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U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 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 September 30, 2008

OR



| ̈ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the Transition Period from  to
.

Commission
File Number: 000-26357

LOOKSMART, LTD.

(Exact Name of Registrant as Specified in its Charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 13-3904355                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

625 Second Street

San Francisco, California 94107

(415) 348-7000

(Address, including zip code, and telephone number, including area code, of Registrants principal executive offices)

NASDAQ Stock Market LLC

Securities
registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.001 per share

Securities registered pursuant to Section 12(g) of the Act:

None

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 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 is a large accelerated filer, an accelerated filer or a non-accelerated filer, as defined in Rule 12b-2 of the Exchange Act.



|                           |  |                      |  |                          |  |                             
|-------------------------- |  | -------------------- |  | ------------------------ |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer  x |  | Non-accelerated filer   ̈ |  | Smaller reporting company  x

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 October 31, 2008, there were 17,040,259 shares of the registrants common stock outstanding, par value $0.001 per share.









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TABLE OF CONTENTS



|              |  |                                                                                       |  |   
|------------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I        |  | 3                                                                                    
|              |  |                                                                                      
|ITEM 1.       |  | FINANCIAL INFORMATION                                                                 |  | 3 
|              |  |                                                                                      
|              |  | CONDENSED CONSOLIDATED BALANCE SHEETS                                                 |  | 3 
|              |  |                                                                                      
|              |  | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                       |  | 4 
|              |  |                                                                                      
|              |  | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                       |  | 5 
|              |  |                                                                                      
|              |  | NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                        |  | 6 
|              |  |                                                                                      
|ITEM 2.       |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 23
|              |  |                                                                                      
|ITEM 3.       |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 37
|              |  |                                                                                      
|ITEM 4.       |  | CONTROLS AND PROCEDURES                                                               |  | 37
|              | 
|PART II       |  | 38                                                                                   
|              |  |                                                                                      
|ITEM 1.       |  | LEGAL PROCEEDINGS                                                                     |  | 38
|              |  |                                                                                      
|ITEM 1A.      |  | RISK FACTORS                                                                          |  | 39
|              |  |                                                                                      
|ITEM 2.       |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           |  | 48
|              |  |                                                                                      
|ITEM 3.       |  | DEFAULTS UPON SENIOR SECURITIES                                                       |  | 48
|              |  |                                                                                      
|ITEM 4.       |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 49
|              |  |                                                                                      
|ITEM 5.       |  | OTHER INFORMATION                                                                     |  | 49
|              |  |                                                                                      
|ITEM 6.       |  | EXHIBITS                                                                              |  | 49
|              | 
|SIGNATURE     |  | 50                                                                                   
|              | 
|EXHIBIT INDEX |  | 51                                                                                   



2



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PART I



|ITEM 1. | FINANCIAL INFORMATION
|------- | ---------------------

LOOKSMART, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)



