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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q







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

For the quarterly period ended June 30, 2012

OR



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

For the transition period from          to

Commission File Number: 001-34197





LOCAL.COM CORPORATION

(Exact name of registrant as specified in its charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 33-0849123                             
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification Number)

7555 Irvine Center Drive

Irvine, CA 92618

(Address of principal executive offices, including zip
code)

(949) 784-0800

(Registrants telephone number, including area code)





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈                                                |  | Accelerated filer         |  | x
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

As of July 31, 2012 there were 22,091,778 shares of the registrants common stock, $0.00001 par value, outstanding.









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##### Table of Contents

LOCAL.COM CORPORATION

Table of Contents



|         |  |                                                                                                          |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                          |  | Page |   
|         |  |                                                                                                         
|PART I.  |  | FINANCIAL INFORMATION                                                                                    |  |      |    | 
|         |  |                                                                                                         
|Item 1.  |  | Financial Statements (Unaudited)                                                                         |  |      |    | 
|         |  |                                                                                                         
|         |  | Condensed Consolidated Balance SheetsAs of June 30, 2012 and December 31, 2011                           |  |      | 3  | 
|         |  |                                                                                                         
|         |  | Condensed Consolidated Statements of OperationsFor the three and six months ended June 30, 2012 and 2011 |  |      | 4  | 
|         |  |                                                                                                         
|         |  | Condensed Consolidated Statements of Cash FlowsFor the six months ended June 30, 2012 and
2011           |  |      | 5  | 
|         |  |                                                                                                         
|         |  | Notes to Condensed Consolidated Financial Statements                                                     |  |      | 6  | 
|         |  |                                                                                                         
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                    |  |      | 18 | 
|         |  |                                                                                                         
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                               |  |      | 29 | 
|         |  |                                                                                                         
|Item 4.  |  | Controls and Procedures                                                                                  |  |      | 29 | 
|         |  |                                                                                                         
|PART II. |  | OTHER INFORMATION                                                                                        |  |      |    | 
|         |  |                                                                                                         
|Item 1.  |  | Legal Proceedings                                                                                        |  |      | 29 | 
|         |  |                                                                                                         
|Item 1A. |  | Risk Factors                                                                                             |  |      | 30 | 
|         |  |                                                                                                         
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                              |  |      | 30 | 
|         |  |                                                                                                         
|Item 3.  |  | Defaults Upon Senior Securities                                                                          |  |      | 30 | 
|         |  |                                                                                                         
|Item 4.  |  | Mine Safety Disclosures                                                                                  |  |      | 30 | 
|         |  |                                                                                                         
|Item 5.  |  | Other Information                                                                                        |  |      | 31 | 
|         |  |                                                                                                         
|Item 6.  |  | Exhibits                                                                                                 |  |      | 32 | 
|         |  |                                                                                                         
|         |  | Signatures                                                                                               |  |      | 34 | 
|         |  |                                                                                                         
|         |  | Index to Exhibits                                                                                        |  |      | 35 | 



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION



|Item 1. | Financial Statements.
|------- | ---------------------

LOCAL.COM CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except par value)



|                                                                                                                                 |  |              |         |   |                  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                 |  | June 30,2012 |         |   | December 31,2011 |  
|ASSETS                                                                                                                           |  |              |         |   |                  |   |         |  
|Current assets:                                                                                                                  |  |              |         |   |                  |   |         |  
|Cash                                                                                                                             |  | $            | 7,103   |   |                  | $ | 10,394  |  
|Restricted cash                                                                                                                  |  |              | 42      |   |                  |   | 10      |  
|Accounts receivable, net of allowances of $453 and $550, respectively                                                            |  |              | 15,224  |   |                  |   | 13,456  |  
|Notes receivable - current portion                                                                                               |  |              | 392     |   |                  |   | 392     |  
|Prepaid expenses and other current assets                                                                                        |  |              | 619     |   |                  |   | 732     |  
|Assets held for sale                                                                                                             |  |              | 2,300   |   |                  |   | 2,187   |  
|                                                                                                                                 |  |              |         |   |                  |   |         |  
|Total current assets                                                                                                             |  |              | 25,680  |   |                  |   | 27,171  |  
|                                                                                                                                 |  |             
|Property and equipment, net                                                                                                      |  |              | 7,499   |   |                  |   | 8,018   |  
|Goodwill                                                                                                                         |  |              | 25,870  |   |                  |   | 31,370  |  
|Intangible assets, net                                                                                                           |  |              | 6,290   |   |                  |   | 8,833   |  
|Long-term portion of note recievable                                                                                             |  |              | 222     |   |                  |   | 350     |  
|Deposits                                                                                                                         |  |              | 60      |   |                  |   | 69      |  
|                                                                                                                                 |  |              |         |   |                  |   |         |  
|Total assets                                                                                                                     |  | $            | 65,621  |   |                  | $ | 75,811  |  
|                                                                                                                                 |  |              |         |   |                  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                             |  |              |         |   |                  |   |         |  
|Current liabilities:                                                                                                             |  |              |         |   |                  |   |         |  
|Accounts payable                                                                                                                 |  | $            | 14,514  |   |                  | $ | 12,193  |  
|Accrued compensation                                                                                                             |  |              | 1,730   |   |                  |   | 2,152   |  
|Deferred rent                                                                                                                    |  |              | 516     |   |                  |   | 551     |  
|Warrant liability                                                                                                                |  |              | 99      |   |                  |   | 207     |  
|Other accrued liabilities                                                                                                        |  |              | 1,599   |   |                  |   | 2,422   |  
|Revolving line of credit                                                                                                         |  |              | 8,000   |   |                  |   | 8,000   |  
|Deferred revenue                                                                                                                 |  |              | 203     |   |                  |   | 281     |  
|Liabilities held for sale                                                                                                        |  |              | 57      |   |                  |   | 32      |  
|                                                                                                                                 |  |              |         |   |                  |   |         |  
|Total current liabilities                                                                                                        |  |              | 26,718  |   |                  |   | 25,838  |  
|                                                                                                                                 |  |              |         |   |                  |   |         |  
|Deferred income taxes                                                                                                            |  |              | 265     |   |                  |   | 265     |  
|                                                                                                                                 |  |              |         |   |                  |   |         |  
|Total liabilities                                                                                                                |  |              | 26,983  |   |                  |   | 26,103  |  
|                                                                                                                                 |  |              |         |   |                  |   |         |  
|Commitments and contingencies                                                                                                    |  |              |         |   |                  |   |         |  
|                                                                                                                                 |  |             
|Stockholders equity (deficit):                                                                                                  |  |              |         |   |                  |   |         |  
|Convertible preferred stock, $0.00001 par value; 10,000 shares authorized; none issued and outstanding for all periods
presented |  |              |        |   |                  |   |        |  
|Common stock, $0.00001 par value; 65,000 shares authorized; issued and outstanding 22,088 and 22,082,
respectively               |  |              |        |   |                  |   |        |  
|Additional paid-in capital                                                                                                       |  |              | 120,547 |   |                  |   | 119,068 |  
|Accumulated deficit                                                                                                              |  |              | (81,909 | ) |                  |   | (69,360 | )
|                                                                                                                                 |  |              |         |   |                  |   |         |  
|Stockholders equity                                                                                                             |  |              | 38,638  |   |                  |   | 49,708  |  
|                                                                                                                                 |  |              |         |   |                  |   |         |  
|Total liabilities and stockholders equity                                                                                       |  | $            | 65,621  |   |                  | $ | 75,811  |  
|                                                                                                                                 |  |              |         |   |                  |   |         |  

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



3



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LOCAL.COM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)



|                                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|---------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                 |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|                                                                 |  | 2012                        |        |   | 2011                      |   |        | 2012 |  |   | 2011    |  
|Revenue                                                          |  | $                           | 27,072 |   |                           | $ | 15,477 |      |  | $ | 52,104  |   |  | $ | 32,272 |  
|                                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Operating Expenses:                                              |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Cost of revenues                                                 |  |                             | 19,990 |   |                           |   | 10,798 |      |  |   | 37,335  |   |  |   | 21,786 |  
|Sales and marketing                                              |  |                             | 4,628  |   |                           |   | 4,158  |      |  |   | 10,291  |   |  |   | 7,435  |  
|General and administrative                                       |  |                             | 2,799  |   |                           |   | 3,291  |      |  |   | 5,185   |   |  |   | 5,907  |  
|Research and development                                         |  |                             | 1,275  |   |                           |   | 1,358  |      |  |   | 2,456   |   |  |   | 2,885  |  
|Amortization of intangibles                                      |  |                             | 819    |   |                           |   | 1,132  |      |  |   | 1,743   |   |  |   | 2,330  |  
|Impairment of goodwill and intangible assets                     |  |                             | 6,451  |   |                           |   |       |      |  |   | 6,451   |   |  |   |       |  
|                                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Total operating expenses                                         |  |                             | 35,962 |   |                           |   | 20,737 |      |  |   | 63,461  |   |  |   | 40,343 |  
|                                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Operating income (loss)                                          |  |                             | (8,890 | ) |                           |   | (5,260 | )    |  |   | (11,357 | ) |  |   | (8,071 | )
|Interest and other income (expense), net                         |  |                             | (97    | ) |                           |   | (30    | )    |  |   | (194    | ) |  |   | (85    | )
|Change in fair value of warrant liability                        |  |                             | 166    |   |                           |   | 411    |      |  |   | 108     |   |  |   | 1,970  |  
|                                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Income (loss) from continuing operations before income taxes     |  |                             | (8,821 | ) |                           |   | (4,879 | )    |  |   | (11,443 | ) |  |   | (6,186 | )
|Provision for income taxes                                       |  |                             | 44     |   |                           |   | 48     |      |  |   | 99      |   |  |   | 59     |  
|                                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Net income (loss) from continuing operations                     |  |                             | (8,865 | ) |                           |   | (4,927 | )    |  |   | (11,542 | ) |  |   | (6,245 | )
|Income (loss) from discontinued operations (net of taxes)        |  |                             | (482   | ) |                           |   | (477   | )    |  |   | (1,007  | ) |  |   | (477   | )
|                                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Net income (loss)                                                |  | $                           | (9,347 | ) |                           | $ | (5,404 | )    |  | $ | (12,549 | ) |  | $ | (6,722 | )
|                                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Per share data:                                                  |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Basic net income (loss) per share from continuing operations     |  | $                           | (0.40  | ) |                           | $ | (0.23  | )    |  | $ | (0.52   | ) |  | $ | (0.30  | )
|                                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Basic net income (loss) per share from discontinued operations   |  | $                           | (0.02  | ) |                           | $ | (0.02  | )    |  | $ | (0.05   | ) |  | $ | (0.02  | )
|                                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Basic net income (loss) per share                                |  | $                           | (0.42  | ) |                           | $ | (0.25  | )    |  | $ | (0.57   | ) |  | $ | (0.32  | )
|                                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Diluted net income (loss) per share from continuing operations   |  | $                           | (0.40  | ) |                           | $ | (0.23  | )    |  | $ | (0.52   | ) |  | $ | (0.30  | )
|                                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Diluted net income (loss) per share from discontinued operations |  | $                           | (0.02  | ) |                           | $ | (0.02  | )    |  | $ | (0.05   | ) |  | $ | (0.02  | )
|                                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Diluted net income (loss) per share                              |  | $                           | (0.42  | ) |                           | $ | (0.25  | )    |  | $ | (0.57   | ) |  | $ | (0.32  | )
|                                                                 |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Basic weighted average shares outstanding                        |  |                             | 22,086 |   |                           |   | 21,254 |      |  |   | 22,084  |   |  |   | 20,750 |  
|Diluted weighted average shares outstanding                      |  |                             | 22,086 |   |                           |   | 21,254 |      |  |   | 22,084  |   |  |   | 20,750 |  

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



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LOCAL.COM CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)



|                                                                                               |  |                           |         |   |      |   |        |  
|---------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                               |  | Six Months Ended June 30, |        
|                                                                                               |  | 2012                      |         |   | 2011 |  
|Cash flows from operating activities:                                                          |  |                           |         |   |      |   |        |  
|Net income (loss)                                                                              |  | $                         | (12,549 | ) |      | $ | (6,722 | )
|                                                                                               |  |                          
|Adjustments to reconcile net income (loss) to cash (used in) provided by operating activities: |  |                           |         |   |      |   |        |  
|Depreciation and amortization                                                                  |  |                           | 3,782   |   |      |   | 3,760  |  
|Provision for doubtful accounts                                                                |  |                           | 38      |   |      |   |       |  
|Stock-based compensation expense                                                               |  |                           | 1,473   |   |      |   | 1,992  |  
|Change in fair value of warrant liability                                                      |  |                           | (108    | ) |      |   | (1,970 | )
|Impairment of goodwill and intangible assets                                                   |  |                           | 6,451   |   |      |   |       |  
|Changes in operating assets and liabilities:                                                   |  |                           |         |   |      |   |        |  
|Accounts receivable                                                                            |  |                           | (1,806  | ) |      |   | 1,191  |  
|Note receivable                                                                                |  |                           | 128     |   |      |   | 114    |  
|Prepaid expenses and other                                                                     |  |                           | 122     |   |      |   | 554    |  
|Accounts payable and accrued liabilities                                                       |  |                           | 1,081   |   |      |   | 63     |  
|Deferred revenue                                                                               |  |                           | (93     | ) |      |   | (398   | )
|                                                                                               |  |                           |         |   |      |   |        |  
|Net cash (used in) provided by operating activities                                            |  |                           | (1,481  | ) |      |   | (1,416 | )
|                                                                                               |  |                           |         |   |      |   |        |  
|Cash flows from investing activities:                                                          |  |                           |         |   |      |   |        |  
|Capital expenditures                                                                           |  |                           | (1,784  | ) |      |   | (2,013 | )
|Increase in restricted cash                                                                    |  |                           | (32     | ) |      |   |       |  
|Issuance of notes receivable                                                                   |  |                           |        |   |      |   | (1,085 | )
|Proceeds from notes receivable                                                                 |  |                           |        |   |      |   | 585    |  
|Acquisitions, net of cash acquired                                                             |  |                           |        |   |      |   | (6,217 | )
|Purchases of intangible assets                                                                 |  |                           |        |   |      |   | (554   | )
|                                                                                               |  |                           |         |   |      |   |        |  
|Net cash used in investing activities                                                          |  |                           | (1,816  | ) |      |   | (9,284 | )
|                                                                                               |  |                           |         |   |      |   |        |  
|Cash flows from financing activities:                                                          |  |                           |         |   |      |   |        |  
|Proceeds from the exercise of warrants                                                         |  |                           |        |   |      |   |       |  
|Proceeds from the exercise of options                                                          |  |                           | 11      |   |      |   | 158    |  
|Proceeds from the public offering of common stock                                              |  |                           |        |   |      |   | 18,227 |  
|Payment of revolving credit facility                                                           |  |                           |        |   |      |   | (7,000 | )
|Proceeds from revolving credit facility                                                        |  |                           |        |   |      |   |       |  
|Payment of financing related costs                                                             |  |                           | (5      | ) |      |   | (282   | )
|                                                                                               |  |                           |         |   |      |   |        |  
|Net cash provided by financing activities                                                      |  |                           | 6       |   |      |   | 11,103 |  
|                                                                                               |  |                           |         |   |      |   |        |  
|Net increase (decrease) in cash                                                                |  |                           | (3,291  | ) |      |   | 403    |  
|Cash, beginning of the period                                                                  |  |                           | 10,394  |   |      |   | 13,079 |  
|                                                                                               |  |                           |         |   |      |   |        |  
|Cash, end of the period                                                                        |  | $                         | 7,103   |   |      | $ | 13,482 |  
|                                                                                               |  |                           |         |   |      |   |        |  
|Supplemental cash flow information:                                                            |  |                           |         |   |      |   |        |  
|Interest paid                                                                                  |  | $                         | 212     |   |      | $ | 64     |  
|                                                                                               |  |                           |         |   |      |   |        |  
|Income taxes paid                                                                              |  | $                         | 7       |   |      | $ | 11     |  
|                                                                                               |  |                           |         |   |      |   |        |  

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



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##### Table of Contents

LOCAL.COM CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



|1. | The Company and Summary of Significant Accounting Policies
|-- | ----------------------------------------------------------

Nature of operations

We are a local media company that specializes in connecting local businesses with online consumers. We reach consumers on our proprietary sites, as well
as third-party sites (collectively, Consumer Properties), which includes our Owned & Operated web sites such as Local.com and Krillion.com (collectively, O&O), as well as our network of over 1,200 third-party
U.S. regional media websites (collectively, Network). We provide a variety of digital media services to small and medium sized businesses (SMBs) to enable these customers to reach consumers both on our Consumer Properties as
well as on the major search engines (collectively, Business Solutions) and we also enable third parties to distribute their advertiser listings on our Consumer Properties, for which we generate ad revenues. We generate revenue from
performance ad units such as daily deals, pay-per-click, pay-per-call and lead generation, subscription ad units, and Cost per Thousand Impressions (CPM) ad units, among others.

Our Consumer Properties serve over 30 million consumers each month. We use patented and proprietary search technologies and systems to provide users of our O&O websites and our Network with
relevant search results for local businesses, products and services, incorporating daily deals, event information, ratings and reviews, driving directions and more. By distributing this information across our Consumer Properties we are able to reach
users that our direct advertisers and advertising partners desire to reach.

Our Business Solutions business serves over 18,000 SMBs
with a variety of digital media products. The products are sold primarily via telesales. Our sales efforts focus principally around our Exact Match product suite, which offers a variety of digital media features including web hosting, search engine
optimization services, display ads, mobile ads, and social media presence management. Over 16,000 of our direct SMB customers use a legacy web hosting and/or listing solution and over 800 of our direct SMB customers are enrolled in our new Exact
Match product. An average Exact Match subscription generates approximately the same monthly revenue as ten legacy customers. Our Business Solutions technologies also power a variety of platform products targeted towards larger businesses such as
regional media publishers and ad agencies. We expect a large portion of our legacy web hosting and listing solution SMB customers to phase out in Q3 2012 with the remainder completely phased out by the end of 2012.

