December 31,2005
    
    
    2004Developed technology
    
    $
    2,233
    
    
    
    Customer contracts and relationships
    
    
    404
    
    
    
    Non-compete agreements
    
    
    261
    
    
    
    Purchased technology
    
    
    1,239Domain name
    
    
    701
    
    
    
    4,838
    
    
    
    Less accumulated amortization
    
    
    (485
    )
    
    
    Intangible assets, net
    
    $
    4,353
    
    
    $
    
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004General and administrative:Non-cash equity based expense
    
    $
    22
    
    
    $
    2
    
    
    $
    102
    
    
    $
    11
 10




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##### Table of Contents



4. Operating segment information
 Disclosures about Segments of an Enterprise and Related Information
   Three month ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue by segment:United States
    
    $
    3,959
    
    
    $
    5,375
    
    
    $
    14,293
    
    
    $
    13,101Europe
    
    
    99
    
    
    
    
    
    
    
    429
    
    
    
    Total revenue
    
    $
    4,058
    
    
    $
    5,375
    
    
    $
    14,722
    
    
    $
    13,101Operating income (loss) by segment:United States
    
    $
    (2,215
    )
    
    $
    537
    
    
    $
    (3,477
    )
    
    $
    1,258Europe
    
    
    (121
    )
    
    
    
    
    
    
    (90
    )
    
    
    Total operating income (loss)
    
    $
    (2,336
    )
    
    $
    537
    
    
    $
    (3,567
    )
    
    $
    1,258
 September 30,
    
    
    December 31,2005
    
    
    2004Total assets by segment:United States
    
    $
    37,537
    
    
    $
    38,148Europe
    
    
    198
    
    
    
    Total assets
    
    $
    37,735
    
    
    $
    38,148
 5. Stock option plans
 1999 Plan
  2000 Plan
  11




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##### Table of Contents



2004 Plan
  2005 Plan
   Weight AverageShares
    
    
    Exercise PriceOutstanding at December 31, 2004
    
    
    1,292,947
    
    
    $
    3.19Granted
    
    
    577,294
    
    
    
    10.69Exercised
    
    
    (424,949
    )
    
    
    2.98Cancelled
    
    
    (211,632
    )
    
    
    8.99Outstanding at September 30, 2005
    
    
    1,233,660
    
    
    $
    5.78Exercisable at September 30, 2005
    
    
    708,648
    
    
    $
    3.95
 12




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##### Table of Contents



Options Outstanding
    
    
    Options ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageContractual
    
    
    Exercise
    
    
    
    
    
    
    ExerciseRange of Exercise Prices
    
    Shares
    
    
    Life
    
    
    Price
    
    
    Shares
    
    
    Price$0.40 - $1.00
    
    
    38,750
    
    
    
    4.1
    
    
    $
    0.40
    
    
    
    38,750
    
    
    $
    0.40$1.01 - $2.00
    
    
    175,000
    
    
    
    7.3
    
    
    $
    2.00
    
    
    
    153,819
    
    
    $
    2.00$2.01 - $3.00
    
    
    214,125
    
    
    
    8.1
    
    
    $
    2.25
    
    
    
    117,439
    
    
    $
    2.25$3.01 - $4.00
    
    
    308,953
    
    
    
    4.4
    
    
    $
    4.00
    
    
    
    308,953
    
    
    $
    4.00$5.01 - $7.00
    
    
    132,182
    
    
    
    9.6
    
    
    $
    5.90
    
    
    
    18,859
    
    
    $
    6.21$7.01 - $9.00
    
    
    175,500
    
    
    
    9.7
    
    
    $
    8.14
    
    
    
    28,122
    
    
    $
    9.00$9.01 - $11.00
    
    
    15,000
    
    
    
    9.7
    
    
    $
    9.90
    
    
    
    9,374
    
    
    $
    9.90$13.01 - $17.00
    
    
    174,150
    
    
    
    9.3
    
    
    $
    15.42
    
    
    
    33,332
    
    
    $
    15.461,233,660
    
    
    
    7.5
    
    
    $
    5.78
    
    
    