|                                                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                                     |  | September 30,2008 |          |   | December 31,2007 |  
|ASSETS                                                                                                                                                                                               |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                                      |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                                            |  | $                 | 11,824   |   |                  | $ | 35,743   |  
|Short-term investments                                                                                                                                                                               |  |                   | 17,148   |   |                  |   | 20,464   |  
|                                                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total cash, cash equivalents and short-term investments                                                                                                                                              |  |                   | 28,972   |   |                  |   | 56,207   |  
|Trade accounts receivable, net                                                                                                                                                                       |  |                   | 9,935    |   |                  |   | 5,183    |  
|Prepaid expenses                                                                                                                                                                                     |  |                   | 778      |   |                  |   | 638      |  
|Other current assets                                                                                                                                                                                 |  |                   | 411      |   |                  |   | 1,628    |  
|                                                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                                 |  |                   | 40,096   |   |                  |   | 63,656   |  
|Long-term investments                                                                                                                                                                                |  |                   | 1,017    |   |                  |   |         |  
|Property and equipment, net                                                                                                                                                                          |  |                   | 3,228    |   |                  |   | 3,401    |  
|Capitalized software and other assets, net                                                                                                                                                           |  |                   | 2,242    |   |                  |   | 2,693    |  
|Intangible assets, net                                                                                                                                                                               |  |                   | 306      |   |                  |   | 247      |  
|Goodwill                                                                                                                                                                                             |  |                   | 9,810    |   |                  |   | 10,296   |  
|Assets held for sale                                                                                                                                                                                 |  |                   | 1,010    |   |                  |   |         |  
|                                                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                                                                                                         |  | $                 | 57,709   |   |                  | $ | 80,293   |  
|                                                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|LIABILITIES & STOCKHOLDERS EQUITY                                                                                                                                                                   |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                                 |  |                   |          |   |                  |   |          |  
|Trade accounts payable                                                                                                                                                                               |  | $                 | 3,915    |   |                  | $ | 3,407    |  
|Accrued expenses and other accrued liabilities                                                                                                                                                       |  |                   | 6,035    |   |                  |   | 8,437    |  
|Deferred revenue and customer deposits                                                                                                                                                               |  |                   | 1,657    |   |                  |   | 1,596    |  
|Current portion of long-term liabilities                                                                                                                                                             |  |                   | 1,939    |   |                  |   | 1,621    |  
|                                                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                                            |  |                   | 13,546   |   |                  |   | 15,061   |  
|Long-term debt and capital lease obligations, net of current portion                                                                                                                                 |  |                   | 1,414    |   |                  |   | 770      |  
|Lease restructuring and other long-term liabilities, net of current portion                                                                                                                          |  |                   | 533      |   |                  |   | 1,507    |  
|                                                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                                                    |  |                   | 15,493   |   |                  |   | 17,338   |  
|Commitment and contingencies                                                                                                                                                                         |  |                   |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                                                                |  |                   |          |   |                  |   |          |  
|Convertible preferred stock, $0.001 par value; Authorized: 5,000 at September 30, 2008 and December 31, 2007; Issued and
Outstanding: none at September 30, 2008 and December 31, 2007               |  |                   |         |   |                  |   |         |  
|Common stock, $0.001 par value; Authorized: 200,000 at September 30, 2008 and December 31, 2007; Issued and Outstanding: 17,040 and
22,925 at September 30, 2008 and December 31, 2007, respectively |  |                   | 17       |   |                  |   | 23       |  
|Additional paid-in capital                                                                                                                                                                           |  |                   | 258,750  |   |                  |   | 276,964  |  
|Other comprehensive income (loss)                                                                                                                                                                    |  |                   | (122     | ) |                  |   | 12       |  
|Accumulated deficit                                                                                                                                                                                  |  |                   | (216,429 | ) |                  |   | (214,044 | )
|                                                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                                           |  |                   | 42,216   |   |                  |   | 62,955   |  
|                                                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                           |  | $                 | 57,709   |   |                  | $ | 80,293   |  
|                                                                                                                                                                                                     |  |                   |          |   |                  |   |          |  

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial
Statements.



3



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LOOKSMART, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per
share data)

(Unaudited)