Principles of consolidation and basis of presentation

Our condensed consolidated financial statements include the accounts of Local.com Corporation and its wholly-owned subsidiaries, Local.com PG Acquisition Corporation, Krillion, Inc. and Screamin Media
Group, Inc (SMG). All intercompany balances and transactions were eliminated. We have evaluated all subsequent events through the date the condensed consolidated financial statements were issued.

The unaudited interim condensed consolidated financial statements as of June 30, 2012, and for the three and six months ended June 30, 2012 and
2011, included herein, have been prepared by us, without audit, pursuant to rules and regulations of the Securities and Exchange Commission, and, in the opinion of management, reflect all adjustments (consisting of only normal recurring
adjustments), which are necessary for a fair presentation.

The consolidated results of operations for the three and six months ended
June 30, 2012, are not necessarily indicative of the results for the full year. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year
ended December 31, 2011, included in our Form 10-K filed with the Securities and Exchange Commission on March 15, 2012.

Discontinued Operations

As a result of
the Companys decision to sell all of the assets and liabilities relating to the Rovion business, the Company has reclassified and presented all related historical financial information as it relates to these assets and liabilties as
discontinued operations in the accompanying condensed consolidated balance sheets and condensed consolidated statements of operations. In addition, all related activities have been excluded from footnote disclosures unless specifically
referenced. These reclassifications have no effect on previously reported net income (loss).



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##### Table of Contents

Use of estimates

The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis,
we evaluate our estimates, including those related to the accounts receivable and sales allowances, fair values of financial instruments, intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of
stock-based awards, income taxes, and contingent liabilities, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments
about the carrying values of assets and liabilities. Actual results could materially differ from those estimates.

Fair Value of Financial
Instruments

Our financial instruments consist principally of accounts receivable, long and short term notes receivable, revolving line of
credit, accounts payable and our warrant liability. The carrying amount of the revolving line of credit approximates its fair value because the interest rate on these instruments fluctuates with market interest rates. The long term note receivable
has a fixed interest rate considered to be at market rates and therefore the carrying value also approximates its fair value. We believe that the recorded values of all of our other financial instruments approximate their current fair values because
of their nature and respective relatively short maturity dates or durations.

The fair value of the warrant liability is determined using the
Black-Scholes valuation method, a Level 3 input, based on the quoted price of our common stock, volatility based on the historical market activity of our stock, the expected life based on the remaining contractual term of the warrants
and the risk free interest rate based on the implied yield available on U.S. Treasury Securities with a maturity equivalent to the warrants contractual life.

Intangible Assets

Intangible assets are amortized over their estimated useful lives,
generally on a straight-line basis over two to four years. The small business subscriber relationships are amortized based on how we expect the customer relationships to contribute to future cash flows. As a result, amortization of the small
business subscriber relationships intangible assets is accelerated over a period of approximately four years with the weighted average percentage amortization for all small business subscriber relationships acquired to date being approximately 60%
in year one, 21% in year two, 14% in year three and 5% in year four. Some of the Companys third party billing providers have been notified of the possibility that certain Local Exchange Carrier (LEC) will not be provide billing
services for our products and services with respect to these small business subscriber relationships. The Company will evaluate and adjust the amortization of the effected small business subscriber relationships to its remaining useful lives based
on these changes.

Impairment of Long-lived Assets

We account for the impairment and disposition of definite life intangible and long-lived assets in accordance with U.S. GAAP guidance on accounting for the impairment or disposal of long-lived assets. In
accordance with the guidance, such assets to be held are reviewed for events, or changes in circumstances, which indicate that their carrying value may not be recoverable. We periodically review related carrying values to determine whether or not
impairment to such value has occurred. During the second quarter 2012, management recorded impairment charges for certain capitalized software assets and intangible assets of $152,000 and $799,000, respectively, related to the Spreebird business
unit.

Revenue Recognition

We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service or
product has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.

We generate revenue when it is realizable and earned, as evidenced by click-throughs occurring on advertisers sponsored listings, the display of a banner advertisement, the fulfillment of
subscription listing obligations, the sale of deal of the day vouchers, or the delivery of Exact Match products to our customers. We enter into contracts to distribute sponsored listings and banner advertisements with our direct and indirect
advertisers. Most of these contracts are short-term, do not contain multiple elements and can be cancelled at anytime. Our indirect advertisers provide us with sponsored listings with bid prices (for example, what their advertisers are willing to
pay for each click-through on those listings). We recognize our portion of the bid price based upon our contractual agreement. Sponsored listings and banner advertisements are included within pages that display search results, among others, in
response to keyword searches performed by consumers on our Local.com website and network partner websites. Revenue is recognized when earned based on click-through and impression activity to the extent that collection is reasonably assured from
credit worthy advertisers. Management has analyzed our revenue recognition and determined that our web hosting revenue will be recognized net of direct costs.



7



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During the year ended December 31, 2010, we entered into multiple-deliverable arrangements for the sale
of domains and for providing services relating to such domains. Management evaluated the agreements in accordance with the provision of the revenue recognition topic that addresses multiple-deliverable revenue arrangements. The multiple-deliverable
arrangements entered into consisted of various units of accounting such as the sale of domains, website development fees, content delivery and hosting fees. Such elements were considered separate units of accounting due to each element having value
to the customer on a stand-alone basis. The selling price for each of the units of accounting was determined using a combination of vendor-specific objective evidence and management estimates. Revenue relating to domains was recognized with the
transfer of title of such domains. Revenue for website development, content delivery and hosting fees are recognized as such services are performed or delivered. The agreements did not include any cancellation, termination or refund provisions that
we consider probable. Subsequent to December 31, 2010 the Company did not enter into any significant multiple deliverable arrangements.

We launched our Spreebird daily deals business in May 2011. Revenue relating to the Spreebird daily deals business is recorded exclusive of the portion
of gross billings paid as merchant revenue share, since we generally act as the agent, rather than the principal, when connecting merchants with online customers. Spreebird deal vouchers are sold primarily through email marketing and our
www.spreebird.com website. Revenue for our Spreebird business is recognized when earned. Revenue is considered to be earned once all revenue recognition criteria have been satisfied.

We evaluate whether it is appropriate to record the gross amount of sales and related costs or the net amount earned as revenue. Generally, when we are primarily obligated in a transaction, are subject to
inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded at the gross sales price. We generally record the net amounts as revenue earned if we are not
primarily obligated and do not have latitude in establishing prices. Such amounts earned are determined using a fixed percentage, a fixed-payment schedule, or a combination of the two. All revenue, other than Spreebird daily deals revenue and web
hosting revenue, is recognized on a gross basis.

Cost of Revenues

Cost of revenues consists of traffic acquisition costs, revenue sharing payments that we make to our network partners, and other cost of revenues. Traffic acquisition costs consist primarily of campaign
costs associated with driving consumers to our Local.com website, including personnel costs associated with managing traffic acquisition programs. Other cost of revenues consists of Internet connectivity costs, data center costs, amortization of
certain software license fees and maintenance, depreciation of computer equipment used in providing our paid-search services, and payment processing fees (credit cards and fees for LEC billings). We advertise on large search engine websites such as
Google, Yahoo!, MSN/Bing and Ask.com, as well as other search engine websites, by bidding on certain keywords we believe will drive traffic to our Local.com website. During the three and six months ended June 30, 2012, approximately 62%, of our
overall traffic were purchased from other search engine websites. During the three and six months ended June 30, 2012, advertising costs to drive consumers to our Local.com website were $16.7 million and $31.2 million respectively. Of the total
advertising cost for the three and six months ended June 30, 2012, $11.9 million and $21.9 million were attributable to Google, Inc. and $4.3 million and $8.4 million were attributable to Yahoo!, respectively. During the three and six months
ended June 30, 2011, approximately 68% and 64% respectively, of our overall traffic were purchased from other search engine websites. During the three and six months ended June 30, 2011, advertising costs to drive consumers to our
Local.com website were $7.6 million and $15.6 million respectively. Of the total advertising cost for the three and six months ended June 30, 2011, $5.7 million and $11.8 million were attributable to Google, Inc. and $1.4 million and $2.8
million were attributable to Yahoo!, respectively.

Recent Accounting Pronouncements

On July 27, 2012, the Financial Accounting Standards Board (FASB) issued guidance on testing indefinite-lived intangible assets for
impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes that it is more than
50% likely that an indefinite-lived intangible asset is not impaired, no further analysis is required. However, if an entity concludes otherwise, it would be required to determine the fair value of the indefinite-lived intangible asset to measure
the amount of actual impairment, if any, as currently required under US GAAP. The new guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted.



8



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##### Table of Contents

|2. | Notes Receivable
|-- | ----------------

During 2010, the Company entered into a promissory note and security agreement with one of its customers related to the sale of domain
names and services. The promissory note totaled $1,000,000, carrying interest at 5% per annum payable in twelve equal quarterly payments of $54,000 beginning on March 31, 2011, and continuing on the last day of each calendar quarter
thereafter until December 31, 2013, and three additional annual balloon payments of $80,000, $210,000 and $157,238 due on the 31st day of December of 2011, 2012 and 2013, respectively. The Company considered the credit quality of the customer
and determined that no allowance for credit losses is necessary. As of June 30 2012, no portion of the note receivable balance was past due. The note receivable is secured by the domain names sold to the customer.



|3. | Assets and liabilities held for sale and discontinued operations
|-- | ----------------------------------------------------------------

As a result of the decision by the Company to sell all of the assets related to the Rovion business, all assets and liabilities to be
sold were classified as held for sale in the accompanying consolidated balance sheets at June 30, 2012 and December 31, 2011. The results of operations relating to the held for sale assets and liabilities have been reclassified to
discontinued operations in the consolidated statements of operations for all periods presented. Assets and liabilities held for sale are valued at the lower of net depreciable value or net realizable value.

Assets and liabilities held for sale consisted of the following (in thousands):



|                            |  |              |       |   |                  |   |       |  
|--------------------------- |  | ------------ | ----- | - | ---------------- | - | ----- | -
|                            |  | June 30,2012 |       |   | December 31,2011 |  
|Goodwill                    |  | $            | 1,169 |   |                  | $ | 1,169 |  
|Intangible assets, net      |  |              | 581   |   |                  |   | 789   |  
|Property and equipment, net |  |              | 550   |   |                  |   | 229   |  
|                            |  |              |       |   |                  |   |       |  
|Assets held for sale        |  | $            | 2,300 |   |                  | $ | 2,187 |  
|                            |  |              |       |   |                  |   |       |  
|Accrued liabilities         |  | $            | (40   | ) |                  | $ |      |  
|Deferred revenue            |  |              | (17   | ) |                  |   | (32   | )
|                            |  |              |       |   |                  |   |       |  
|Liabilities held for sale   |  | $            | (57   | ) |                  | $ | (32   | )
|                            |  |              |       |   |                  |   |       |  

The Company is actively marketing these assets and liabilities for sale and the Companys results of discontinued
operations will be affected by the disposal of properties related to discontinued operations to the extent that proceeds from the sale exceed or are less than net book value.

Revenue and pretax income (loss) related to discontinued operations are as follows (in thousands):



|                                                          |  |                             |      |   |                           |   |      |      |  |   |        |   |  |   |      |  
|--------------------------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | ------ | - |  | - | ---- | -
|                                                          |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|                                                          |  | 2012                        |      |   | 2011                      |   |      | 2012 |  |   | 2011   |  
|Revenue                                                   |  | $                           | 204  |   |                           | $ | 107  |      |  | $ | 373    |   |  | $ | 107  |  
|                                                          |  |                             |      |   |                           |   |      |      |  |   |        |   |  |   |      |  
|Pretax income (loss)                                      |  | $                           | (465 | ) |                           | $ | (474 | )    |  | $ | (984   | ) |  | $ | (474 | )
|Provision (benefit) for income taxes                      |  |                             | 17   |   |                           |   | 3    |      |  |   | 23     |   |  |   | 3    |  
|                                                          |  |                             |      |   |                           |   |      |      |  |   |        |   |  |   |      |  
|Income (loss) from discontinued operations (net of taxes) |  | $                           | (482 | ) |                           | $ | (477 | )    |  | $ | (1,007 | ) |  | $ | (477 | )
|                                                          |  |                             |      |   |                           |   |      |      |  |   |        |   |  |   |      |  

All revenue from discontinued operations is part of the Companys paid search segment.



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|4. | Intangible assets
|-- | -----------------

Intangible assets, net, consisted of the following (in thousands):



|                               |  |                     |        |                   |                                    |   |         |                   |  |   |                            |  |                     |   |  |                                    |        |  |                   |   |         |                            |  |   |       |  |  |  
|------------------------------ |  | ------------------- | ------ | ----------------- | ---------------------------------- | - | ------- | ----------------- |  | - | -------------------------- |  | ------------------- | - |  | ---------------------------------- | ------ |  | ----------------- | - | ------- | -------------------------- |  | - | ----- |  |  | -
|                               |  | June 30, 2012       |        | December 31, 2011
|                               |  | GrossCarryingAmount |        |                   | AccumulatedAmortization/Impairment |   |         | NetCarryingAmount |  |   | WeightedAverageUseful Life |  | GrossCarryingAmount |   |  | AccumulatedAmortization/Impairment |        |  | NetCarryingAmount |   |         | WeightedAverageUseful Life
|                               |  |                     |        |                   |                                    |   |         |                   |  |   | (years)                    |  |                     |   |  |                                    |        |  |                   |   |         | (years)                   
|Developed technology           |  | $                   | 6,053  |                   |                                    | $ | (3,727  | )                 |  | $ | 2,326                      |  |                     | 4 |  | $                                  | 6,488  |  |                   | $ | (3,339  | )                          |  | $ | 3,149 |  |  | 4
|Non-compete agreements         |  |                     | 138    |                   |                                    |   | (72     | )                 |  |   | 66                         |  |                     | 2 |  |                                    | 153    |  |                   |   | (56     | )                          |  |   | 97    |  |  | 2
|Vendor-related                 |  |                     | 300    |                   |                                    |   | (100    | )                 |  |   | 200                        |  |                     | 3 |  |                                    | 300    |  |                   |   | (50     | )                          |  |   | 250   |  |  | 3
|Customer-related               |  |                     | 14,194 |                   |                                    |   | (12,269 | )                 |  |   | 1,925                      |  |                     | 4 |  |                                    | 14,194 |  |                   |   | (11,149 | )                          |  |   | 3,045 |  |  | 4
|Patents                        |  |                     | 431    |                   |                                    |   | (431    | )                 |  |   |                           |  |                     | 3 |  |                                    | 431    |  |                   |   | (431    | )                          |  |   |      |  |  | 3
|Domain names - indefinite life |  |                     | 1,601  |                   |                                    |   |        |                   |  |   | 1,601                      |  |                     |   |  |                                    | 1,601  |  |                   |   |        |                            |  |   | 1,601 |  |  |  
|Trademarks and Trade Name      |  |                     | 700    |                   |                                    |   | (558    | )                 |  |   | 142                        |  |                     | 4 |  |                                    | 700    |  |                   |   | (534    | )                          |  |   | 166   |  |  | 4
|License agreements             |  |                     | 600    |                   |                                    |   | (570    | )                 |  |   | 30                         |  |                     | 4 |  |                                    | 600    |  |                   |   | (75     | )                          |  |   | 525   |  |  | 4
|                               |  |                     |        |                   |                                    |   |         |                   |  |   |                            |  |                     |   |  |                                    |        |  |                   |   |         |                            |  |   |       |  |  |  
|                               |  | $                   | 24,017 |                   |                                    | $ | (17,727 | )                 |  | $ | 6,290                      |  |                     |   |  | $                                  | 24,467 |  |                   | $ | (15,634 | )                          |  | $ | 8,833 |  |  |  
|                               |  |                     |        |                   |                                    |   |         |                   |  |   |                            |  |                     |   |  |                                    |        |  |                   |   |         |                            |  |   |       |  |  |  

As of June 30, 2012, a review of the Spreebird business units intangible assets, current and forecasted
operating results (Level 3 Fair Value Measurement) indicated that the carrying amount of these finite-lived intangible assets may not be recoverable from the sum of future undiscounted cash flows. As a result, these finite-lived intangible assets
were written down to their fair value, based on the sum of future discounted cash flows, resulting in an impairment charge of approximately $799,000 included in Impairment of goodwill and intangible assets in the accompanying consolidated statements
of operations. The impairment charge of $799,000 included $420,000 related to license agreements, $272,000 related to developed technology, $100,000 related to customer related intangible assets and $7,000 related to a non-compete agreement.



|5. | Goodwill and Other Intangible Assets
|-- | ------------------------------------

Goodwill representing the excess of the purchase price over the fair value of the net tangible and intangible assets arising from
acquisitions and purchased domain names are recorded at cost. Intangible assets, such as goodwill and domain names, which are determined to have an indefinite life, are not amortized. The first step in determining if there is any goodwill impairment
is a comparison of the estimated fair value of an internal reporting unit with its carrying amount, including goodwill. If the estimated fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered
impaired and the second step is unnecessary. If the carrying value of the reporting unit exceeds its estimated fair value, the second step is performed to measure the amount of impairment by comparing the carrying amount of the goodwill to a
determination of the implied value of the goodwill. If the carrying amount of goodwill is greater than the implied value, an impairment charge is recognized for the difference. We engage an independent appraiser to assist management in the
valuation. We perform annual impairment reviews during the fourth fiscal quarter of each year or earlier if indicators of potential impairment exist. For other intangible assets with indefinite lives, we compare the fair value of related assets to
the carrying value to determine if there is impairment. For other intangible assets with definite lives, we compare future undiscounted cash flow forecasts prepared by management to the carrying value of the related intangible asset group to
determine if there is impairment. We performed our annual impairment analysis as of December 31, 2011, and determined that the estimated fair value of the reporting units exceeded its carrying value and therefore no impairment existed. The
Spreebird business unit was identified as a separate reporting unit for evaluation of goodwill impairment. Due to lower than expected financial performance by the Spreebird business unit and a significant decrease in the market capitalization of
comparable public companies during the second quarter of fiscal 2012, the Company determined that there were potential indicators of impairment at June 30, 2012. Goodwill was tested for impairment by estimating the fair value of the reporting
unit using a consideration of market multiples and a discounted cash flow model (Level 3 Fair Value Measurement) and was written down to its estimated implied fair value, which was approximately $6.7 million as of June 30, 2012, resulting in an
estimated impairment charge of approximately $5.5 million, which is included in Impairment of goodwill and intangible assets in the accompanying consolidated statements of operations. The Company is still in the process of finalizing the goodwill
impairment review of the Spreebird business unit and the impairment charge recorded in the second quarter 2012 was based on managements best estimate at the time. Any adjustments to the impairment of goodwill, once the evaluation has been
finalized, will be recorded in the third quarter 2012.