    708,648
    
    
    $
    3.95
 6. Warrants
  Weight AverageShares
    
    
    Exercise PriceOutstanding at December 31, 2004
    
    
    2,088,194
    
    
    $
    6.43Exercised
    
    
    (680,861
    )
    
    
    3.14Expired
    
    
    (45,000
    )
    
    
    15.11Outstanding at September 30, 2005
    
    
    1,362,333
    
    
    $
    7.79Exercisable at September 30, 2005
    
    
    1,359,833
    
    
    $
    7.87
  Warrants Outstanding
    
    
    Warrants ExercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageContractual
    
    
    Exercise
    
    
    
    
    
    
    ExerciseRange of Exercise Prices
    
    Shares
    
    
    Life
    
    
    Price
    
    
    Shares
    
    
    Price$0.00 - $2.99
    
    
    59,750
    
    
    
    0.1
    
    
    $
    2.00
    
    
    
    59,750
    
    
    $
    2.00$3.00 - $3.99
    
    
    475,750
    
    
    
    2.7
    
    
    $
    3.54
    
    
    
    475,750
    
    
    $
    3.54$4.00 - $5.99
    
    
    331,683
    
    
    
    1.6
    
    
    $
    4.00
    
    
    
    331,683
    
    
    $
    4.00$6.00 - $9.99
    
    
    15,000
    
    
    
    2.0
    
    
    $
    8.00
    
    
    
    12,500
    
    
    $
    8.00$10.00 - $19.99
    
    
    315,750
    
    
    
    4.1
    
    
    $
    10.00
    
    
    
    315,750
    
    
    $
    10.00$20.00 - $25.53
    
    
    164,400
    
    
    
    4.3
    
    
    $
    25.53
    
    
    
    164,400
    
    
    $
    25.531,362,333
    
    
    
    2.8
    
    
    $
    7.79
    
    
    
    1,359,833
    
    
    $
    7.87
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7. Payroll taxes
     8. Employment agreement
    9. Income taxes
  14




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10. Inspire Infrastructure 2i AB acquisition
  Current assets
    
    $
    159Fixed assets
    
    
    34Developed technology
    
    
    2,233Customer contracts and relationships
    
    
    404Non-compete agreement
    
    
    249Goodwill
    
    
    12,401Long-term assets
    
    
    5Liabilities assumed
    
    
    (120
    )Total purchase price
    
    $
    15,365
  Goodwill and Other Intangible Assets
 11. Subsequent events
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Item 2. Managements Discussion and Analysis or Plan of Operation
 This Quarterly Report on Form 10-QSB contains forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results could differ materially from those anticipated in
the forward-looking statements as a result of certain factors discussed in Risk Factors and
elsewhere in this Report.
 The following discussion and analysis of financial condition and results of operations should be
read in conjunction with the attached consolidated financial statements and related notes thereto,
and with the audited financial statements and related notes thereto as of December 31, 2004 and for
the year ended December 31, 2004 included in our Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on March 9, 2005.
 Overview
   Results of Operations
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating expenses:Search serving
    
    
    75.0
    
    
    
    52.1
    
    
    
    60.2
    
    
    
    50.6Sales and marketing
    
    
    35.9
    
    
    
    19.7
    
    
    
    29.2
    
    
    
    20.3General and administrative
    
    
    23.7
    
    
    
    11.2
    
    
    
    19.5
    
    
    
    13.1Research and development
    
    
    16.1
    
    
    
    7.0
    
    
    
    11.3
    
    
    
    6.4Amortization of intangibles
    
    
    6.3
    
    
    
    
    
    
    
    3.3
    
    
    
    Non-cash equity based expense
    
    
    0.5
    
    
    
    0.0
    
    
    
    0.7
    
    
    
    0.0Total operating expenses
    
    
    157.5
    
    
    
    90.0
    
    
    
    124.2
    
    
    
    90.4Operating income (loss)
    
    
    (57.5
    )
    
    
    10.0
    
    
    
    (24.2
    )
    
    
    9.6Interest and other income (expense)
    
    
    2.0
    
    
    