|                                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------ |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                           |  | Three months ended September 30, |        |   | Nine months ended September 30, |  
|                                                                                           |  | 2008                             |        |   | 2007                            |   |        | 2008 |  |   | 2007   |  
|Revenue                                                                                    |  | $                                | 15,423 |   |                                 | $ | 11,287 |      |  | $ | 50,059 |   |  | $ | 36,703 |  
|Cost of revenues                                                                           |  |                                  | 9,239  |   |                                 |   | 6,298  |      |  |   | 29,715 |   |  |   | 20,371 |  
|                                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                                                               |  |                                  | 6,184  |   |                                 |   | 4,989  |      |  |   | 20,344 |   |  |   | 16,332 |  
|Operating expenses:                                                                        |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Sales and marketing                                                                        |  |                                  | 2,471  |   |                                 |   | 1,880  |      |  |   | 6,681  |   |  |   | 6,232  |  
|Product development                                                                        |  |                                  | 2,865  |   |                                 |   | 3,076  |      |  |   | 8,603  |   |  |   | 9,114  |  
|General and administrative                                                                 |  |                                  | 2,599  |   |                                 |   | 3,197  |      |  |   | 7,833  |   |  |   | 9,110  |  
|Restructuring charges, net                                                                 |  |                                  | 211    |   |                                 |   | 224    |      |  |   | 76     |   |  |   | 224    |  
|                                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                                                                   |  |                                  | 8,146  |   |                                 |   | 8,377  |      |  |   | 23,193 |   |  |   | 24,680 |  
|                                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Loss from operations                                                                       |  |                                  | (1,962 | ) |                                 |   | (3,388 | )    |  |   | (2,849 | ) |  |   | (8,348 | )
|Non-operating income, net                                                                  |  |                                  | 239    |   |                                 |   | 489    |      |  |   | 919    |   |  |   | 1,522  |  
|                                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Loss from continuing operations before income taxes                                        |  |                                  | (1,723 | ) |                                 |   | (2,899 | )    |  |   | (1,930 | ) |  |   | (6,826 | )
|Income tax expense (benefit)                                                               |  |                                  | (7     | ) |                                 |   |       |      |  |   | 7      |   |  |   | 6      |  
|                                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Loss from continuing operations                                                            |  |                                  | (1,716 | ) |                                 |   | (2,899 | )    |  |   | (1,937 | ) |  |   | (6,832 | )
|Loss from discontinued operations, net of tax                                              |  |                                  | (5     | ) |                                 |   | (1,420 | )    |  |   | (448   | ) |  |   | (2,980 | )
|                                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Net loss                                                                                   |  | $                                | (1,721 | ) |                                 | $ | (4,319 | )    |  | $ | (2,385 | ) |  | $ | (9,812 | )
|                                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss) per share - Basic and Diluted                                            |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Loss from continuing operations                                                            |  | $                                | (0.10  | ) |                                 | $ | (0.13  | )    |  | $ | (0.10  | ) |  | $ | (0.30  | )
|Loss from discontinued operations, net of tax                                              |  |                                  |       |   |                                 |   | (0.06  | )    |  |   | (0.03  | ) |  |   | (0.13  | )
|                                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Net loss per share                                                                         |  | $                                | (0.10  | ) |                                 | $ | (0.19  | )    |  | $ | (0.13  | ) |  | $ | (0.43  | )
|                                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Weighted average shares outstanding used in computing basic and diluted net loss per share |  |                                  | 17,056 |   |                                 |   | 22,913 |      |  |   | 18,251 |   |  |   | 22,899 |  
|                                                                                           |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial
Statements.