10



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##### Table of Contents

The change in the carrying amount of goodwill, using significant unobservable inputs, for the six months
ended June 30, 2012 is as follows (in thousands):



|                             |  |                        |        |   |       |   |        |       |  |   |        |  
|---------------------------- |  | ---------------------- | ------ | - | ----- | - | ------ | ----- |  | - | ------ | -
|                             |  | SpreebirdBusiness unit |        |   | Other |   |        | Total | 
|Balance at December 31, 2011 |  | $                      | 12,169 |   |       | $ | 19,201 |       |  | $ | 31,370 |  
|Asset impairment             |  |                        | (5,500 | ) |       |   |       |       |  |   | (5,500 | )
|                             |  |                        |        |   |       |   |        |       |  |   |        |  
|Balance at June 30, 2012     |  | $                      | 6,669  |   |       | $ | 19,201 |       |  | $ | 25,870 |  
|                             |  |                        |        |   |       |   |        |       |  |   |        |  



|6. | Website development costs and computer software developed for internal use
|-- | --------------------------------------------------------------------------

U.S. GAAP requires that development costs incurred in the preliminary project and post-implementation stages of an internal use
software project be expensed as incurred and that certain costs incurred in the application development stage of a project be capitalized. U.S. GAAP further requires that costs incurred in the preliminary project and operating stage of website
development be expensed as incurred and that certain costs incurred in the development stage of website development be capitalized and amortized over its useful life. Capitalized website costs are included in property and equipment, net. During the
second quarter 2012, the Company recorded an impairment charge of $152,000 relating to capitalized software of the Spreebird business unit.

The following table sets forth the additional capitalized website development costs and the amortization of capitalized website development costs for the
period indicated (in thousands):



|                                                      |  |                             |      |   |                           |   |      |      |  |   |        |   |  |   |       |  
|----------------------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | - | ---- | ---- |  | - | ------ | - |  | - | ----- | -
|                                                      |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|                                                      |  | 2012                        |      |   | 2011                      |   |      | 2012 |  |   | 2011   |  
|Additional capitalized website development costs      |  | $                           | 557  |   |                           | $ | 780  |      |  | $ | 1,247  |   |  | $ | 1,732 |  
|Amortization of capitalized website development costs |  | $                           | (566 | ) |                           | $ | (425 | )    |  | $ | (1,085 | ) |  | $ | (806  | )



|7. | Net income (loss) per share
|-- | ---------------------------

Basic net income (loss) per share is calculated using the weighted average shares of common stock outstanding during the periods.
Diluted net income (loss) per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the treasury stock method for options and warrants.

The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated (in thousands, except per share
amounts):



|                                                                            |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|--------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                            |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|                                                                            |  | 2012                        |        |   | 2011                      |   |        | 2012 |  |   | 2011    |  
|Numerator:                                                                  |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Net income (loss) from continuing operations                                |  | $                           | (8,865 | ) |                           | $ | (4,927 | )    |  | $ | (11,542 | ) |  | $ | (6,245 | )
|                                                                            |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Net income (loss) from discontinued operations                              |  | $                           | (482   | ) |                           | $ | (477   | )    |  | $ | (1,007  | ) |  | $ | (477   | )
|                                                                            |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Denominator:                                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Denominator for historical basic calculation weighted average shares        |  |                             | 22,086 |   |                           |   | 21,254 |      |  |   | 22,084  |   |  |   | 20,750 |  
|Dilutive common stock equivalents:*                                         |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Options                                                                     |  |                             |       |   |                           |   |       |      |  |   |        |   |  |   |       |  
|Warrants                                                                    |  |                             |       |   |                           |   |       |      |  |   |        |   |  |   |       |  
|                                                                            |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Denominator for historical diluted calculation weighted average shares      |  |                             | 22,086 |   |                           |   | 21,254 |      |  |   | 22,084  |   |  |   | 20,750 |  
|                                                                            |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Net income (loss) from continuing operations per share:                     |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Historical basic net income (loss) from continuing operations per share     |  | $                           | (0.40  | ) |                           | $ | (0.23  | )    |  | $ | (0.52   | ) |  | $ | (0.30  | )
|                                                                            |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Historical diluted net income (loss) from continuing operations per share   |  | $                           | (0.40  | ) |                           | $ | (0.23  | )    |  | $ | (0.52   | ) |  | $ | (0.30  | )
|                                                                            |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Net income (loss) from discontinued operations per share:                   |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Historical basic net income (loss) from discontinued operations per share   |  | $                           | (0.02  | ) |                           | $ | (0.02  | )    |  | $ | (0.05   | ) |  | $ | (0.02  | )
|                                                                            |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Historical diluted net income (loss) from discontinued operations per share |  | $                           | (0.02  | ) |                           | $ | (0.02  | )    |  | $ | (0.05   | ) |  | $ | (0.02  | )
|                                                                            |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Net income (loss) per share:                                                |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Historical basic net income (loss) per share                                |  | $                           | (0.42  | ) |                           | $ | (0.25  | )    |  | $ | (0.57   | ) |  | $ | (0.32  | )
|                                                                            |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  
|Historical diluted net income (loss) per share                              |  | $                           | (0.42  | ) |                           | $ | (0.25  | )    |  | $ | (0.57   | ) |  | $ | (0.32  | )
|                                                                            |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |        |  



|* | For the three and six months ended June 30, 2012, potentially dilutive securities, which consist of options to purchase 4,508,173 shares of common stock at prices
ranging from $1.41 to $16.59 per share and warrants to purchase 1,238,660 shares of common stock at prices ranging from $2.87 to $8.09 per share were not included in the computation of diluted net income (loss) per share because such inclusion would
be antidilutive.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|* | For the three and six months ended June 30, 2011, potentially dilutive securities, which consist of options to purchase 4,257,792 shares of common stock at prices
ranging from $1.41 to $16.59 per share and warrants to purchase 1,477,936 shares of common stock at prices ranging from $4.32 to $8.09 per share were not included in the computation of diluted net income (loss) per share because such inclusion would
be antidilutive.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



11



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##### Table of Contents

|8. | Property and equipment
|-- | ----------------------

Property and equipment, net, consisted of the following (in thousands):



|                                               |  |              |        |   |                  |   |        |  
|---------------------------------------------- |  | ------------ | ------ | - | ---------------- | - | ------ | -
|                                               |  | June 30,2012 |        |   | December 31,2011 |  
|Furniture and fixtures                         |  | $            | 975    |   |                  | $ | 935    |  
|Office equipment                               |  |              | 513    |   |                  |   | 496    |  
|Computer equipment                             |  |              | 3,411  |   |                  |   | 3,180  |  
|Computer software                              |  |              | 10,516 |   |                  |   | 9,659  |  
|Leasehold improvements                         |  |              | 899    |   |                  |   | 898    |  
|                                               |  |              |        |   |                  |   |        |  
|                                               |  |              | 16,314 |   |                  |   | 15,168 |  
|Less accumulated depreciation and amortization |  |              | (8,815 | ) |                  |   | (7,150 | )
|                                               |  |              |        |   |                  |   |        |  
|Property and equipment, net                    |  | $            | 7,499  |   |                  | $ | 8,018  |  
|                                               |  |              |        |   |                  |   |        |  



|9. | Interest and other income, net
|-- | ------------------------------

Interest and other income (expense), net, consisted of the following (in thousands):



|                                         |  |                             |      |   |                           |   |     |      |  |   |      |   |  |   |      |  
|---------------------------------------- |  | --------------------------- | ---- | - | ------------------------- | - | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                                         |  | Three Months Ended June 30, |      |   | Six Months Ended June 30, |  
|                                         |  | 2012                        |      |   | 2011                      |   |     | 2012 |  |   | 2011 |  
|Interest income                          |  | $                           | 8    |   |                           | $ | 15  |      |  | $ | 18   |   |  | $ | 32   |  
|Interest expense                         |  |                             | (105 | ) |                           |   | (45 | )    |  |   | (212 | ) |  |   | (117 | )
|                                         |  |                             |      |   |                           |   |     |      |  |   |      |   |  |   |      |  
|Interest and other income (expense), net |  | $                           | (97  | ) |                           | $ | (30 | )    |  | $ | (194 | ) |  | $ | (85  | )
|                                         |  |                             |      |   |                           |   |     |      |  |   |      |   |  |   |      |  



|10. | Credit facilities
|--- | -----------------

On August 3, 2011, we entered into a Loan and Security Agreement (the Loan Agreement) with Square 1 Bank, as amended
by the First Amendment on March 28, 2012, and the Second Amendment on April 11, 2012. The Loan Agreement provides us with a revolving credit facility of up to $12.0 million (the Facility). Subject to the terms of the Loan
Agreement, the borrowing base used to determine loan availability under the Facility is based on a formula equal to 80% of eligible accounts receivable, with account eligibility measured in accordance with standard determinations as more
particularly defined in the Loan Agreement (the Formula Revolving Line). Notwithstanding the foregoing, we may borrow up to $3.0 million from the Facility at any time and up to $5.0 million from the Facility in any thirty day period of a
calendar quarter, irrespective of our borrowing base (the Non-Formula Revolving Line), provided that total advances under the Facility will not exceed $12.0 million and we are otherwise in compliance with the terms of the Agreement. The
Facility expires on August 3, 2013.

All amounts borrowed under the Facility are secured by a general security interest on our assets,
except for our intellectual property, which we have instead agreed to remain unencumbered during the term of the Loan Agreement.

Except as
otherwise set forth in the Loan Agreement, borrowings made pursuant to the Formula Revolving Line will bear interest at a rate equal to the greater of (i) 5.0% or (ii) the Prime Rate (as announced by Square 1 Bank) plus 1.75% and
borrowings made pursuant to the Non-Formula Revolving Line will bear interest at a rate equal to the greater of (i) 5.25% or (ii) the Prime Rate (as announced by Square 1 Bank) plus 2.0%. In connection with establishing the Facility, we
incurred fees payable to Square 1 Bank of approximately $10,000. Additionally, there is an annual fee of $25,000 and an unused line fee equal to 0.25% of the unused line if less than 40% of the Facility is in use.

The Loan Agreement contains customary representations, warranties, and affirmative and negative covenants for facilities of this type, including certain
restrictions on dispositions of assets, changes in business, change in control, mergers and acquisitions, payment of dividends, and incurrence of certain indebtedness and encumbrances. The Loan Agreement also contains customary events of default,
including payment defaults and a breach of representations and warranties and covenants. If an event of default occurs and is continuing, Square 1 Bank has certain rights and remedies under the Loan Agreement, including declaring all outstanding
borrowings immediately due and payable, ceasing to advance money or extend credit, and rights of set-off.



12



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##### Table of Contents

The Company must meet certain financial covenants during the term of the Facility, including
(i) maintaining a minimum liquidity ratio, which is defined as cash on hand plus the most recently reported borrowing base less the aggregate amount outstanding under the Non-Formula Revolving Line divided by outstanding bank debt less the
Non-Formula Revolving Line, and (ii) certain Adjusted EBITDA covenants, as defined, as more particularly described in the Agreement and amendments to the Agreement (such Adjusted EBITDA amounts are for financial covenant purposes only, and do
not represent projections of the Companys financial results). As of June 30, 2012, the Company is in compliance with all financial covenants.

On March 28, 2012, the Loan Agreement was amended to modify the borrowing base eligibility criteria under the Loan Agreement, to provide a five (5) day cure period for any Liquidity Ratio
violations before any such violation would be deemed an Event of Default under the Agreement, and to establish certain Adjusted EBITDA financial covenant levels for fiscal 2012 pursuant to the Loan Agreement.

On April 12, 2012, the Loan Agreement was amended to modify the maximum allowable borrowings under the non-formula line by increasing the maximum to
$5.0 million from $3.0 million under certain circumstances. Additionally, the Liquidity Ratio was redefined to provide that non-formula borrowings only require a 1.0:1.0 ratio, as opposed to a 1.25:1.0 ratio.

At the end of the second quarter, the Company had $8.0 million outstanding on the Facility. As of July 15, 2012, the Company had approximately $2.2
million available of the $4.0 million unused on the Facility.



|11. | Operating information
|--- | ---------------------

The Company manages its business functionally and has two reportable operating segments: Paid Search and Daily Deals. Paid Search
consists of the Companys online businesses that collectively reach customers with a variety of local online advertising products and web hosting. The Companys Daily Deals segment consists of the Companys business that reaches its
customers with discounted offers for goods and services provided by merchants.

Management relies on an internal management reporting process
that provides revenue and segment operating income (loss) for making financial decisions and allocating resources. Management believes that segment revenues and operating income (loss) are appropriate measures of evaluating the operational
performance of the Companys segments.

The following is a summary of operating results from continuing operations and assets by business
segment:



|                                             |  |                                  |        |   |                                |   |        |        |  |   |             |   |  |             |        |   |        |   |        |   |  |   |         |  
|-------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------ | - | ------ | ------ |  | - | ----------- | - |  | ----------- | ------ | - | ------ | - | ------ | - |  | - | ------- | -
|                                             |  | Three Months Ended June 30, 2012 |        |   | Six Months Ended June 30, 2012 |  
|                                             |  | Daily Deals                      |        |   | Paid Search                    |   |        | Totals |  |   | Daily Deals |   |  | Paid Search |        |   | Totals |  
|Segment revenue                              |  | $                                | 387    |   |                                | $ | 26,685 |        |  | $ | 27,072      |   |  | $           | 1,070  |   |        | $ | 51,034 |   |  | $ | 52,104  |  
|                                             |  |                                  |        |   |                                |   |        |        |  |   |             |   |  |             |        |   |        |   |        |   |  |   |         |  
|Depreciation and amortization                |  | $                                | 189    |   |                                | $ | 1,538  |        |  | $ | 1,727       |   |  | $           | 374    |   |        | $ | 3,138  |   |  | $ | 3,512   |  
|                                             |  |                                  |        |   |                                |   |        |        |  |   |             |   |  |             |        |   |        |   |        |   |  |   |         |  
|Operating loss                               |  | $                                | (6,687 | ) |                                | $ | (2,203 | )      |  | $ | (8,890      | ) |  | $           | (7,795 | ) |        | $ | (3,562 | ) |  | $ | (11,357 | )
|                                             |  |                                  |        |   |                                |   |        |        |  |   |             |   |  |             |        |   |        |   |        |   |  |   |         |  
|Interest and other income (expense), net     |  |                                  |        |   |                                |   |        |        |  |   | (97         | ) |  |             |        |   |        |   |        |   |  |   | (194    | )
|Change in fair value of warrant liability    |  |                                  |        |   |                                |   |        |        |  |   | 166         |   |  |             |        |   |        |   |        |   |  |   | 108     |  
|Provision for income taxes                   |  |                                  |        |   |                                |   |        |        |  |   | (44         | ) |  |             |        |   |        |   |        |   |  |   | (99     | )
|                                             |  |                                  |        |   |                                |   |        |        |  |   |             |   |  |             |        |   |        |   |        |   |  |   |         |  
|Net income (loss) from continuing operations |  |                                  |        |   |                                |   |        |        |  | $ | (8,865      | ) |  |             |        |   |        |   |        |   |  | $ | (11,542 | )
|                                             |  |                                  |        |   |                                |   |        |        |  |   |             |   |  |             |        |   |        |   |        |   |  |   |         |  
|Segment assets as of June 30, 2012           |  |                                  |        |   |                                |   |        |        |  |   |             |   |  | $           | 7,810  |   |        | $ | 57,811 |   |  | $ | 65,621  |  
|                                             |  |                                  |        |   |                                |   |        |        |  |   |             |   |  |             |        |   |        |   |        |   |  |   |         |  
|Goodwill as of June 30, 2012                 |  |                                  |        |   |                                |   |        |        |  |   |             |   |  | $           | 6,669  |   |        | $ | 19,201 |   |  | $ | 25,870  |  
|                                             |  |                                  |        |   |                                |   |        |        |  |   |             |   |  |             |        |   |        |   |        |   |  |   |         |  
|                                             |  |                                 
|                                             |  | Three Months Ended June 30, 2011 |        |   | Six Months Ended June 30, 2011 |  
|                                             |  | Daily Deals                      |        |   | Paid Search                    |   |        | Totals |  |   | Daily Deals |   |  | Paid Search |        |   | Totals |  
|Segment revenue                              |  | $                                |       |   |                                | $ | 15,477 |        |  | $ | 15,477      |   |  | $           |       |   |        | $ | 32,272 |   |  | $ | 32,272  |  
|                                             |  |                                  |        |   |                                |   |        |        |  |   |             |   |  |             |        |   |        |   |        |   |  |   |         |  
|Depreciation and amortization                |  | $                                |       |   |                                | $ | 1,835  |        |  | $ | 1,835       |   |  | $           |       |   |        | $ | 3,682  |   |  | $ | 3,682   |  
|                                             |  |                                  |        |   |                                |   |        |        |  |   |             |   |  |             |        |   |        |   |        |   |  |   |         |  
|Operating loss                               |  | $                                |       |   |                                | $ | (5,260 | )      |  | $ | (5,260      | ) |  | $           |       |   |        | $ | (8,071 | ) |  | $ | (8,071  | )
|                                             |  |                                  |        |   |                                |   |        |        |  |   |             |   |  |             |        |   |        |   |        |   |  |   |         |  
|Interest and other income (expense), net     |  |                                  |        |   |                                |   |        |        |  |   | (30         | ) |  |             |        |   |        |   |        |   |  |   | (85     | )
|Change in fair value of warrant liability    |  |                                  |        |   |                                |   |        |        |  |   | 411         |   |  |             |        |   |        |   |        |   |  |   | 1,970   |  
|Provision for income taxes                   |  |                                  |        |   |                                |   |        |        |  |   | (48         | ) |  |             |        |   |        |   |        |   |  |   | (59     | )
|                                             |  |                                  |        |   |                                |   |        |        |  |   |             |   |  |             |        |   |        |   |        |   |  |   |         |  
|Net income (loss) from continuing operations |  |                                  |        |   |                                |   |        |        |  | $ | (4,927      | ) |  |             |        |   |        |   |        |   |  | $ | (6,245  | )
|                                             |  |                                  |        |   |                                |   |        |        |  |   |             |   |  |             |        |   |        |   |        |   |  |   |         |  
|Segment assets as of December 31, 2011       |  |                                  |        |   |                                |   |        |        |  |   |             |   |  | $           | 15,092 |   |        | $ | 60,719 |   |  | $ | 75,811  |  
|                                             |  |                                  |        |   |                                |   |        |        |  |   |             |   |  |             |        |   |        |   |        |   |  |   |         |  
|Goodwill as of December 31, 2011             |  |                                  |        |   |                                |   |        |        |  |   |             |   |  | $           | 12,169 |   |        | $ | 19,201 |   |  | $ | 31,370  |  
|                                             |  |                                  |        |   |                                |   |        |        |  |   |             |   |  |             |        |   |        |   |        |   |  |   |         |  