    (4.5
    )
    
    
    4.2
    
    
    
    (6.4
    )Income (loss) before income taxes
    
    
    (55.5
    )
    
    
    5.5
    
    
    
    (20.0
    )
    
    
    3.2Provision for income taxes
    
    
    12.7
    
    
    
    0.1
    
    
    
    3.5
    
    
    
    0.3Net income (loss)
    
    
    (68.2
    )%
    
    
    5.4
    %
    
    
    (23.5
    )%
    
    
    2.9
    %
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Three months ended September 30, 2005 and 2004
 Revenue
     Search serving
  Sales and marketing
  General and administrative
  Research and development
  Amortization of intangibles
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Non-cash equity based expense
  Interest and other income (expense)
  Provision for income taxes
  Net income (loss)
  Nine months ended September 30, 2005 and 2004
 Revenue
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Search serving
  Sales and marketing
  General and administrative
  Research and development
  Amortization of intangibles
  Non-cash equity based expense
  Interest and other income (expense)
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Provision for income taxes
  Net income (loss)
  Liquidity and Capital Resources
     Inspire Infrastructure 2i AB acquisition
  20




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Payroll tax liability
  New facility lease
  Atlocal asset purchase
  Overture agreement
  Off-Balance Sheet Arrangements
  New accounting pronouncements
 Share-Based
Payment Stock-based compensation
 Risk Factors
 We have historically incurred losses and expect to incur losses in the future, which may impact our
ability to implement our business strategy and adversely affect our financial condition .
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We face intense competition from larger, more established companies, as well as our own Advertiser
Network partners, and we may not be able to compete effectively, which could reduce demand for our
services.
   We rely on our Advertiser Network partners to provide us access to their advertisers, and if they
do not, it could have an adverse impact on our business.
  We are dependent on our Distribution Network partners to provide us with search traffic, and if
they do not, our business could be harmed.
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We released our Local Direct platform in early 2004 and our future success will depend upon the
continued development and enhancement of our services and technologies.
   If we are not successful with our Local.com initiative, our future financial performance may be
affected.
  Our executive officers and certain key personnel are critical to our success, and the loss of these
officers and key personnel could harm our business.
  The market for Internet and paid-search advertising services is in the early stages of development,
and if the market for our services decreases it will have a material adverse effect on our
business, prospects, financial condition and results of operations.
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We expect that our anticipated future growth, including through potential acquisitions, may strain
our management, administrative, operational and financial infrastructure, which could adversely
affect our business.
   On February 28, 2005, we completed the acquisition, through a wholly-owned subsidiary, of all of
the outstanding capital stock of Inspire Infrastructure 2i AB, a Swedish Internet and wireless
local-search technology company. We may not be able to successfully integrate Inspire
Infrastructure 2i ABs operations with our own or realize the anticipated benefits of the
transaction.
  
    
    coordinating expanded business operations in additional geographic areas;
    
    integrating personnel with diverse backgrounds and organizational cultures;
    
    coordinating sales and marketing functions;
    
    retaining key employees, customers or suppliers;
    
    preserving the other important relationships of Inspire Infrastructure 2i AB and Interchange; and
    
    consolidating other corporate and administrative functions.
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We may incur impairment losses related to goodwill and other intangible assets which could have a
material and adverse effect on our financial results.
  We may be subject to intellectual property claims that create uncertainty about ownership of
technology essential to our business and divert our managerial and other resources.
     We may be exposed to risks associated with our international operations, which may adversely affect
our business.
  
    
    localization of our services, including translation into foreign languages;
    
    unexpected changes in foreign regulatory requirements, including Internet and technology regulations;
    
    longer accounts receivable payment cycles and difficulties in collecting accounts receivable;
    
    difficulties managing and staffing international operations;
    
    potentially adverse tax consequences, including foreign tax systems and restrictions on
the repatriation of earnings;
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
    
    maintaining and servicing computer hardware in distant locations;
    
    complying with a wide variety of foreign laws and different legal standards; and
    
    reduced or varied protection for intellectual property rights in some countries.
  We may be subject to lawsuits for information displayed on our websites and the websites of our
advertisers, which may affect our business.
  Government and legal regulations may damage our business.
  If we do not deliver traffic that converts into revenue for advertisers, then the advertisers may
pay us less for their listings or discontinue listings with us.
  If we fail to detect click-through fraud, we could lose the confidence of our advertisers, thereby
causing our business to suffer.
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Failure to adequately protect our intellectual property and proprietary rights could harm our
competitive position.
  We may experience downward pressure on our bid prices if advertisers do not obtain a competitive
return on investment, which could have a material and adverse effect on our financial results.
 