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LOOKSMART, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                                                                               |  |                                 |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                               |  | Nine months ended September 30, |        
|                                                                                                                                               |  | 2008                            |         |   | 2007 |  
|Cash flows from operating activities:                                                                                                          |  |                                 |         |   |      |   |         |  
|Net loss                                                                                                                                       |  | $                               | (2,385  | ) |      | $ | (9,812  | )
|Adjustment to reconcile net loss to net cash used in operating activities:                                                                     |  |                                 |         |   |      |   |         |  
|Depreciation and amortization                                                                                                                  |  |                                 | 2,467   |   |      |   | 3,836   |  
|Share-based compensation                                                                                                                       |  |                                 | 2,290   |   |      |   | 1,735   |  
|Restructuring charge                                                                                                                           |  |                                 | 76      |   |      |   | 224     |  
|Impairment charges                                                                                                                             |  |                                 | 381     |   |      |   | 1,645   |  
|Gain from sale of assets and other non-cash charges                                                                                            |  |                                 | (594    | ) |      |   | (537    | )
|Changes in operating assets and liabilities:                                                                                                   |  |                                 |         |   |      |   |         |  
|Trade accounts receivable                                                                                                                      |  |                                 | (4,625  | ) |      |   | 284     |  
|Prepaid expenses and other assets                                                                                                              |  |                                 | 36      |   |      |   | (213    | )
|Trade accounts payable                                                                                                                         |  |                                 | 508     |   |      |   | (61     | )
|Accrued expenses and other current liabilities                                                                                                 |  |                                 | (2,520  | ) |      |   | 1,190   |  
|Other long-term liabilities                                                                                                                    |  |                                 | (935    | ) |      |   | (659    | )
|Deferred revenue and customer deposits                                                                                                         |  |                                 | 61      |   |      |   | (514    | )
|                                                                                                                                               |  |                                 |         |   |      |   |         |  
|Net cash used in operating activities                                                                                                          |  |                                 | (5,240  | ) |      |   | (2,882  | )
|                                                                                                                                               |  |                                 |         |   |      |   |         |  
|Cash flows from investing activities:                                                                                                          |  |                                 |         |   |      |   |         |  
|Purchase of short-term investments                                                                                                             |  |                                 | (29,171 | ) |      |   | (25,096 | )
|Proceeds from sale of short-term investments                                                                                                   |  |                                 | 32,359  |   |      |   | 14,908  |  
|Purchase of long-term investments                                                                                                              |  |                                 | (1,017  | ) |      |   |        |  
|Payments for property, equipment and capitalized software development                                                                          |  |                                 | (1,233  | ) |      |   | (1,620  | )
|Purchase of intangible assets                                                                                                                  |  |                                 | (280    | ) |      |   |        |  
|Proceeds from sale of certain consumer assets                                                                                                  |  |                                 | 1,245   |   |      |   |        |  
|Proceeds from contingent purchase consideration of certain consumer assets                                                                     |  |                                 | 415     |   |      |   |        |  
|Distributions from joint venture                                                                                                               |  |                                 |        |   |      |   | 434     |  
|                                                                                                                                               |  |                                 |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                                                                                            |  |                                 | 2,318   |   |      |   | (11,374 | )
|                                                                                                                                               |  |                                 |         |   |      |   |         |  
|Cash flows from financing activities:                                                                                                          |  |                                 |         |   |      |   |         |  
|Principal payments under notes and capital lease obligations                                                                                   |  |                                 | (405    | ) |      |   | (96     | )
|Proceeds from the sale and leaseback of equipment                                                                                              |  |                                 |        |   |      |   | 211     |  
|Proceeds from issuance of common stock                                                                                                         |  |                                 | 184     |   |      |   | 161     |  
|Payments for repurchase of common stock                                                                                                        |  |                                 | (20,776 | ) |      |   |        |  
|                                                                                                                                               |  |                                 |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                                                                                            |  |                                 | (20,997 | ) |      |   | 276     |  
|                                                                                                                                               |  |                                 |         |   |      |   |         |  
|Decrease in cash and cash equivalents                                                                                                          |  |                                 | (23,919 | ) |      |   | (13,980 | )
|Cash and cash equivalents, beginning of period                                                                                                 |  |                                 | 35,743  |   |      |   | 32,901  |  
|                                                                                                                                               |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                                                                       |  | $                               | 11,824  |   |      | $ | 18,921  |  
|                                                                                                                                               |  |                                 |         |   |      |   |         |  
|Supplemental disclosure of noncash activities                                                                                                  |  |                                 |         |   |      |   |         |  
|Assets acquired through capital lease obligations                                                                                              |  | $                               | 1,463   |   |      | $ | 173     |  
|Reclass of property and equipment, capitalized software, and intangible assets related to certain consumer assets to assets held for sale, net |  | $                               | 1,010   |   |      | $ |        |  

The accompanying Notes are an integral part of these Unaudited Condensed Consolidated Financial
Statements.



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LOOKSMART, LTD.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant
Accounting Policies

Nature of Business and Principles of Consolidation

LookSmart is a search advertising network solutions company that provides relevant solutions for search advertisers and publishers. LookSmart was organized in 1996 and is incorporated in the State of Delaware.

LookSmart offers search advertisers targeted, pay-per-click (PPC) search, and contextual search advertising via a monitored search advertising
distribution network (AdCenter). The Companys search advertising distribution network (Advertising Networks) includes publishers and search partners in the United States and certain other countries. The Companys
application programming interface (API) allows search advertisers and their advertising agencies to connect any type of marketing or reporting software with minimal effort, for easier access, management, and optimization of search advertising
campaigns.