13



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##### Table of Contents

The following table presents summary operating geographic and product information as required by the
entity-wide disclosure requirements (in thousands):



|                                        |  |                             |        |  |                           |   |        |      |  |   |        |  |  |   |        | 
|--------------------------------------- |  | --------------------------- | ------ |  | ------------------------- | - | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                                        |  | Three Months Ended June 30, |        |  | Six Months Ended June 30, |  
|                                        |  | 2012                        |        |  | 2011                      |   |        | 2012 |  |   | 2011   | 
|Revenue by geographic region:           |  |                             |        |  |                           |   |        |      |  |   |        |  |  |   |        | 
|United States                           |  | $                           | 27,072 |  |                           | $ | 15,477 |      |  | $ | 52,104 |  |  | $ | 32,272 | 
|                                        |  |                             |        | 
|Revenue by product:                     |  |                             |        |  |                           |   |        |      |  |   |        |  |  |   |        | 
|Pay-Per-Click (PPC)                     |  |                             | 21,312 |  |                           |   | 11,660 |      |  |   | 40,355 |  |  |   | 24,087 | 
|Subscription Advertising Products       |  |                             | 723    |  |                           |   | 857    |      |  |   | 1,438  |  |  |   | 1,820  | 
|Domain Sales and Services               |  |                             | 1,396  |  |                           |   | 1,447  |      |  |   | 2,993  |  |  |   | 3,320  | 
|Display and Banner Advertising Services |  |                             | 3,254  |  |                           |   | 1,513  |      |  |   | 6,248  |  |  |   | 3,045  | 
|Spreebird Daily Deals                   |  |                             | 387    |  |                           |   |       |      |  |   | 1,070  |  |  |   |       | 
|                                        |  |                             |        |  |                           |   |        |      |  |   |        |  |  |   |        | 
|Total revenue                           |  | $                           | 27,072 |  |                           | $ | 15,477 |      |  | $ | 52,104 |  |  | $ | 32,272 | 
|                                        |  |                             |        |  |                           |   |        |      |  |   |        |  |  |   |        | 



|12. | Stock-based compensation
|--- | ------------------------

Stock option activity under the equity incentive plans during the six months ended June 30, 2012, was as follows:



|                                 |  |        |           |   |                               |   |      |                                        |  |   |     | 
|-------------------------------- |  | ------ | --------- | - | ----------------------------- | - | ---- | -------------------------------------- |  | - | --- | 
|                                 |  | Shares |           |   | WeightedAverageExercise Price |   |      | AggregateIntrinsic Value(in thousands) | 
|Outstanding at December 31, 2011 |  |        | 5,005,584 |   |                               | $ | 4.30 |                                        |  |   |     | 
|Granted                          |  |        | 271,250   |   |                               |   | 2.48 |                                        |  |   |     | 
|Exercised                        |  |        | (5,802    | ) |                               |   | 1.78 |                                        |  |   |     | 
|Cancelled                        |  |        | (762,859  | ) |                               |   | 3.77 |                                        |  |   |     | 
|                                 |  |        |           |   |                               |   |      |                                        |  |   |     | 
|Outstanding at June 30, 2012     |  |        | 4,508,173 |   |                               | $ | 4.28 |                                        |  | $ | 337 | 
|                                 |  |        |           |   |                               |   |      |                                        |  |   |     | 
|Exercisable at June 30, 2012     |  |        | 2,696,031 |   |                               | $ | 4.90 |                                        |  | $ | 237 | 
|                                 |  |        |           |   |                               |   |      |                                        |  |   |     | 

The weighted-average fair value at grant date for the options granted during the six months ended June 30, 2012 and
2011, was $1.72 and $2.73 per option, respectively.

The aggregate intrinsic value of all options exercised during the six months ended
June 30, 2012 and 2011, was $4,000 and $193,000, respectively.

The following table summarizes information regarding options outstanding
and exercisable at June 30, 2012:



|                         |  |                     |           |        |                                         |  |                              |                              |  |   |                     |  |  |  |           |  |  |   |       | 
|------------------------ |  | ------------------- | --------- | ------ | --------------------------------------- |  | ---------------------------- | ---------------------------- |  | - | ------------------- |  |  |  | --------- |  |  | - | ----- | 
|                         |  | Options Outstanding |           |        |                                         | 
|Range of Exercise Prices |  | Shares              |           |        | WeightedAverageRemainingContractualLife |  |                              | WeightedAverageExercisePrice |  |   | Options Exercisable | 
|                         |  |                     |           | Shares |                                         |  | WeightedAverageExercisePrice |                             
|                         |  |                     |           |       
|                         |  |                     |           |       
|                         |  |                     |           |       
|$0.00 - $2.00            |  |                     | 263,823   |        |                                         |  | 5.6 years                    |                              |  | $ | 1.56                |  |  |  | 263,823   |  |  | $ | 1.56  | 
|$2.01 - $3.00            |  |                     | 1,075,562 |        |                                         |  | 6.4 years                    |                              |  |   | 2.38                |  |  |  | 91,093    |  |  |   | 2.32  | 
|$3.01 - $4.00            |  |                     | 991,532   |        |                                         |  | 7.1 years                    |                              |  |   | 3.59                |  |  |  | 597,642   |  |  |   | 3.57  | 
|$4.01 - $5.00            |  |                     | 1,062,512 |        |                                         |  | 5.1 years                    |                              |  |   | 4.60                |  |  |  | 859,886   |  |  |   | 4.63  | 
|$5.01 - $6.00            |  |                     | 217,875   |        |                                         |  | 4.7 years                    |                              |  |   | 5.54                |  |  |  | 184,161   |  |  |   | 5.59  | 
|$6.01 - $7.00            |  |                     | 548,943   |        |                                         |  | 7.1 years                    |                              |  |   | 6.17                |  |  |  | 360,252   |  |  |   | 6.21  | 
|$7.01 - $8.00            |  |                     | 204,750   |        |                                         |  | 2.0 years                    |                              |  |   | 7.51                |  |  |  | 198,498   |  |  |   | 7.51  | 
|$8.01 - $9.00            |  |                     | 62,500    |        |                                         |  | 3.5 years                    |                              |  |   | 8.90                |  |  |  | 60,000    |  |  |   | 8.92  | 
|$9.01 - $10.00           |  |                     | 15,000    |        |                                         |  | 2.9 years                    |                              |  |   | 9.90                |  |  |  | 15,000    |  |  |   | 9.90  | 
|$10.01 - $16.59          |  |                     | 65,676    |        |                                         |  | 2.5 years                    |                              |  |   | 15.76               |  |  |  | 65,676    |  |  |   | 15.76 | 
|                         |  |                     |           |        |                                         |  |                              |                              |  |   |                     |  |  |  |           |  |  |   |       | 
|                         |  |                     | 4,508,173 |        |                                         |  | 5.9 years                    |                              |  | $ | 4.28                |  |  |  | 2,696,031 |  |  | $ | 4.90  | 
|                         |  |                     |           |        |                                         |  |                              |                              |  |   |                     |  |  |  |           |  |  |   |       | 



14



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##### Table of Contents

Restricted stock unit activity under the 2011 Omnibus Plan for the six months ended June 30, 2012 is as
follows:



|                              |  |        |         |   |                                      |   |      | 
|----------------------------- |  | ------ | ------- | - | ------------------------------------ | - | ---- | 
|                              |  | Shares |         |   | Weighted AverageGrant
Date FairValue |  
|                              | 
|                              | 
|Unvested at December 31, 2011 |  |        | 111,547 |   |                                      | $ | 2.29 | 
|Granted                       |  |        | 273,048 |   |                                      |   | 2.25 | 
|Vested                        |  |        |        |   |                                      |   |     | 
|Cancelled                     |  |        | (8,274  | ) |                                      |   | 2.29 | 
|                              |  |        |         |   |                                      |   |      | 
|Unvested at June 30, 2012     |  |        | 376,321 |   |                                      | $ | 2.26 | 
|                              |  |        |         |   |                                      |   |      | 

Performance stock unit activity under the 2011 Omnibus Plan for the six months ended June 30, 2012 is as follows:



|                                 |  |        |        |  |                               |   |      | 
|-------------------------------- |  | ------ | ------ |  | ----------------------------- | - | ---- | 
|                                 |  | Shares |        |  | WeightedAverageExercise Price |  
|Outstanding at December 31, 2011 |  |        |       |  |                               | $ |     | 
|Granted                          |  |        | 94,607 |  |                               |   | 2.26 | 
|Exercised                        |  |        |       |  |                               |   |     | 
|Cancelled                        |  |        |       |  |                               |   |     | 
|                                 |  |        |        |  |                               |   |      | 
|Outstanding at June 30, 2012     |  |        | 94,607 |  |                               | $ | 2.26 | 
|                                 |  |        |        |  |                               |   |      | 
|Exercisable at June 30, 2012     |  |        | 94,607 |  |                               | $ | 2.26 | 
|                                 |  |        |        |  |                               |   |      | 

The fair values of these options were estimated at the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions:



|                          |  |                             |           |   |                           |  |           |      |  |  |           |   |  |  |           |  
|------------------------- |  | --------------------------- | --------- | - | ------------------------- |  | --------- | ---- |  |  | --------- | - |  |  | --------- | -
|                          |  | Three Months Ended June 30, |           |   | Six Months Ended June 30, | 
|                          |  | 2012                        |           |   | 2011                      |  |           | 2012 |  |  | 2011      |  
|Risk-free interest rate   |  |                             | 0.72      | % |                           |  | 1.88      | %    |  |  | 0.80      | % |  |  | 1.92      | %
|Expected lives (in years) |  |                             | 5.1 years |   |                           |  | 5.2 years |      |  |  | 5.1 years |   |  |  | 5.2 years |  
|Expected dividend yield   |  |                             | None      |   |                           |  | None      |      |  |  | None      |   |  |  | None      |  
|Expected volatility       |  |                             | 89.35     | % |                           |  | 85.35     | %    |  |  | 89.35     | % |  |  | 85.35     | %

Total stock-based compensation expense recognized for the three and six months ended June 30, 2012 and 2011 was as
follows (in thousands, except per share amount):



|                                                                 |  |                             |      |  |                           |   |      |      |  |   |       |  |  |   |       | 
|---------------------------------------------------------------- |  | --------------------------- | ---- |  | ------------------------- | - | ---- | ---- |  | - | ----- |  |  | - | ----- | 
|                                                                 |  | Three Months Ended June 30, |      |  | Six Months Ended June 30, |  
|                                                                 |  | 2012                        |      |  | 2011                      |   |      | 2012 |  |   | 2011  | 
|Cost of revenues                                                 |  | $                           | 18   |  |                           | $ | 66   |      |  | $ | 40    |  |  | $ | 153   | 
|Sales and marketing                                              |  |                             | 268  |  |                           |   | 330  |      |  |   | 585   |  |  |   | 648   | 
|General and administrative                                       |  |                             | 332  |  |                           |   | 489  |      |  |   | 668   |  |  |   | 936   | 
|Research and development                                         |  |                             | 49   |  |                           |   | 106  |      |  |   | 100   |  |  |   | 225   | 
|                                                                 |  |                             |      |  |                           |   |      |      |  |   |       |  |  |   |       | 
|Total stock-based compensation expense                           |  | $                           | 667  |  |                           | $ | 991  |      |  | $ | 1,393 |  |  | $ | 1,962 | 
|                                                                 |  |                             |      |  |                           |   |      |      |  |   |       |  |  |   |       | 
|Basic and diluted net stock-based compensation expense per share |  | $                           | 0.03 |  |                           | $ | 0.05 |      |  | $ | 0.06  |  |  | $ | 0.09  | 
|                                                                 |  |                             |      |  |                           |   |      |      |  |   |       |  |  |   |       | 



|13. | Warrants
|--- | --------

On January 20, 2011, in connection with the completion of the offer and sale to the underwriter of 4,600,000 shares of common
stock and in accordance with the anti-dilution provisions contained in each of the warrants to purchase up to 537,373 shares of common stock at an exercise price of $7.89 per share that were issued in a private placement transaction on
August 1, 2007 (the Series A Warrants) and the warrants to purchase up to 537,373 shares of common stock at an exercise price of $9.26 per share that were issued in the same private placement transaction on August 1, 2007 (the
Series B Warrants), the exercise price of the Series A Warrants and the Series B Warrants was reduced to $7.02 per share and $8.09 per share, respectively, and the Company issued an additional 66,207 Series A Warrants at an exercise
price of $7.02 per share, which are immediately exercisable (the New Series A Warrants), and an additional 77,707 Series B Warrants at an exercise price of $8.09 per share, which are immediately exercisable (the New Series B
Warrants and together with the New Series A Warrants, the New Warrants). The Series A Warrants and the Series B Warrants are exercisable until February 1, 2013, and February 3, 2014, respectively, and the New Series A
Warrants and the New Series B Warrants are exercisable until February 1, 2013, and February 3, 2014, respectively.



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Warrant activity for the six months ended June 30, 2012, was as follows:



|                                 |  |        |           |   |                               |   |      | 
|-------------------------------- |  | ------ | --------- | - | ----------------------------- | - | ---- | 
|                                 |  | Shares |           |   | WeightedAverageExercise Price |  
|Outstanding at December 31, 2011 |  |        | 1,497,936 |   |                               | $ | 7.05 | 
|Issued                           |  |        |          |   |                               |   |     | 
|Exercised                        |  |        |          |   |                               |   |     | 
|Expired                          |  |        | (259,276  | ) |                               |   | 5.00 | 
|                                 |  |        |           |   |                               |   |      | 
|Outstanding at June 30, 2012     |  |        | 1,238,660 |   |                               | $ | 7.48 | 
|                                 |  |        |           |   |                               |   |      | 
|Exercisable at June 30, 2012     |  |        | 1,238,660 |   |                               | $ | 7.48 | 
|                                 |  |        |           |   |                               |   |      | 

The following table summarizes information regarding warrants outstanding and exercisable at June 30, 2012:



|                        |  |                      |           |  |                                         |  |           |                               |  |   |        |  |  |                               |           |  |  |   |      | 
|----------------------- |  | -------------------- | --------- |  | --------------------------------------- |  | --------- | ----------------------------- |  | - | ------ |  |  | ----------------------------- | --------- |  |  | - | ---- | 
|                        |  | Warrants Outstanding |           |  | Warrants Exercisable                    | 
|Range of Exercise Price |  | Shares               |           |  | WeightedAverageRemainingContractualLife |  |           | WeightedAverageExercise Price |  |   | Shares |  |  | WeightedAverageExercise Price |          
|$ 2.00 - $ 4.99         |  |                      | 20,000    |  |                                         |  | 2.3 years |                               |  | $ | 2.87   |  |  |                               | 20,000    |  |  | $ | 2.87 | 
|$ 5.00 - $ 7.99         |  |                      | 603,580   |  |                                         |  | 0.6 years |                               |  |   | 7.02   |  |  |                               | 603,580   |  |  |   | 7.02 | 
|$ 8.00 - $ 8.99         |  |                      | 615,080   |  |                                         |  | 1.6 years |                               |  |   | 8.09   |  |  |                               | 615,080   |  |  |   | 8.09 | 
|                        |  |                      |           |  |                                         |  |           |                               |  |   |        |  |  |                               |           |  |  |   |      | 
|                        |  |                      | 1,238,660 |  |                                         |  | 1.1 years |                               |  | $ | 7.48   |  |  |                               | 1,238,660 |  |  | $ | 7.48 | 
|                        |  |                      |           |  |                                         |  |           |                               |  |   |        |  |  |                               |           |  |  |   |      | 



|14. | Fair Value Measurement of Financial Assets and Liabilities
|--- | ----------------------------------------------------------

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of June 30,
2012 (in thousands):



|                  |  |                   |    |  |                                          |   |    | 
|----------------- |  | ----------------- | -- |  | ---------------------------------------- | - | -- | 
|Description       |  | As
ofJune 30,2012 |    |  | SignificantUnobservable
Inputs (Level 3) |  
|                  | 
|                  | 
|Liabilities:      |  |                   |    |  |                                          |   |    | 
|Warrant liability |  | $                 | 99 |  |                                          | $ | 99 | 
|                  |  |                   |    |  |                                          |   |    | 

The following table summarizes our financial assets and liabilities measured at fair value on a recurring basis as of
December 31, 2011 (in thousands):



|                  |  |                       |     |  |                                          |   |     | 
|----------------- |  | --------------------- | --- |  | ---------------------------------------- | - | --- | 
|Description       |  | As
ofDecember 31,2011 |     |  | SignificantUnobservable
Inputs (Level 3) |  
|                  | 
|                  | 
|Liabilities:      |  |                       |     |  |                                          |   |     | 
|Warrant liability |  | $                     | 207 |  |                                          | $ | 207 | 
|                  |  |                       |     |  |                                          |   |     | 

As of June 30, 2012, our warrant liability was based on measurement at fair value without observable market values
that required a high level of judgment to determine fair value (Level 3) using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as our stock price, risk-free interest rates and expected
volatility.