 One Advertiser Network partner has provided a substantial portion of our revenue; the loss of this
partner may have a material adverse effect on our operating results.
  One of our customers accounts for a significant portion of our accounts receivable, and the failure
to collect from that customer would harm our financial condition and results of operations.
  Problems with our computer and communication systems may harm our business.
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We rely on third party technology, server and hardware providers, and a failure of service by these
providers could adversely affect our business and reputation.
 
 State and local governments may be able to levy additional taxes on Internet access and electronic
commerce transactions, which could result in a decrease in the level of usage of our services.
  Our business could be substantially harmed if we fail to pay taxes we owe.
  The market price of our common stock has been and is likely to continue to be highly volatile,
which could cause investment losses for our stockholders and result in stockholder litigation with
substantial costs, economic loss and diversion of our resources.
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
    
    developments concerning proprietary rights, including patents, by us or a competitor;
    
    market acceptance of our new and existing services and technologies;
    
    announcements by us or our competitors of significant contracts, acquisitions,
commercial relationships, joint ventures or capital commitments;
    
    actual or anticipated fluctuations in our operating results;
    
    continued growth in the Internet and the infrastructure for providing Internet access
and carrying Internet traffic;
    
    introductions of new services by us or our competitors;
    
    enactment of new government regulations affecting our industry;
    
    changes in the number of our Advertising and Distribution Network partners;
    
    seasonal fluctuations in the level of Internet usage;
    
    loss of key employees;
    
    institution of intellectual property litigation by or against us;
    
    success of our international expansion;
    
    changes in the market valuations of similar companies; and
    
    changes in our industry and the overall economic environment.
  Future sales of shares of our common stock that are eligible for sale by our stockholders may
decrease the price of our common stock.
  Anti-takeover provisions may limit the ability of another party to acquire us, which could cause
our stock price to decline.
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
    
    special meetings of our stockholders may be called only by our Chief Executive Officer,
by a majority of the members of our board of directors or by the holders of shares entitled
to cast not less than 10% of the votes at the meeting;
    
    stockholder proposals to be brought before any meeting of our stockholders must comply
with advance notice procedures;
    
    our board of directors is classified into three classes, as nearly equal in number as
possible;
    
    newly-created directorships and vacancies on our board of directors may only be filled
by a majority of remaining directors, and not by our stockholders;
    
    a director may be removed from office only for cause by the holders of at least 75% of
the voting power entitled to vote at an election of directors;
    
    our amended and restated bylaws may be further amended by our stockholders only upon a
vote of at least 75% of the votes entitled to be cast by the holders of all outstanding shares
then entitled to vote generally in the election of directors, voting together as a
single class; and
    
    our board of directors is authorized to issue, without further action by our
stockholders, up to 10,000,000 shares of undesignated preferred stock with rights and
preferences, including voting rights, designated from time to time by our board of
directors.
  Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be
limited.
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Item 3. Controls and Procedures
     31




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
     
 Item 3. Defaults upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 ExhibitNumber
    
    Description31.1
    
    Certification of Principal Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Principal Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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SIGNATURES
  INTERCHANGE CORPORATIONNovember 11, 2005
    
    
    
    /s/ Heath B. ClarkeDate
    
    
    
    Heath B. ClarkeChief Executive Officer and Chairman/s/ Douglas S. NormanDouglas S. NormanChief Financial Officer and Secretary
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EXHIBITS FILED WITH THIS REPORT
 ExhibitNumber
    
    Description31.1
    
    Certification of Principal Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Principal Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 34