LookSmart also offers publishers licensed private-label search advertiser network solutions based on its AdCenter platform technology
(Publisher Solutions). Publisher Solutions consist of hosted auction-based ad serving with an ad backfill capability that allows search engines, networks, media companies, social networking sites, retail sites, directories, ISPs and
portals to manage their advertiser relationships, distribution channels and accounts.

In 2007, the Companys management made the decision to exit
certain consumer products activities and to sell or otherwise dispose of the various related websites and assets associated with those activities. During 2007, the Company sold FindArticles, the assets relating to Grub, the websites and trademark
associated with Zeal, and completed the shutdown of the Wisenut website and search functionality. In the first quarter of 2008 the Companys management made the decision to exit the remaining consumer products activities and to sell or
otherwise dispose of the remaining consumer assets. Additionally, during the first quarter of 2008 Furl assets have been accounted for under the guidance of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS 144) as assets held for sale. The results of operations of consumer product activities, including related gains (losses), have been classified as discontinued operations for all
periods presented in the accompanying Unaudited Condensed Consolidated Statements of Operations. See Footnotes 3, 5 and 6 for further details. At September 30, 2008, the Company continues to own the Wisenut search engine technology and its
intellectual property rights in such technology and other assets, and owns and operates Furl.

The Unaudited Condensed Consolidated Financial Statements as
of September 30, 2008 and for the three and nine months ended September 30, 2008 and 2007 include the accounts of the Company and its subsidiaries. All significant inter-company balances and transactions have been eliminated in
consolidation.

Unaudited Interim Financial Information

The accompanying Unaudited Condensed Consolidated Financial Statements as of September 30, 2008 and for the three and nine months ended September 30, 2008 and 2007 reflect all adjustments that are normal and recurring in nature
and, in the opinion of management, are necessary for a fair representation of the results of operations for the periods shown. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Companys
Consolidated Financial Statements and Notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2007. The Unaudited Condensed Consolidated Balance Sheet as of December 31, 2007 has been
derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The results of operations for the interim
periods ended September 30, 2008 are not necessarily indicative of results to be expected for the full year.

Use of Estimates and Assumptions

The Unaudited Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the
United States. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue, expenses, and contingent assets and liabilities during the reporting period. The Company bases its
estimates on various factors and information which may include, but are not



6



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limited to, history and prior experience, experience of other enterprises in the same industry, new related events, and current economic conditions, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. In managements opinion, all
adjustments necessary for a fair statement are reflected in the interim periods presented.

Reclassifications

Certain amounts in the financial statements for prior periods have been reclassified to conform to the current presentation. These reclassifications did not change the
previously reported net loss, net change in cash and cash equivalents or stockholders equity.

Concentrations, Credit Risk and Credit Risk
Evaluation

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, investments, and accounts receivable. As of September 30, 2008 and December 31, 2007, we placed our
investments primarily through one financial institution, City National Bank (CNB), and mitigated the concentration of credit risk by placing percentage limits on the maximum portion of the investment portfolio which may be invested in
any one investment instrument. The fair value of these investments is subject to fluctuation based on market prices.

Credit Risk, Customer and Vendor
Evaluation

Accounts receivable are typically unsecured and are derived from sales to customers. The Company performs ongoing credit evaluations of its
customers and maintains allowances for estimated credit losses. The Company applies judgment as to its ability to collect outstanding receivables based primarily on managements evaluation of the customers financial condition and past
collection history and records a specific allowance. In addition, the Company records an allowance based on the length of time the receivables are past due. Historically, such losses have been within managements expectations.

The following table reflects customers that accounted for more than 10% of gross accounts receivable:



|          |  |                   |   |  |                  |  
|--------- |  | ----------------- | - |  | ---------------- | -
|          |  | September 30,2008 |   |  | December 31,2007 |  
|Company 1 |  | 33                | % |  | 22               | %
|Company 2 |  | 16                | % |  | *                | *
|Company 3 |  | *                 | * |  | 21               | %



|** | Less than 10%
|-- | -------------

As of September 30, 2008 there was no deterioration
in the Companys accounts receivables.