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The fair value of the warrant liability was estimated at June 30, 2012, using a Black-Scholes option
pricing model with the following assumptions:



|                          |  |                                    |  |          
|------------------------- |  | ---------------------------------- |  | ---------
|                          |  | Exercise Price of Related Warrants
|                          |  | $8.09                              |  | $7.02    
|Risk-free interest rate   |  | 0.33%                              |  | 0.16%    
|Expected lives (in years) |  | 1.6 years                          |  | 0.6 years
|Expected dividend yield   |  | None                               |  | None     
|Expected volatility       |  | 72.03%                             |  | 46.50%   

The following table presents a reconciliation for our warrant liability measured and recorded at fair value on a
recurring basis, using significant unobservable inputs (Level 3) (in thousands):



|                                          |  |         |      |  
|----------------------------------------- |  | ------- | ---- | -
|                                          |  | Level 3 |     
|Balance at December 31, 2011              |  | $       | 207  |  
|Change in fair value of warrant liability |  |         | (108 | )
|                                          |  |         |      |  
|Balance at June 30, 2012                  |  | $       | 99   |  
|                                          |  |         |      |  



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

This Quarterly Report on Form 10-Q or certain information included or incorporated by reference in this report, contains or may contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, are statements that could be deemed forward-looking statements within the meaning of the federal securities laws. These statements relate
to our future operations, prospects, potential products, services, developments and business strategies. These statements can, in some cases, be identified by the use of terms such as may, will, should,
could, would, expect, plan, anticipate, believe, estimate, predict, project, and potential or the negative of such terms or other
comparable terminology. In addition, important factors to consider in evaluating such forward-looking statements include changes or developments in social, economic, market, legal or regulatory circumstances, changes in our business or growth
strategy or an inability to execute our strategy due to changes in our industry or the economy generally, the emergence of new or growing competitors, the actions or omissions of third parties, including customers, competitors and governmental
authorities, and various other factors, including those described or referred to in Item 1A of Part II of this Quarterly Report. Should any one or more of these risks or uncertainties materialize, or the underlying estimates or assumptions
prove incorrect, our actual results could differ materially from those expressed in the forward-looking statements and there can be no assurance that the forward-looking statements contained in this report will in fact occur.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the attached condensed
consolidated financial statements and related notes thereto, and with the audited consolidated financial statements and related notes thereto as of December 31, 2011, and for the year ended December 31, 2011, included in our Annual Report
on Form 10-K filed with the Securities and Exchange Commission on March 15, 2012.

Overview

We are a local media company that specializes in connecting local businesses with online consumers. We reach consumers on our proprietary sites, as well
as third-party sites (collectively, Consumer Properties), which includes our Owned & Operated web sites such as Local.com and Krillion.com (collectively, O&O), as well as our network of over 1,200 third-party
U.S. regional media websites (collectively, Network). We provide a variety of digital media services to small and medium sized businesses (SMBs) to enable these customers to reach consumers both on our Consumer Properties as
well as on the major search engines (collectively, Business Solutions) and we also enable third parties to distribute their advertiser listings on our Consumer Properties, for which we generate ad revenues. We generate revenue from
performance ad units such as daily deals, pay-per-click, pay-per-call and lead generation, subscription ad units, and CPM ad units, among others.

Our Consumer Properties serve over 30 million consumers each month. We use patented and proprietary search technologies and systems to provide users of our O&O websites and our Network with
relevant search results for local businesses, products and services, incorporating daily deals, event information, ratings and reviews, driving directions and more. By distributing this information across our Consumer Properties we are able to reach
users that our direct advertisers and advertising partners desire to reach.

Our Business Solutions business serves over 18,000 SMBs with a
variety of digital media products. The products are sold primarily to telesales. Our sales efforts focus principally around our Exact Match product suite, which offers a variety of digital media features including web hosting, search engine
optimization services, display ads, mobile ads, and social media presence management. Over 16,000 of our direct SMB customers are using a legacy web hosting and/or listing solution and over 800 of our direct SMB customers are enrolled in our new
Exact Match product. An average Exact Match subscription generates approximately the same monthly revenue as ten legacy customers. Our Business Solutions technologies also power a variety of platform products targeted towards larger businesses such
as regional media publishers and ad agencies. We expect a large portion of our legacy web hosting and listing solution SMB customers to phase out in Q3 2012 with the remainder completely phased out by the end of 2012.

We launched Local.com in August of 2005 and our local syndication network in July 2007, which together form our Consumer Properties business. We have
completed a number of acquisitions in order to broaden our product portfolio, diversify our revenue streams and serve new markets. In the third quarter of 2010, we acquired Octane360 which included the initial version of our Exact Match digital
media suite. In the second quarter of 2011, we acquired Krillion, Inc., which provides us with a robust real-time local product search platform that enables us to provide consumers with real-time, in-stock product availability at local retailers. We
also acquired the assets of Rovion, Inc. in the second quarter of 2011 and have since decided to sell all such assets. Also in the second quarter of 2011we launched our Spreebird daily deals business. In the third quarter of 2011, we acquired
Screamin Media Group, Inc., a competitor to our daily deals business, as part of our effort to expand our daily deals business. We regularly develop and deploy new products and product features based on our



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##### Table of Contents

powerful technology platform, for which we have 9 issued patents and 11 pending. We have a long-term focus on building three key drivers for our business  traffic, technology and
advertisers. Our traffic is at record levels, our technology platform has been dramatically expanded, and we are generating record revenues from our own direct customers. We believe we can continue to grow through our own efforts and the acquisition
of complementary businesses and technologies intended to accelerate our growth.

Recent Developments

On March 28, 2012, we entered into the First Amendment to the Loan and Security Agreement with Square One Bank, which amends the Loan and Security
Agreement by and between us and Square One Bank dated August 3, 2011 (Loan Agreement). The First Amendment to the Loan Agreement modifies the borrowing base eligibility criteria under the Loan Agreement, provides a five (5) day
cure period for any liquidity ratio violations before any such violation would be deemed an event of default under the Loan Agreement, and establishes certain Adjusted EBITDA financial covenant, as defined, levels for fiscal 2012 pursuant to the
Loan Agreement. On April 11, 2012, we entered into the Second Amendment to Loan Agreement with Square One Bank, which amends the Loan Agreement by and among the Company and Square One Bank dated August 3, 2011. The Second Amendment of the
Loan Agreement modifies the maximum allowable borrowings under the non-formula line by increasing the maximum to $5.0 million from $3.0 million under certain circumstances. Additionally, it redefines the liquidity ratio to provide that non-formula
borrowings only require a 1.0:1.0 ratio, rather than the 1.25:1.0 ratio.

During the second quarter 2012 we decided to sell all assets
relating to the Rovion business. The Rovion business, which is considered a usage model, did not align with the Companys intent to become both a local media publisher and local advertising sales and marketing organization. These assets are
actively being marketed and all operating results related to these assets have been classified as discontinued operations in the Consolidated Statements of Operations.

At June 30, 2012, we performed an impairment valuation of goodwill as it relates to the Spreebird business unit. The evaluation was triggered by the continued decline in the market capitalization of
comparable public companies and lower than expected financial performance of the Spreebird business unit during the second quarter of 2012. The evaluation resulted in an estimated impairment charge of $5.5 million to goodwill. During the second
quarter of 2012 we also recorded an impairment charge relating to intangible assets and capitalized software of the Spreebird business unit for $799,000 and $152,000, respectively.

Outlook for Our Business

According to BIA/Kelsey, the U.S. online advertising market is an
over $47 billion a year industry. Local search, that is, searches for products, services and businesses within a geographic region is an increasingly significant segment of the online advertising industry. Local search allows consumers
to search for local businesses products or services by including geographic area, zip code, city and other geographically targeted search parameters in their search requests. According to a May 2011 study, BIA/Kelsey estimates that the local
search market in the United States will grow from $5.1 billion in 2010, to $8.2 billion by 2015. Consumers who conduct local searches on the Internet (local searchers) tend to convert into buying customers at a higher rate than other
types of Internet users. As a result, advertisers often pay a significant premium to place their ads in front of local searchers on websites like those powered by our Consumer Properties business, including Local.com or our network partners
websites. Additionally, local SMBs that would not normally compete at the national level for advertising opportunities are increasingly engaging in and competing for local advertising opportunities, including local search, to promote their products
and services.

Local online search is still relatively new, and as a result, it is difficult to determine our current market share, or predict
our future market share. However, we have a number of competitors that have announced an intention to increase their focus on local search with regard to U.S. online advertising, including some of the leading online advertising companies in the
world, including Google, Yahoo!, and Microsoft, among many others, with greater experience and resources than we have.

The U.S. online
advertising industry, including the local search segment, is regularly impacted and changed by new and emerging technologies, including, for instance, ad targeting and mobile technologies, as well as the increased fragmentation of the online
advertising industry in general, from different technology platforms, to different advertising formats, targeting methodologies and the like. Those companies within our industry that are able to quickly adapt to new technologies, as well as offer
innovations of their own, have a better chance of succeeding than those that do not.

We believe that local search will be an increasingly
significant segment of the online advertising industry. Although search advertising has been used primarily by businesses that serve the national market, local businesses are increasingly using online advertising to attract local customers. Our
Consumer Properties and Business Solutions are all designed to serve this market of consumers, advertisers and publishers, which we believe will provide an opportunity for growth from increased local search volumes by consumers, as well as increased
competition by advertisers to display their ad listings in front of those consumers.



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Our revenue, profitability and future growth depend not only on our ability to execute our business plan,
but also, the growth of the paid-search market and our ability to effectively compete with other providers of local, and paid-search technologies and services among other things.

As we continue to diversify our technologies and traffic sources, we remain focused on local media offerings that will improve the experience for our end users, enable our SMBs to better reach their
potential customers, and allow our regional media network partners to enhance their service offerings and lower their costs. While we are still very focused on the local search industry, we believe there are additional opportunities in local media
that we and our customers can benefit from, while diversifying our revenue sources. We intend to continue making significant investments in initiatives to diversify our revenue sources and promote our future growth.

As we continue to invest in our core offerings, while pursuing the acquisitions noted above, we have increased our operating expenses, mainly related to
traffic acquisition costs, the deployment of new features and functionality across our business and the support of our acquired companies. We cannot give assurances that our efforts to improve our results of operations through this strategy will be
successful.

Sources of Revenue

We generate revenue primarily on our Consumer Properties from both direct and indirect advertiser relationships, via:



| |  |  | click-throughs on sponsored listings;
| | - |  | -------------------------------------



| |  |  | calls to cost-per-call advertiser listings;
| | - |  | -------------------------------------------



| |  |  | lead generation;
| | - |  | ----------------



| |  |  | banner ads;
| | - |  | -----------



| |  |  | subscription advertiser listings;
| | - |  | ---------------------------------



| |  |  | domain sales and services;
| | - |  | --------------------------



| |  |  | web hosting services; and
| | - |  | -------------------------



| |  |  | daily deal offerings.
| | - |  | ---------------------

Operating Expenses

Cost of
Revenues

Cost of revenues consists of traffic acquisition costs, revenue sharing payments that we make to our network partners, and
other cost of revenues. Traffic acquisition costs consist primarily of campaign costs associated with driving consumers to our Local.com website, including personnel costs associated with managing traffic acquisition programs. Other cost of revenues
consists of Internet connectivity costs, data center costs, amortization of certain software license fees and maintenance, depreciation of computer equipment used in providing our paid-search services, and payment processing fees (credit cards and
fees for Local Exchange Carrier (LEC) billings). We advertise on large search engine websites such as Google, Yahoo!, MSN/Bing and Ask.com, as well as other search engine websites, by bidding on certain keywords we believe will drive
traffic to our Local.com website. During the three and six months ended June 30, 2012, approximately 62%, of our overall traffic were purchased from other search engine websites. During the three and six months ended June 30, 2012,
advertising costs to drive consumers to our Local.com website were $16.7 million and $31.2 million respectively. Of the total advertising cost for the three and six months ended June 30, 2012, $11.9 million and $21.9 million were attributable
to Google, Inc. and $4.3 million and $8.4 million were attributable to Yahoo!, respectively. During the three and six months ended June 30, 2011, approximately 68% and 64% respectively, of our overall traffic were purchased from other search
engine websites. During the three and six months ended June 30, 2011, advertising costs to drive consumers to our Local.com website were $7.6 million and $15.6 million respectively. Of the total advertising cost for the three and six months
ended June 30, 2011, $5.7 million and $11.8 million were attributable to Google, Inc. and $1.4 million and $2.8 million were attributable to Yahoo!, respectively.

Sales and Marketing

Sales and marketing expenses consist of sales commissions and
salaries for our internal and outsourced sales force, customer service staff and marketing personnel, advertising and promotional expenses. We record advertising costs and sales commission in the period in which the expense is incurred. We expect
our sales and marketing expenses will increase in absolute dollars as we continue to experience growth.



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General and Administrative

General and administrative expenses consist of salaries and other costs associated with employment of our executive, finance, human resources and information technology staff, legal, tax and accounting,
and professional service fees.

Research and Development

Research and development expenses consist of salaries and other costs of employment of our development staff, outside contractor costs and amortization of capitalized website development costs.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reported period. We
review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the result of which forms the basis for making judgments about the
carrying values of assets and liabilities and the reported amounts of revenue and expenses. Actual results may differ materially from these estimates under different assumptions or conditions. Our significant accounting policies described in more
detail in Note 1 to our condensed consolidated financial statements included in this Report on Form 10-Q, involve judgments and estimates that are significant to the presentation of our condensed consolidated financial statements.

Revenue Recognition

We recognize
revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service or product has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed
or determinable; and (4) the collection of our fees is probable.

We generate revenue when it is realizable and earned, as evidenced by
click-throughs occurring on advertisers sponsored listings, the display of a banner advertisement, the fulfillment of subscription listing obligations, the sale of deal of the day vouchers, or the delivery of Exact Match products to our
customers. We enter into contracts to distribute sponsored listings and banner advertisements with our direct and indirect advertisers. Most of these contracts are short-term, do not contain multiple elements and can be cancelled at anytime. Our
indirect advertisers provide us with sponsored listings with bid prices (for example, what their advertisers are willing to pay for each click-through on those listings). We recognize our portion of the bid price based upon the execution of our
contractual obligations. Sponsored listings and banner advertisements are included within pages that display search results, among others, in response to keyword searches performed by consumers on our Local.com website and network partner websites.
Revenue is recognized when earned based on click-through and impression activity to the extent that collection is reasonably assured from credit worthy advertisers. Management has analyzed our revenue recognition and determined that our web hosting
revenue is recognized net of direct costs.

During the year ended December 31, 2010, we entered into multiple-deliverable arrangements
for the sale of domains and for providing services relating to such domains. Management evaluated the agreements in accordance with the provision of the revenue recognition topic that addresses multiple-deliverable revenue arrangements. The
multiple-deliverable arrangements entered into consisted of various units of accounting such as the sale of domains, website development fees, content delivery and hosting fees. Such elements were considered separate units of accounting due to each
element having value to the customer on a stand-alone basis. The selling price for each of the units of accounting was determined using a combination of vendor-specific objective evidence and management estimates. Revenue relating to domains was
recognized with the transfer of title of such domains. Revenue for website development, content delivery and hosting fees are recognized as such services are performed or delivered. The agreements did not include any cancellation, termination or
refund provisions that we consider probable. Subsequent to December 31, 2010 the Company did not enter into any significant multiple deliverable arrangements.

We launched our Spreebird daily deals business in May 2011. Revenue relating to the Spreebird daily deals business is recorded exclusive of the portion of gross billings paid as merchant revenue share,
since we generally act as the agent, rather than the principal, when connecting merchants with online customers. Spreebird deal vouchers are sold primarily through email marketing and our www.spreebird.com website. Revenue for our Spreebird business
is recognized when earned. Revenue is considered to be earned once all revenue recognition criteria have been satisfied.



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We evaluate whether it is appropriate to record the gross amount of sales and related costs or the net
amount earned as revenue. Generally, when we are primarily obligated in a transaction, are subject to inventory risk, have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators, revenue is recorded
at the gross sales price. We generally record the net amounts as revenue earned if we are not primarily obligated and do not have latitude in establishing prices. Such amounts earned are determined using a fixed percentage, a fixed-payment schedule,
or a combination of the two. All revenue, other than Spreebird daily deals revenue and web hosting revenue, is recognized on a gross basis.

Allowance for Doubtful Accounts

Our management estimates the losses that may result from that portion of our accounts receivable that may not be collectible as a result of the inability
of our customers to make required payments. Management specifically analyzes accounts receivable and historical bad debt, customer concentration, customer credit-worthiness, current economic trends and changes in customer payment terms when
evaluating the adequacy of the allowance for doubtful accounts. If we believe that our customers financial condition has deteriorated such that it impairs their ability to make payments to us, additional allowances may be required. We review
past due accounts on a monthly basis and record an allowance for doubtful accounts generally equal to any accounts receivable that are over 90 days past due and for which collectability is not reasonably assured.

As of June 30, 2012 and December 31, 2011, two customers, Yahoo! and Google represented 58% and 47% of our total accounts receivable,
respectively. These customers have historically paid within the payment period provided for under their contracts and management believes these customers will continue to do so.

Goodwill and Other Intangible Assets

Goodwill representing the excess of the
purchase price over the fair value of the net tangible and intangible assets arising from acquisitions and purchased domain names are recorded at cost. Intangible assets, such as goodwill and domain names, which are determined to have an indefinite
life, are not amortized. The first step in determining if there is any goodwill impairment is a comparison of the estimated fair value of an internal reporting unit with its carrying amount, including goodwill. If the estimated fair value of the
reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and the second step is unnecessary. If the carrying value of the reporting unit exceeds its estimated fair value, the second step is performed to
measure the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied value of the goodwill. If the carrying amount of goodwill is greater than the implied value, an impairment charge is recognized for
the difference. We engage an independent appraiser to assist management in the valuation. We perform annual impairment reviews during the fourth fiscal quarter of each year or earlier if indicators of potential impairment exist. For other intangible
assets with indefinite lives, we compare the fair value of related assets to the carrying value to determine if there is impairment. For other intangible assets with definite lives, we compare future undiscounted cash flow forecasts prepared by
management to the carrying value of the related intangible asset group to determine if there is impairment. We performed our annual impairment analysis as of December 31, 2011, and determined that the estimated fair value of the reporting units
exceeded its carrying value and therefore no impairment existed. The Spreebird business unit was identified as a separate reporting unit for evaluation of goodwill impairment. Due to lower than expected financial performance by the Spreebird
business unit and a significant decrease in the market capitalization of comparable public companies during the second quarter of fiscal 2012, the Company determined that there were potential indicators of impairment at June 30, 2012. Goodwill
was tested for impairment by estimating the fair value of the reporting unit using a consideration of market multiples and a discounted cash flow model (Level 3 Fair Value Measurement) and was written down to its estimated implied fair value, which
was approximately $6.7 million as of June 30, 2012, resulting in an estimated impairment charge of approximately $5.5 million, which is included in Impairment of goodwill and intangible assets in the accompanying consolidated statements of
operations. As of June 30, 2012, a review of the Spreebird business units intangible assets, current and forecasted operating results (Level 3 Fair Value Measurement) indicated that the carrying amount of these finite-lived intangible
assets may not be recoverable from the sum of future undiscounted cash flows. As a result, these finite-lived intangible assets were written down to their fair value, based on the sum of future discounted cash flows, resulting in an impairment
charge of approximately $799,000 included in Impairment of goodwill and intangible assets in the accompanying consolidated statements of operations. The Company is still in the process of finalizing the goodwill impairment review of the
Spreebird business unit and the impairment charge recorded in the second quarter 2012 was based on managements best estimate at the time. Any adjustments to the impairment of goodwill, once the evaluation has been finalized, will be recorded
in the third quarter 2012.



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Stock Based Compensation

Total stock-based compensation expense recognized for the three and six months ended June 30, 2012 and 2011, is as follows (in thousands, except per share amount):



|                                                                 |  |                             |      |  |                           |   |      |      |  |   |       |  |  |   |       | 
|---------------------------------------------------------------- |  | --------------------------- | ---- |  | ------------------------- | - | ---- | ---- |  | - | ----- |  |  | - | ----- | 
|                                                                 |  | Three Months Ended June 30, |      |  | Six Months Ended June 30, |  
|                                                                 |  | 2012                        |      |  | 2011                      |   |      | 2012 |  |   | 2011  | 
|Cost of revenues                                                 |  | $                           | 18   |  |                           | $ | 66   |      |  | $ | 40    |  |  | $ | 153   | 
|Sales and marketing                                              |  |                             | 268  |  |                           |   | 330  |      |  |   | 585   |  |  |   | 648   | 
|General and administrative                                       |  |                             | 332  |  |                           |   | 489  |      |  |   | 668   |  |  |   | 936   | 
|Research and development                                         |  |                             | 49   |  |                           |   | 106  |      |  |   | 100   |  |  |   | 225   | 
|                                                                 |  |                             |      |  |                           |   |      |      |  |   |       |  |  |   |       | 
|Total stock-based compensation expense                           |  | $                           | 667  |  |                           | $ | 991  |      |  | $ | 1,393 |  |  | $ | 1,962 | 
|                                                                 |  |                             |      |  |                           |   |      |      |  |   |       |  |  |   |       | 
|Basic and diluted net stock-based compensation expense per share |  | $                           | 0.03 |  |                           | $ | 0.05 |      |  | $ | 0.06  |  |  | $ | 0.09  | 
|                                                                 |  |                             |      |  |                           |   |      |      |  |   |       |  |  |   |       | 

Results of Operations

The following table sets forth our historical operating results as a percentage of revenue for the three and six months ended June 30, 2012 and 2011:



|                                                             |  |                             |       |    |                           |  |       |      |  |  |       |    |  |  |       |   
|------------------------------------------------------------ |  | --------------------------- | ----- | -- | ------------------------- |  | ----- | ---- |  |  | ----- | -- |  |  | ----- | --
|                                                             |  | Three Months Ended June 30, |       |    | Six Months Ended June 30, | 
|                                                             |  | 2012                        |       |    | 2011                      |  |       | 2012 |  |  | 2011  |   
|Revenue                                                      |  |                             | 100.0 | %  |                           |  | 100.0 | %    |  |  | 100.0 | %  |  |  | 100.0 | % 
|                                                             |  |                             |       |    |                           |  |       |      |  |  |       |    |  |  |       |   
|Operating expenses:                                          |  |                             |       |    |                           |  |       |      |  |  |       |    |  |  |       |   
|Cost of revenues                                             |  |                             | 73.8  |    |                           |  | 69.8  |      |  |  | 71.7  |    |  |  | 67.5  |   
|Sales and marketing                                          |  |                             | 17.1  |    |                           |  | 26.9  |      |  |  | 19.8  |    |  |  | 23.0  |   
|General and administrative                                   |  |                             | 10.3  |    |                           |  | 21.3  |      |  |  | 10.0  |    |  |  | 18.3  |   
|Research and development                                     |  |                             | 4.7   |    |                           |  | 8.8   |      |  |  | 4.7   |    |  |  | 8.9   |   
|Amortization of intangibles                                  |  |                             | 3.0   |    |                           |  | 7.3   |      |  |  | 3.3   |    |  |  | 7.2   |   
|Impairment of goodwill and intangible assets                 |  |                             | 23.8  |    |                           |  |      |      |  |  | 12.4  |    |  |  |      |   
|                                                             |  |                             |       |    |                           |  |       |      |  |  |       |    |  |  |       |   
|Total operating expenses                                     |  |                             | 132.8 |    |                           |  | 134.0 |      |  |  | 121.8 |    |  |  | 125.0 |   
|                                                             |  |                             |       |    |                           |  |       |      |  |  |       |    |  |  |       |   
|Operating income (loss)                                      |  |                             | (32.8 | )  |                           |  | (34.0 | )    |  |  | (21.8 | )  |  |  | (25.0 | ) 
|Interest and other income (expense), net                     |  |                             | (0.4  | )  |                           |  | (0.2  | )    |  |  | (0.4  | )  |  |  | (0.3  | ) 
|Change in fair value of warrant liability                    |  |                             | 0.6   |    |                           |  | 2.7   |      |  |  | 0.2   |    |  |  | 6.1   |   
|                                                             |  |                             |       |    |                           |  |       |      |  |  |       |    |  |  |       |   
|Income (loss) from continuing operations before income taxes |  |                             | (32.6 | )  |                           |  | (31.5 | )    |  |  | (22.0 | )  |  |  | (19.2 | ) 
|Provision for income taxes                                   |  |                             | 0.2   |    |                           |  | 0.3   |      |  |  | 0.2   |    |  |  | 0.2   |   
|                                                             |  |                             |       |    |                           |  |       |      |  |  |       |    |  |  |       |   
|Net income (loss) from continuing operations                 |  |                             | (32.7 | )  |                           |  | (31.8 | )    |  |  | (22.2 | )  |  |  | (19.4 | ) 
|Income (loss) from discontinued operations (net of taxes)    |  |                             | (1.8  | )  |                           |  | (3.1  | )    |  |  | (1.9  | )  |  |  | (1.5  | ) 
|Net income (loss)                                            |  |                             | (34.5 | )% |                           |  | (34.9 | )%   |  |  | (24.1 | )% |  |  | (20.8 | )%
|                                                             |  |                             |       |    |                           |  |       |      |  |  |       |    |  |  |       |   



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Three and six months ended June 30, 2012 and 2011

Revenue (dollars in thousands):



|                   |  |                             |        |  |         |  |       |                           |  |   |         |  |  |        |       |   |      |  |       |     |  |   |        |  |  |     |       |   |        |   |        |  |  |  |       |   |  |  |      |  
|------------------ |  | --------------------------- | ------ |  | ------- |  | ----- | ------------------------- |  | - | ------- |  |  | ------ | ----- | - | ---- |  | ----- | --- |  | - | ------ |  |  | --- | ----- | - | ------ | - | ------ |  |  |  | ----- | - |  |  | ---- | -
|                   |  | Three Months Ended June 30, |        |  | Percent |  |       | Six Months Ended June 30, |  |   | Percent | 
|                   |  | 2012                        |        |  | (*)     |  |       | 2011                      |  |   | (*)     |  |  | change |       |   | 2012 |  |       | (*) |  |   | 2011   |  |  | (*) |       |   | change |  
|Owned and operated |  | $                           | 20,478 |  |         |  | 75.6  | %                         |  | $ | 9,502   |  |  |        | 61.4  | % |      |  | 115.5 | %   |  | $ | 38,451 |  |  |     | 73.8  | % |        | $ | 19,744 |  |  |  | 61.2  | % |  |  | 94.7 | %
|Network            |  |                             | 4,114  |  |         |  | 15.2  | %                         |  |   | 3,716   |  |  |        | 24.0  | % |      |  | 10.7  | %   |  |   | 8,328  |  |  |     | 16.0  | % |        |   | 7,439  |  |  |  | 23.1  | % |  |  | 12.0 | %
|Business solutions |  |                             | 2,480  |  |         |  | 9.2   | %                         |  |   | 2,259   |  |  |        | 14.6  | % |      |  | 9.8   | %   |  |   | 5,325  |  |  |     | 10.2  | % |        |   | 5,089  |  |  |  | 15.8  | % |  |  | 4.6  | %
|                   |  |                             |        |  |         |  |       |                           |  |   |         |  |  |        |       |   |      |  |       |     |  |   |        |  |  |     |       |   |        |   |        |  |  |  |       |   |  |  |      |  
|Total revenue      |  | $                           | 27,072 |  |         |  | 100.0 | %                         |  | $ | 15,477  |  |  |        | 100.0 | % |      |  | 74.9  | %   |  | $ | 52,104 |  |  |     | 100.0 | % |        | $ | 32,272 |  |  |  | 100.0 | % |  |  | 61.5 | %
|                   |  |                             |        |  |         |  |       |                           |  |   |         |  |  |        |       |   |      |  |       |     |  |   |        |  |  |     |       |   |        |   |        |  |  |  |       |   |  |  |      |  



|(*) |  Percent of total revenue
|--- | --------------------------

Owned and
operated revenue for the three and six months ended June 30, 2012, increased 115.5% and 94.7%, respectively, compared to the same periods in 2011. The increase in revenue for the three and six months ended June 30, 2012, compared to the
same period in 2011 is a combination of increased traffic to our Local.com website, together with an increase in monetization as our revenue per thousand visitors (RKV) increased to $299 and $292, respectively for the three and six
months ended June 30, 2012, from $193 and $203, respectively for the three and six months ended June 30, 2011. The increase in RKV was primarily a result of changes made to our advertising partner relationships. The increase in RKV due to
a new advertising partner relationship was partially offset by a significant decrease in revenue from one of our large advertising partners. The lower RKV for the three and six months ended June 30, 2011, was primarily due to the Yahoo!/Bing
alliance, which resulted in changes to the Yahoo! search and advertising platform. Starting in August 2011 we entered into a new advertising partner relationship that resulted in a significant increase in monetization of traffic to our owned and
operated properties. The increase in RKV due to a new advertising partner relationship was partially offset by a significant decrease in revenue from one of our large advertising partners. The increase in traffic to our owned and operated properties
are the result of higher cost of revenues to attract users as well as increased organic search traffic over the same period.

As noted above,
in August 2011 we entered into an agreement with a new advertising partner. The revenue generated from such partner has been subject to seasonality, which has similarly subjected all of our owned and operated revenue results to
seasonality. As such, we believe that owned and operated revenue is expected to be seasonally lower for the third quarter 2012 and higher in the fourth quarter of 2012.

Network revenue for the three and six months ended June 30, 2012, increased 10.7% and 12.0%, compared to the same periods in 2011. The increase is primarily due to increased traffic to our network
partner websites and the increase in revenue per click (RPC) from our advertising partner feed. The increase in traffic is a combination of increased cost of revenues to attract users to the network partner sites together with an
increase in organic traffic over the same period.

Business Solutions revenue for the three and six months ended June 30, 2012, increased
9.8% and 4.6%, respectively compared to the same periods in 2011. The increase in revenue is due to an increase in revenue from our Exact Match product suite together with the inclusion of revenue from our newly acquired Spreebird business. The
increase is partially offset by the continued decline in the small business subscribers from 35,000 at June 30, 2011 to 16,000 at June 30, 2012. The decrease in the small business subscriber base is due to the natural attrition of the
current subscriber bases, subject to prior contractual commitments, as well as the Companys decision to suspend acquisitions of LEC-billed subscriber bases in order to concentrate resources around the Exact Match product suite powered by our
acquired Octane360 platform and investment in our new Spreebird daily deals business. As a result, we anticipate revenue from our existing subscribers to continue to decline.

We currently maintain a billing relationship with certain third parties that bill a portion of our legacy subscribers for us via LECs. For the three months ended June 30, 2012, our legacy subscribers
represented revenue of approximately $1.4 million, a decline of 24% from the three months ended June 30, 2011, revenue derived from our legacy subscribers of $1.9 million. For the six months ended June 30, 2012, our legacy subscribers
represented revenue of approximately $3.0 million, a decline of 29% from the six months ended June 30, 2011, revenue derived from our legacy subscribers of $4.2 million. Since our decision to suspend the acquisition of new LEC-billed customers
in the fourth quarter of fiscal 2010, subject to existing contractual obligations, we have experienced a natural and expected churn in these legacy subscribers resulting in a fairly predictable reduction in our total legacy subscription customers on
a quarter to quarter basis. In April 2012, we were advised that certain of our third party billing partners had received notification that certain LECs would no longer provide billing services for our products and services with respect to these
legacy subscribers as of September and December 2012, respectively. In August 2012, our billing partner, LaRoss Partners, provided notice to us that such suspension of billing services would occur in September and December 2012. As such, we expect
that the inability to bill our legacy subscribers via LECs will reduce revenue for the second half of 2012 by approximately $666,000 and net income for the second half of 2012 by approximately $634,000. The impact to our revenues after fiscal 2012
would continue to decline as a result of the



24



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natural churn which would have occurred in the absence of these actions by the LECs. We remain focused on selling our new products from our Exact Match product suite, which are billed via credit
card and are entirely unaffected by LEC billing. As of June 30, 2012, we had 828 Exact Match customers which are billed monthly at an average charge that is approximately 10 times as much as one legacy subscription customer. There can be no
assurance that our efforts to secure new Exact Match customers will be capable of offsetting the revenue and net income losses we from the loss of our revenue and net income by our legacy subscribers.

The growth in small business subscribers in prior years was a result of acquisitions of subscriber bases and internal and outsourced sales efforts. The
following table provides the revenue relating to the acquisition of subscriber bases and revenue relating to internal and outsourced sales efforts (dollars in thousands):



|                                            |  |                             |       |  |         |  |       |                           |  |   |         |  |  |        |       |   |      |  |       |     |  |   |       |  |  |     |       |   |        |   |       |  |  |  |       |   |  |  |       |  
|------------------------------------------- |  | --------------------------- | ----- |  | ------- |  | ----- | ------------------------- |  | - | ------- |  |  | ------ | ----- | - | ---- |  | ----- | --- |  | - | ----- |  |  | --- | ----- | - | ------ | - | ----- |  |  |  | ----- | - |  |  | ----- | -
|                                            |  | Three Months Ended June 30, |       |  | Percent |  |       | Six Months Ended June 30, |  |   | Percent | 
|                                            |  | 2012                        |       |  | (*)     |  |       | 2011                      |  |   | (*)     |  |  | change |       |   | 2012 |  |       | (*) |  |   | 2011  |  |  | (*) |       |   | change |  
|Revenue from internal and outsourced sales  |  | $                           | 1,436 |  |         |  | 57.9  | %                         |  | $ | 779     |  |  |        | 34.5  | % |      |  | 84.3  | %   |  | $ | 3,201 |  |  |     | 60.1  | % |        | $ | 1,603 |  |  |  | 31.5  | % |  |  | 99.7  | %
|Revenue from acquired bases                 |  |                             | 1,044 |  |         |  | 42.1  | %                         |  |   | 1,480   |  |  |        | 65.5  | % |      |  | -29.5 | %   |  |   | 2,124 |  |  |     | 39.9  | % |        |   | 3,486 |  |  |  | 68.5  | % |  |  | -39.1 | %
|                                            |  |                             |       |  |         |  |       |                           |  |   |         |  |  |        |       |   |      |  |       |     |  |   |       |  |  |     |       |   |        |   |       |  |  |  |       |   |  |  |       |  
|Total sales and advertiser services revenue |  | $                           | 2,480 |  |         |  | 100.0 | %                         |  | $ | 2,259   |  |  |        | 100.0 | % |      |  | 9.8   | %   |  | $ | 5,325 |  |  |     | 100.0 | % |        | $ | 5,089 |  |  |  | 100.0 | % |  |  | 4.6   | %
|                                            |  |                             |       |  |         |  |       |                           |  |   |         |  |  |        |       |   |      |  |       |     |  |   |       |  |  |     |       |   |        |   |       |  |  |  |       |   |  |  |       |  

Based on the above, total revenue for the three and six months ended June 30, 2012, increased 74.9% and 61.5%,
respectively, compared to the same periods in 2011.