The Company collected approximately $2.0 million of the accounts receivable balance due from Company 1 in the
first day after quarter end reducing the outstanding balance to approximately 16% of gross accounts receivables.



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##### Table of Contents

The Company derives its revenue primarily from its relationships with significant distribution network partners. The
following table reflects the vendors that accounted for more than 10% of the total traffic acquisition costs (TAC):



|                       |  |                                 |   |  |                                |   |  |      |   |  |      |  
|---------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                       |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                       |  | 2008                            |   |  | 2007                           |   |  | 2008 |   |  | 2007 |  
|Distribution Partner 1 |  | 11                              | % |  | *                              | * |  | 10   | % |  | *    | *
|Distribution Partner 2 |  | 11                              | % |  | 15                             | % |  | 12   | % |  | 11   | %
|Distribution Partner 3 |  | 11                              | % |  | *                              | * |  | *    | * |  | *    | *
|Distribution Partner 4 |  | 11                              | % |  | *                              | * |  | 13   | % |  | *    | *
|Distribution Partner 5 |  | 11                              | % |  | *                              | * |  | 10   | % |  | *    | *
|Distribution Partner 6 |  | 10                              | % |  | *                              | * |  | 10   | % |  | *    | *
|Distribution Partner 7 |  | *                               | * |  | 16                             | % |  | *    | * |  | 19   | %



|** | Less than 10%
|-- | -------------

Revenue Concentrations

The United States and Canada accounted for 85% and 10%, respectively, of gross revenue for the three months ended September 20, 2008. The United States was the only
country which accounted for more than 10% of gross revenue, at 87%, for the nine months ended September 30, 2008.

LookSmart derives its revenue from
two service offerings, or products: Advertising Networks and Publisher Solutions. The percentage distributions between the two service offerings are as follows:



|                     |  |                                 |   |  |                                |   |  |      |   |  |      |  
|-------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                     |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                     |  | 2008                            |   |  | 2007                           |   |  | 2008 |   |  | 2007 |  
|Advertising Networks |  | 90                              | % |  | 88                             | % |  | 91   | % |  | 89   | %
|Publisher Solutions  |  | 10                              | % |  | 12                             | % |  | 9    | % |  | 11   | %

The following table reflects the percentage of revenue attributed to customers who accounted for 10% or more of
net revenue:



|          |  |                                 |   |  |                                |   |  |      |   |  |      |  
|--------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|          |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|          |  | 2008                            |   |  | 2007                           |   |  | 2008 |   |  | 2007 |  
|Company 1 |  | *                               | * |  | 14                             | % |  | 12   | % |  | 13   | %
|Company 2 |  | 19                              | % |  | 14                             | % |  | 14   | % |  | 11   | %
|Company 3 |  | 13                              | % |  | *                              | * |  | *    | * |  | *    | *



|** | Less than 10%
|-- | -------------

For the three and nine months ended September 30,
2008, one publisher customer represented 92% and 87%, respectively, of Publisher Solutions revenue as compared to 82% and 83%, respectively, for the same periods in 2007. This customer accounted for 19%, 14%, 14% and 11% of total revenue for the
three and nine months ended September 30, 2008 and 2007, respectively.

Share-Based Compensation

Share-based compensation expense recognized under SFAS 123R, Share-Based Payment, for the three and nine months ended September 30, 2008 was approximately
$0.7 million and $2.4 million, respectively, and approximately $0.6 million and $1.8 million for the three and nine months ended September 30, 2007, respectively, which was related to stock options and employee stock purchases. SFAS 123R
requires companies to estimate the fair value of share-based payment awards on the grant date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Companys
Unaudited Condensed Consolidated Statement of Operations over the requisite service periods.