The following table identifies our major customers that represented greater than 10% of
our total revenue in the periods presented:



|                |  |                             |      |   |                             |  |      |      |  |  |      |   |  |  |      |  
|--------------- |  | --------------------------- | ---- | - | --------------------------- |  | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                |  | Percentage of Total Revenue |      |   | Percentage of Total Revenue | 
|                |  | Three Months Ended June 30, |      |   | Six Months Ended June 30,   | 
|Customer        |  | 2012                        |      |   | 2011                        |  |      | 2012 |  |  | 2011 |  
|Google, Inc     |  |                             | 48.3 | % |                             |  | 0.0  | %    |  |  | 46.7 | % |  |  | 0.0  | %
|Yahoo! Inc.     |  |                             | 17.3 | % |                             |  | 33.6 | %    |  |  | 17.5 | % |  |  | 35.4 | %
|SuperMedia Inc. |  |                             | 1.6  | % |                             |  | 21.5 | %    |  |  | 1.8  | % |  |  | 22.1 | %

Operating expenses:

Operating expenses were as follows (dollars in thousands):



|                            |  |                             |        |  |                        |  |       |                           |  |   |                        |  |  |               |       |   |      |  |       |                        |  |   |        |  |  |                        |       |   |               |   |        |  |  |  |       |   |  |  |       |   
|--------------------------- |  | --------------------------- | ------ |  | ---------------------- |  | ----- | ------------------------- |  | - | ---------------------- |  |  | ------------- | ----- | - | ---- |  | ----- | ---------------------- |  | - | ------ |  |  | ---------------------- | ----- | - | ------------- | - | ------ |  |  |  | ----- | - |  |  | ----- | --
|                            |  | Three Months Ended June 30, |        |  |                        |  |       | Six Months Ended June 30, |  |   |                        | 
|                            |  | 2012                        |        |  | Percent ofTotalRevenue |  |       | 2011                      |  |   | Percent ofTotalRevenue |  |  | PercentChange |       |   | 2012 |  |       | Percent ofTotalRevenue |  |   | 2011   |  |  | Percent ofTotalRevenue |       |   | PercentChange |  
|Cost of revenues            |  | $                           | 19,990 |  |                        |  | 73.8  | %                         |  | $ | 10,798                 |  |  |               | 69.8  | % |      |  | 85.1  | %                      |  | $ | 37,335 |  |  |                        | 71.7  | % |               | $ | 21,786 |  |  |  | 67.5  | % |  |  | 71.4  | % 
|Sales and marketing         |  | $                           | 4,628  |  |                        |  | 17.1  | %                         |  | $ | 4,158                  |  |  |               | 26.9  | % |      |  | 11.3  | %                      |  | $ | 10,291 |  |  |                        | 19.8  | % |               | $ | 7,435  |  |  |  | 23.0  | % |  |  | 38.4  | % 
|General and administrative  |  | $                           | 2,799  |  |                        |  | 10.3  | %                         |  | $ | 3,291                  |  |  |               | 21.3  | % |      |  | (14.9 | )%                     |  | $ | 5,185  |  |  |                        | 10.0  | % |               | $ | 5,907  |  |  |  | 18.3  | % |  |  | (12.2 | )%
|Research and development    |  | $                           | 1,275  |  |                        |  | 4.7   | %                         |  | $ | 1,358                  |  |  |               | 8.8   | % |      |  | (6.1  | )%                     |  | $ | 2,456  |  |  |                        | 4.7   | % |               | $ | 2,885  |  |  |  | 8.9   | % |  |  | (14.9 | )%
|Amortization of intangibles |  | $                           | 819    |  |                        |  | 3.0   | %                         |  | $ | 1,132                  |  |  |               | 7.3   | % |      |  | (27.7 | )%                     |  | $ | 1,743  |  |  |                        | 3.3   | % |               | $ | 2,330  |  |  |  | 7.2   | % |  |  | (25.2 | )%
|Asset impairment            |  | $                           | 6,451  |  |                        |  | 23.8  | %                         |  | $ |                       |  |  |               |      | % |      |  | NM    |                        |  | $ | 6,451  |  |  |                        | 12.4  | % |               | $ |       |  |  |  | NM    |   |  |  | NM    |   
|                            |  |                             |        |  |                        |  |       |                           |  |   |                        |  |  |               |       |   |      |  |       |                        |  |   |        |  |  |                        |       |   |               |   |        |  |  |  |       |   |  |  |       |   
|Total operating expenses    |  | $                           | 35,962 |  |                        |  | 132.8 | %                         |  | $ | 20,737                 |  |  |               | 134.0 | % |      |  | 73.4  | %                      |  | $ | 63,461 |  |  |                        | 121.8 | % |               | $ | 40,343 |  |  |  | 125.0 | % |  |  | 57.3  | % 
|                            |  |                             |        |  |                        |  |       |                           |  |   |                        |  |  |               |       |   |      |  |       |                        |  |   |        |  |  |                        |       |   |               |   |        |  |  |  |       |   |  |  |       |   

Cost of revenues

Cost of revenues for the three and six months ended June 30, 2012, increased by 85.1% and 71.4%, respectively, compared to the same periods in 2011. The increase during the three and six months ended
June 30, 2012 compared to the same periods in 2011 is due to an increase in traffic acquisition costs associated with driving consumers to our Local.com website. Costs incurred related to the Daily Deals segment was immaterial for the three and
six months ended June 30, 2012.

Sales and marketing

Sales and marketing expenses for the three and six months ended June 30, 2012, increased 11.3% and 38.4%, respectively, compared to the same periods in 2011. The increase was primarily due to higher
personnel-related costs due to increased costs related to the two acquisitions completed during the second and third quarter of 2011 together with our continued efforts in expanding our sales force. Included in sales and marketing expense for the
three and six months ended June 30, 2012 is $637,000 million and $2.4 million, respectively, relating to the Daily Deals segment, which commenced operations in May 2011.

General and administrative

General and administrative expenses for the three and six
months ended June 30, 2012, decreased by 14.9% and 12.2%, respectively, compared to the same periods in 2011. The decrease was mainly due to a decrease in compensation expense for the quarter, partially offset by an increase in personnel
related cost due to acquisitions. Costs incurred related to the Daily Deals segment was immaterial for the three and six months ended June 30, 2012.



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Research and development

Research and development expenses for the three and six months ended June 30, 2012, decreased by 6.1% and 14.9%, respectively, compared to the same periods in 2011. The decrease is mainly due to our
effort to reduce technology related costs together with a larger percentage of total technology related cost being capitalized as we invest in improving existing and newly acquired technologies.

The following table sets forth research and development expenses, additional capitalized website development costs and amortization of capitalized
website development costs for the periods indicated (in thousands):



|                                                      |  |                             |       |   |                           |   |       |      |  |   |        |   |  |   |       |  
|----------------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                                      |  | Three Months Ended June 30, |       |   | Six Months Ended June 30, |  
|                                                      |  | 2012                        |       |   | 2011                      |   |       | 2012 |  |   | 2011   |  
|Research and development expense                      |  | $                           | 1,275 |   |                           | $ | 1,358 |      |  | $ | 2,456  |   |  | $ | 2,885 |  
|Capitalized website development costs                 |  | $                           | 557   |   |                           | $ | 780   |      |  | $ | 1,247  |   |  | $ | 1,732 |  
|Amortization of capitalized website development costs |  | $                           | (566  | ) |                           | $ | (425  | )    |  | $ | (1,085 | ) |  | $ | (806  | )

Amortization of intangibles

Amortization of intangibles expense was $819,000 and $1.7 million for the three and six months ended June 30, 2012, respectively, compared to $1.1 million and $2.3 million for the same periods in
2011. The decrease in amortization expense was primarily due to our decision to suspend subscriber acquisitions of customer-related intangible assets in 2010, except where prior contractual commitments exist. The customer-related intangible assets
purchased in 2010 are amortized over the expected life of the assets based on the expected cash flow from the customers, resulting in accelerated amortization of the intangible assets over a period of approximately four years with the weighted
average percentage amortization for all small business subscriber relationships acquired to date being approximately 60% in year one, 21% in year two, 14% in year three and 5% in year four. This was partially offset by an increase in other
intangible asset amortization expense from the three acquisitions during the second and third quarter of 2011. Some of the Companys third party billing providers have been notified of the possibility that certain LECs will not be provide
billing services for our products and services with respect to these small business subscriber relationships. The Company will evaluate and adjust the amortization of the effected small business subscriber relationships intangible assets to its
remaining useful lives based on these changes.

Impairment of goodwill and intangible assets

During the quarter we recorded an impairment charge of $6.5 million, which consisted of the impairment of goodwill, intangible assets and capitalized
software related to the Spreebird business unit.

Interest and other income (expense), net

Interest and other income (expense), net were ($97,000) and ($194,000) for the three and six months ended June 30, 2012, respectively, compared to
($30,000) and ($85,000) for the same periods in 2011. The increase is due to a balance of $8.0 million outstanding on the Square 1 Bank line of credit while the Company only had $7.0 million outstanding for a portion of the first quarter 2011 on the
previous line of credit with Silicon Valley Bank.

Provision for income taxes

Provision for income taxes was $44,000 and $99,000 for the three and six months ended June 30, 2012 and $48,000 and $59,000 for the three and six months ended June 30, 2011. Taxes are primarily
due to anticipated tax amortization on indefinite-lived assets, partially offset by California research and development credits.

Liquidity
and Capital Resources

Liquidity and capital resources highlights (in thousands):



|                          |  |          |       |   |              |   |        | 
|------------------------- |  | -------- | ----- | - | ------------ | - | ------ | 
|                          |  | June 30, |       |   | December 31, |  
|                          |  | 2012     |       |   | 2011         |  
|Cash and cash equivalents |  | $        | 7,103 |   |              | $ | 10,394 | 
|                          |  |          |       |   |              |   |        | 
|Working capital           |  | $        | (939  | ) |              | $ | 1,540  | 
|                          |  |          |       |   |              |   |        | 



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##### Table of Contents

Cash flow highlights (in thousands):



|                                                    |  |                           |        |   |      |   |        |  
|--------------------------------------------------- |  | ------------------------- | ------ | - | ---- | - | ------ | -
|                                                    |  | Six Months Ended June 30, |       
|                                                    |  | 2012                      |        |   | 2011 |  
|Net cash (used in) provided by operating activities |  | $                         | (1,481 | ) |      | $ | (1,416 | )
|Net cash used in investing activities               |  |                           | (1,816 | ) |      |   | (9,284 | )
|Net cash provided by financing activities           |  |                           | 6      |   |      |   | 11,103 |  

We have funded our business, to date, primarily from issuances of equity securities as well as through debt facilities.
Cash was $7.1 million as of June 30, 2012, and $10.4 million as of December 31, 2011. We had a working capital deficit of ($939,000) as of June 30, 2012, and working capital of $1.5 million as of December 31, 2011. As of
June 30, 2012, we had a total of $8.0 million outstanding on the revolving credit facility with Square 1 Bank. The decrease in working capital is largely due to a decrease in cash of approximately $3.3 million, which was mainly due to the
payment of expenses accrued for at December 31, 2011, and capital expenditures during the first two quarters of 2012. This decrease was partially offset by the timing of payments to vendors and cash receipts from customers. Working capital
excludes the warrant liability and includes assets and liabilities held for sale.

Net cash used in operating activities was $1.5 million for
the six months ended June 30, 2012. Net loss adjusted for non-cash charges (adding back depreciation and amortization, stock-based compensation expense, change in fair value of warrant liability and asset impairment) used was approximately
$913,000, and changes in operating assets and liabilities used cash of $568,000 for the six months ended June 30, 2012. Net cash used in operating activities was $1.4 million for the six months ended June 30, 2011. Net loss adjusted for
non-cash charges (adding back depreciation and amortization, stock-based compensation expense, change in fair value of warrant liability and asset impairment) used was approximately $2.9 million. Changes in operating assets and liabilities provided
cash of $1.5 million.

There are four primary drivers that affect cash provided by or (used in) operations: net income (loss); non-cash
adjustments to net income (loss); changes in accounts receivable; and changes in accounts payable. For the six months ended June 30, 2012, the terms of our accounts receivable and accounts payable remained unchanged.

The table below substantiates the change in net cash provided by (used in) operating activities for the six months ended June 30, 2012 and 2011 (in
thousands):



|                                          |  |                           |         |   |      |   |        |        |  |   |        |  
|----------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------ | ------ |  | - | ------ | -
|                                          |  | Six Months Ended June 30, |         |   |      |  
|                                          |  | 2012                      |         |   | 2011 |   |        | Change | 
|Net income (loss)                         |  | $                         | (12,549 | ) |      | $ | (6,722 | )      |  | $ | (5,827 | )
|Non-cash (1)                              |  |                           | 11,636  |   |      |   | 3,782  |        |  |   | 7,854  |  
|                                          |  |                           |         |   |      |   |        |        |  |   |        |  
|Subtotal                                  |  |                           | (913    | ) |      |   | (2,940 | )      |  |   | 2,027  |  
|AR, AP and Other                          |  |                           | (568    | ) |      |   | 1,524  |        |  |   | (2,092 | )
|                                          |  |                           |         |   |      |   |        |        |  |   |        |  
|Net cash (used in) provided by operations |  | $                         | (1,481  | ) |      | $ | (1,416 | )      |  | $ | (65    | )
|                                          |  |                           |         |   |      |   |        |        |  |   |        |  



|(1) | Includes depreciation, amortization, change in fair value of warrant liability, asset impairment, non-cash expense related to stock-based compensation and provision for
doubtful accounts.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Net cash used in investing activities was $1.8 million for the six months ended June 30, 2012, and
consisted of $1.8 million of capital expenditures, primarily related to website development costs. There was no material financing activities for the six months ended June 30, 2012.

Net cash used in investing activities was $9.3 million for the six months ended June 30, 2011, and consisted of $2.0 million for capital expenditures, $6.2 million acquisition related costs and
$0.5 million for purchases of customer-related intangible assets. Net cash provided by financing activities was $11.1 million for the six months ended June 30, 2011, primarily consisted of $18.2 million from a public offering of our common
stock partially offset by the repayment of the $7.0 million outstanding balance of the revolving credit facility with Silicon Valley Bank.

During the second half of 2011 and continuing through the first half of 2012, we were able to reduce our operating losses through the restructuring of
agreements with current partners, entering into agreements with new partners and continued efforts to optimize monetization on our O&O and Network properties. These changes resulted in a significant improvement in monetization compared to the
prior quarters. Part of the improvement related to a new significant ad partner which was effective August 1, 2011. The full quarter impact of these improvements was realized in the fourth quarter 2011 and has improved during the first half of
2012. These improvements were partially offset by a decrease in revenues from one of our advertising partners due to certain contract amendments. We believe that our new advertising relationship will, in time compensate for the loss of these
revenues. We have also been able to increase traffic to our O&O and Network sites resulting



27



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in record traffic for the past twelve months. Although we have increased investments in recently acquired businesses, much of the investment became discretionary marketing spend beginning in the
second quarter of 2012, and is accordingly now controlled based on available working capital. Management believes that now that it is able to control its discretionary marketing spend the trend of cash provided by operating activities will continue.
Management further believes that based upon projected operating needs, cash from operations and availability on our revolving credit facility will be sufficient to fund our operations for at least the next 12 months. If the projections and
assumptions used by management to form its opinion prove incorrect, then we may require additional capital to fund our operations over the next 12 months. Management cannot provide assurances that, if required, any additional equity or debt
arrangements will be available to the Company in the future or that the required capital would be available on terms acceptable to the Company, if at all, or that any such activity would not be dilutive to our stockholders.

Shelf Registration Statement

On
January 14, 2011, we filed a new shelf registration statement with the Securities and Exchange Commission pursuant to which we registered 8,000,000 shares of our common stock. On March 23, 2011, we filed an amendment to the new shelf
registration statement with an effective date of April 12, 2011. The new shelf registration statement is set to expire in April 2014. We may periodically offer all or a portion of the shares of common stock registered on the new shelf
registration statement, when it becomes effective, at prices and on terms to be announced when and if the shares of common stock are so offered. The specifics of any future offerings, along with the use of proceeds of any common stock offered, will
be described in detail in a prospectus supplement, or other offering materials, at the time of the offering. Our ability to sell our common stock, including on terms and at prices that are acceptable to the Company, is subject to market conditions
and other factors, such as contractual commitments of our previously issued warrants.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.



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##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

There have been no material changes in our disclosures regarding market risk since December 31, 2011. See also Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2011
for further sensitivity analysis regarding our market risk related to interest rates and derivative liabilities.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of
Disclosure Controls and Procedures

In accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the Exchange
Act), as of the end of the period covered by this Quarterly Report on Form 10-Q, our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a- 15(e) and Rule 15d-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer
have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in
Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the
period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

From time to time we
may initiate or be subject to a variety of legal proceedings and claims in the ordinary course of business, including claims seeking to enforce our intellectual property rights, claims that allege we infringe the intellectual property rights of
another party and claims arising in connection in the ordinary course of business. Other than the litigations discussed below, we are not currently a party to any material legal proceedings.

GEOTAG Litigation

On July 23, 2010, a lawsuit alleging patent infringement was filed
in the United States District Court for the Eastern District of Texas against us and others in our sector, by GEOTAG, Inc., a Delaware corporation with its principal offices in Plano, Texas. The complaint alleges that we infringe U.S. Patent
No. 5,930,474 (hereinafter, the  474 Patent) as a result of the operation of our website at www.local.com. GEOTAG, Inc. purports to be the rightful assignee of all right, title and interest in and to the 474
Patent. The complaint seeks unspecified amounts of damages and costs incurred, including attorney fees, as well as a permanent injunction preventing us from continuing those activities that are alleged to infringe the 474 Patent. We are
investigating the merits of the claims and intend to vigorously defend ourselves.

Bernstein Litigation

On March 22, 2012, a putative class action lawsuit was filed in the United States District Court for the Southern District of California against
Local.com Corporation, by Matthew Bernstein and other alleged to be similarly situated. The complaint alleges that Local.com Corporation violated California Penal Code Section 632 by allegedly recording a conversation with Plaintiff Bernstein
without his consent, as well as similar claims such as alleged invasion of privacy, alleged negligence, and alleged unlawful, fraudulent and unfair business acts. The complaint was dismissed without prejudice on May 21, 2012.

Frys Electronics Litigation

On
June 18, 2012, we filed a lawsuit against Frys Electronics, Inc. (Frys) alleging that Frys violates our registered U.S. Patent No. 7,062,453, which is entitled Methods and systems for dynamic networked
commerce architecture. The lawsuit was filed in the Central District of California. We are seeking an injunction against Frys and an award of damages in an amount to be determined at trial, as well as attorneys fees. There can be
no guarantees as to the outcome of the litigation.



29



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##### Table of Contents

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

Information on risk factors
can be found in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission on March 15, 2012. There were no material changes from
the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, except as follows:

If our billing partners lose the ability to bill our monthly subscription customers through LECs on those monthly subscription customers telephone bills it would adversely impact our
consolidated results of operations.

We currently maintain a billing relationship with certain third parties that bill
some of our monthly subscription customers for us through each customers LEC. These third parties are approved to bill our products and services directly on most of our monthly subscription customers local telephone bills through their
LEC, commonly referred to as their local telephone company. In fiscal 2011, approximately 83% of our monthly subscription customers were billed via LEC billing and revenue from LEC billing represented 10% of our total revenue in fiscal 2011 .
The existence of the LECs is the result of federal legislation. As such, Congress could pass future legislation that obviates the existence of or the need for the LECs. Additionally, regulatory agencies could limit or prevent the ability of our
third-party partners to use the LECs to bill our monthly subscription customers. Similarly, the introduction of and advancement of new technologies, such as WiFi technology or other wireless-related technologies, could render unnecessary the
existence of fixed telecommunication lines, which also could obviate the need for and access to the LECs. Finally, our third-party billing partners have historically been affected by the LECs internal policies. With respect to many LECs, such
policies are becoming more stringent. In April 2012, we became aware that certain of our third party billing partners had received notices from their partners that certain LECs would no longer be accepting billing for our products and services on
our monthly subscription customers local telephone bills. On August 8, 2012, we received a notice from our billing partner, LaRoss Partners that they would not be able to bill approximately 70% of our legacy monthly subscribers
historically billed through LEC after August 2012. Further, based on information presently available to us, we believe that in December 2012, the remaining approximately 30% of our legacy monthly subscription customers billed via LEC billing or
4,100 of our total monthly subscription customers will be impacted by these decisions. If we are unable to bill our monthly subscription customers, our results will be negatively impacted. We estimate that the impact after the
effectiveness of these actions will be a loss starting at approximately $257,000 per month in revenue and $200,000 per month in net income both of which would decrease over time with expected churn. These changes could also impact the collectability
of our LEC related receivables in the future. The inability on the part of our third-party billing partners to use the LECs to bill our advertisers through their monthly telephone bills will increase the churn rate of our existing monthly
subscription customers and would have a material adverse impact on our consolidated financial condition and results of operations.

Our ability to efficiently bill our monthly subscription customers depends upon our third-party billing partners.

We currently depend upon our third-party billing partners to efficiently bill and collect monies through LEC billing. We currently have agreements with two third-party billing partners. Any disruption in
these third parties ability to perform these functions could adversely affect our financial condition and results of operations. In April 2012, we became aware that certain of our third party billing partners had received notices from their
partners that certain LECs would no longer be accepting billing for our products and services on our monthly subscription customers local telephone bills. On August 8, 2012, we received a notice from our billing partner, LaRoss
Partners that they would not be able to bill approximately 70% of our legacy monthly subscribers historically billed through LEC after August 2012. As such, in August 2012, approximately 12,000 of our total monthly subscription customers will be
impacted by these decisions. Further, based on information presently available to us, we believe that in December 2012, the remaining approximately 30% of our legacy monthly subscription customers billed via LEC billing or 4,100 of our total monthly
subscription customers will be impacted by these decisions. The inability on the part of our third-party billing partners to use the LECs to bill our advertisers through their monthly telephone bills will increase the churn rate of our existing
monthly subscription customers and will have a material adverse impact on our financial condition and results of operations.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

None



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None



|Item 4. | Mine Safety Disclosures
|------- | -----------------------

None



30



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##### Table of Contents

|Item 5. | Other Information
|------- | -----------------

None



31



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##### Table of Contents

Item 6. Exhibits



|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|               | 
|1.1(1)         |  | Underwriting Agreement dated January 14, 2011, by and between Registrant and Canaccord Genuity Inc.                                                                                                                                                                                                                                                                                                                                                                             
|               | 
|2.1(2)         |  | Agreement and Plan of Merger by and among Local.com Corporation, Agile Acquisition Corporation, Screamin Media Group, Inc. and Dan Griffith, as stockholders agent dated July
8, 2011.                                                                                                                                                                                                                                                                                         
|               | 
|3.1(3)         |  | Amended and Restated Certificate of Incorporation of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                            
|               | 
|3.2(4)         |  | Amendment to Restated Certificate of Incorporation of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                           
|               | 
|3.2(5)         |  | Amended and Restated Bylaws of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|               | 
|3.3(6)         |  | Certificate of Ownership and Merger of Interchange Merger Sub, Inc. with and into Interchange Corporation.                                                                                                                                                                                                                                                                                                                                                                      
|               | 
|3.4(7)         |  | Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation.                                                                                                                                                                                                                                                                                                                                            
|               | 
|4.1(7)         |  | Preferred Stock Rights Agreement, dated as of October 15, 2008, by and between Local.com Corporation and Computershare Trust Company, N.A., as Rights Agent (which includes the form
of Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation as Exhibit A thereto, the form of Rights Certificate as Exhibit B thereto, and the Stockholder Rights Plan,
Summary of Rights as Exhibit C thereto).
|               | 
|10.1(8)#       |  | Employment Agreement by and between the Registrant and Erick Herring dated January 9, 2012.                                                                                                                                                                                                                                                                                                                                                                                     
|               | 
|10.2(9)       |  | Amendment Number Two to Google Services Agreement with an effective date of February 1, 2012, by and between the Registrant and Google Inc.                                                                                                                                                                                                                                                                                                                                     
|               | 
|10.3(10)       |  | First Amendment to Loan and Security Agreement dated March 28, 2012, by and among the Registrant, Krillion, Inc., Screamin Media Group, Inc. and Square 1 Bank.                                                                                                                                                                                                                                                                                                                 
|               | 
|10.4(11)       |  | Second Amendment to Loan and Security Agreement dated April 11, 2012, by and among the Registrant, Krillion, Inc., Screamin Media Group, Inc. and Square 1 Bank.                                                                                                                                                                                                                                                                                                                
|               | 
|10.5(11)      |  | Amendment Number 5 date April 12, 2012, to Yahoo! Publisher Network Contract dated August 30, 2010, by and between the Registrant and Yahoo! Inc.                                                                                                                                                                                                                                                                                                                               
|               | 
|10.6(12)      |  | Amendment Number Three to Google Services Agreement with an effective date of May 1, 2012, by and between the Registrant and Google Inc.                                                                                                                                                                                                                                                                                                                                        
|               | 
|10.7(13)      |  | AOL Advertising Insertion Order dated May 29, 2012, by and between the Registrant and AOL Advertising.                                                                                                                                                                                                                                                                                                                                                                          
|               | 
|10.8(13)      |  | Amendment Number 6 dated May 29, 2012, to Yahoo! Publisher Network Contract dated August 30, 2010, by and among the Registrant, Yahoo! Inc., and Yahoo! SARL.                                                                                                                                                                                                                                                                                                                   
|               | 
|10.9(13)      |  | Amendment Number Four to Google Services Agreement with an effective date of June 1, 2012, by and between the Registrant and Google Inc.                                                                                                                                                                                                                                                                                                                                        
|               | 
|10.10(14)#     |  | 2011 Omnibus Incentive Plan, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|               | 
|10.11(15)#     |  | Description of the Material Terms of the Registrants Bonus Program as of June 20, 2012.                                                                                                                                                                                                                                                                                                                                                                                        
|               | 
|31.1*          |  | Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.                                                                                                                                                                                                                                                                               
|               | 
|31.2*          |  | Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.                                                                                                                                                                                                                                                                               
|               | 
|32.1*          |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                                                                                                                                                                                                                  
|               | 
|101.INS**      |  | XBRL Instance Document.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|               | 
|101.SCH**      |  | XBRL Taxonomy Extension Schema Document.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|               | 
|101.CAL**      |  | XBRL Taxonomy Extension Calculation Linkbase Document.                                                                                                                                                                                                                                                                                                                                                                                                                          
|               | 
|101.DEF**      |  | XBRL Taxonomy Extension Definition Linkbase Document.                                                                                                                                                                                                                                                                                                                                                                                                                           
|               | 
|101.LAB**      |  | XBRL Taxonomy Extension Label Linkbase Document.                                                                                                                                                                                                                                                                                                                                                                                                                                
|               | 
|101.PRE**      |  | XBRL Taxonomy Extension Presentation Linkbase Document.                                                                                                                                                                                                                                                                                                                                                                                                                         



|* | Filed herewith.
|- | ---------------

|# | Indicates management contract or compensatory plan.
|- | ---------------------------------------------------

|** | To be filed by amendment.
|-- | -------------------------

| | Application has been made with the Securities and Exchange Commission to seek confidential treatment of certain provisions. Omitted material for which confidential
treatment has been requested has been filed separately with the Securities and Exchange Commission.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



32



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##### Table of Contents

|(1) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 14, 2011.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 14, 2011.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference from the Registrants Statement on Form SB-2, Amendment No. 2, filed with the Securities and Exchange Commission on
September 16, 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 17, 2009
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 2, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference from the Registrants Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 2, 2006.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 15, 2008.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 13, 2012.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 9, 2012.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 30, 2012.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 16, 2012.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 16, 2012.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 4, 2012.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Incorporated by reference from the Registrants definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on June 12,
2012.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 20, 2012.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------



33



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##### Table of Contents

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|               |  |  |  |  |  |                                                                                   
|-------------- |  |  |  |  |  | ----------------------------------------------------------------------------------
|               |  |  |  |  |  | LOCAL.COM CORPORATION                                                             
|               |  |  | 
|August 9, 2012 |  |  |  |  |  | /s/ Heath B. Clarke                                                               
|Date           |  |  |  |  |  | Heath B. Clarke                                                                   
|               |  |  |  |  |  | Chief Executive Officer                                                           
|               |  |  |  |  |  | (principal executive officer) and Chairman                                        
|               |  |  | 
|August 9, 2012 |  |  |  |  |  | /s/ Kenneth S. Cragun                                                             
|Date           |  |  |  |  |  | Kenneth S. Cragun                                                                 
|               |  |  |  |  |  | Chief Financial Officer (principal financial and accounting officer) and Secretary



34



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##### Table of Contents

INDEX TO EXHIBITS



|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|               | 
|1.1(1)         |  | Underwriting Agreement dated January 14, 2011, by and between Registrant and Canaccord Genuity Inc.                                                                                                                                                                                                                                                                                                                                                                             
|               | 
|2.1(2)         |  | Agreement and Plan of Merger by and among Local.com Corporation, Agile Acquisition Corporation, Screamin Media Group, Inc. and Dan Griffith, as stockholders agent dated July
8, 2011.                                                                                                                                                                                                                                                                                         
|               | 
|3.1(3)         |  | Amended and Restated Certificate of Incorporation of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                            
|               | 
|3.2(4)         |  | Amendment to Restated Certificate of Incorporation of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                           
|               | 
|3.2(5)         |  | Amended and Restated Bylaws of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|               | 
|3.3(6)         |  | Certificate of Ownership and Merger of Interchange Merger Sub, Inc. with and into Interchange Corporation.                                                                                                                                                                                                                                                                                                                                                                      
|               | 
|3.4(7)         |  | Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation.                                                                                                                                                                                                                                                                                                                                            
|               | 
|4.1(7)         |  | Preferred Stock Rights Agreement, dated as of October 15, 2008, by and between Local.com Corporation and Computershare Trust Company, N.A., as Rights Agent (which includes the form
of Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock of Local.com Corporation as Exhibit A thereto, the form of Rights Certificate as Exhibit B thereto, and the Stockholder Rights Plan,
Summary of Rights as Exhibit C thereto).
|               | 
|10.1(8)#       |  | Employment Agreement by and between the Registrant and Erick Herring dated January 9, 2012.                                                                                                                                                                                                                                                                                                                                                                                     
|               | 
|10.2(9)       |  | Amendment Number Two to Google Services Agreement with an effective date of February 1, 2012, by and between the Registrant and Google Inc.                                                                                                                                                                                                                                                                                                                                     
|               | 
|10.3(10)       |  | First Amendment to Loan and Security Agreement dated March 28, 2012, by and among the Registrant, Krillion, Inc., Screamin Media Group, Inc. and Square 1 Bank.                                                                                                                                                                                                                                                                                                                 
|               | 
|10.4(11)       |  | Second Amendment to Loan and Security Agreement dated April 11, 2012, by and among the Registrant, Krillion, Inc., Screamin Media Group, Inc. and Square 1 Bank.                                                                                                                                                                                                                                                                                                                
|               | 
|10.5(11)      |  | Amendment Number 5 date April 12, 2012, to Yahoo! Publisher Network Contract dated August 30, 2010, by and between the Registrant and Yahoo! Inc.                                                                                                                                                                                                                                                                                                                               
|               | 
|10.6(12)      |  | Amendment Number Three to Google Services Agreement with an effective date of May 1, 2012, by and between the Registrant and Google Inc.                                                                                                                                                                                                                                                                                                                                        
|               | 
|10.7(13)      |  | AOL Advertising Insertion Order dated May 29, 2012, by and between the Registrant and AOL Advertising.                                                                                                                                                                                                                                                                                                                                                                          
|               | 
|10.8(13)      |  | Amendment Number 6 dated May 29, 2012, to Yahoo! Publisher Network Contract dated August 30, 2010, by and among the Registrant, Yahoo! Inc., and Yahoo! SARL.                                                                                                                                                                                                                                                                                                                   
|               | 
|10.9(13)      |  | Amendment Number Four to Google Services Agreement with an effective date of June 1, 2012, by and between the Registrant and Google Inc.                                                                                                                                                                                                                                                                                                                                        
|               | 
|10.10(14)#     |  | 2011 Omnibus Incentive Plan, as amended.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|               | 
|10.11(15)#     |  | Description of the Material Terms of the Registrants Bonus Program as of June 20, 2012.                                                                                                                                                                                                                                                                                                                                                                                        
|               | 
|31.1*          |  | Certification of Principal Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.                                                                                                                                                                                                                                                                               
|               | 
|31.2*          |  | Certification of Principal Financial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.                                                                                                                                                                                                                                                                               
|               | 
|32.1*          |  | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                                                                                                                                                                                                                  
|               | 
|101.INS**      |  | XBRL Instance Document.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|               | 
|101.SCH**      |  | XBRL Taxonomy Extension Schema Document.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|               | 
|101.CAL**      |  | XBRL Taxonomy Extension Calculation Linkbase Document.                                                                                                                                                                                                                                                                                                                                                                                                                          
|               | 
|101.DEF**      |  | XBRL Taxonomy Extension Definition Linkbase Document.                                                                                                                                                                                                                                                                                                                                                                                                                           
|               | 
|101.LAB**      |  | XBRL Taxonomy Extension Label Linkbase Document.                                                                                                                                                                                                                                                                                                                                                                                                                                
|               | 
|101.PRE**      |  | XBRL Taxonomy Extension Presentation Linkbase Document.                                                                                                                                                                                                                                                                                                                                                                                                                         



|* | Filed herewith.
|- | ---------------

|# | Indicates management contract or compensatory plan.
|- | ---------------------------------------------------

|** | To be filed by amendment.
|-- | -------------------------

| | Application has been made with the Securities and Exchange Commission to seek confidential treatment of certain provisions. Omitted material for which confidential
treatment has been requested has been filed separately with the Securities and Exchange Commission.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



35



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##### Table of Contents

|(1) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 14, 2011.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on July 14, 2011.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference from the Registrants Statement on Form SB-2, Amendment No. 2, filed with the Securities and Exchange Commission on
September 16, 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 17, 2009
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 2, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference from the Registrants Current Report on Form 8-K/A, filed with the Securities and Exchange Commission on November 2, 2006.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on October 15, 2008.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on January 13, 2012.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on February 9, 2012.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on March 30, 2012.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 16, 2012.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on May 16, 2012.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 4, 2012.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Incorporated by reference from the Registrants definitive proxy statement on Schedule 14A filed with the Securities and Exchange Commission on June 12,
2012.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) | Incorporated by reference from the Registrants Current Report on Form 8-K, filed with the Securities and Exchange Commission on June 20, 2012.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------



36