8



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##### Table of Contents

SFAS 123R requires forfeitures to be estimated at the time of grant in order to estimate the amount of share-based awards
that will ultimately vest. The forfeiture rate is determined at the beginning of each fiscal year, based on historical rates, and reviewed on a periodic basis. Share-based compensation expense recognized in the Companys Unaudited Condensed
Consolidated Statement of Operations for the three and nine months ended September 30, 2008 and 2007 includes (i) compensation expense for share-based payment awards granted prior to, but not yet fully vested as of December 31, 2005,
based on the grant-date fair value estimated in accordance with the pro forma provisions of SFAS 123 and (ii) compensation expense for the share-based payment awards granted subsequent to December 31, 2005, based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123R.

Under the provisions of SFAS 123R the Company continues its use of the Black-Scholes
method of valuation for share-based awards granted beginning in fiscal 2006, which was previously used for the Companys pro forma information required under SFAS 123. On November 10, 2005, the FASB issued FASB Staff Position No. SFAS
123R-3,Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards (SFAS 123R-3). The alternative transition method includes simplified methods to establish the beginning balance of the additional
paid-in capital pool (APIC pool) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC pool and Unaudited Condensed Consolidated Statements of Cash Flows of the tax effects of
employee share-based compensation awards that are outstanding upon adoption of SFAS 123R. The Company has elected to adopt the alternative transition method provided in this FASB Staff Position for calculating the tax effects of share-based
compensation pursuant to SFAS 123R-3.

Net Income (Loss) per Common Share

SFAS No. 128,Earnings per Share (SFAS 128), establishes standards for computing and presenting net income (loss) per share. Basic net income (loss) per share is calculated using the weighted
average shares of common stock outstanding. 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 stock
options and warrants.

Adoption of New Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS 157,Fair Value Measures (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring
fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 became effective for the
Company on January 1, 2008.

In February 2008, the FASB issued FASB Staff Position FAS No. 157-1, Application of FASB Statement No. 157
to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (FSP FAS 157-1). FSP FAS 157-1 provides a scope exception
from SFAS 157 for the evaluation criteria on lease classification and capital lease measurement under SFAS No. 13, Accounting for Leases and other related accounting pronouncements. Accordingly, the Company did not apply the
provisions of SFAS 157 in determining the classification of and accounting for leases.

In February 2008, the FASB issued FSP FAS No. 157-2,
Effective Date of FASB Statement No. 157 (FSP FAS 157-2) which delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for certain nonfinancial assets and nonfinancial liabilities. FSP FAS
157-2 will become effective for the Company on January 1, 2009. The Company is in the process of evaluating the impact of applying FSP FAS 157-2 to nonfinancial assets and liabilities measured on a nonrecurring basis. Examples of items to which
the deferral would apply include, but are not limited to:



| |  |  | reporting units measured at fair value in the first step of a goodwill impairment test as described in Statement of Financial Standards No. 142,Goodwill
and Other Intangible Assets (SFAS 142), and nonfinancial assets and nonfinancial liabilities measured at fair value in the SFAS 142 goodwill impairment test, if applicable;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | indefinite-lived intangible assets measured at fair value for impairment assessment under SFAS 142, and nonfinancial long-lived assets (asset groups) measured at
fair value for an impairment assessment under SFAS 144; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | nonfinancial liabilities for exit or disposal activities initially measured at fair value under Statement of Financial Standards No. 146,Accounting for
Costs Associated with Exit or Disposal Activities (SFAS 146).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



9



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As a result of the issuance of FSP FAS 157-2, the Company did not apply the provisions of SFAS 157 to the nonfinancial
assets and nonfinancial liabilities within the scope of FSP FAS 157-2.

In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active (FSP FAS 157-3), with an immediate effective date, including prior periods for which financial statements have not been issued. FSP FAS 157-3 amends FAS 157 to clarify the
application of fair value in inactive markets and allows for the use of managements internal assumptions about future cash flows with appropriately risk-adjusted discount rates when relevant observable market data does not exist. The objective
of FAS 157 has not changed and continues to be the determination of the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date. The adoption of FSP FAS 157-3 in the third
quarter did not have a material effect on the Companys results of operations, financial position or liquidity.

In February 2007, the FASB issued
SFAS No. 159 (SFAS 159),The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115. SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value, with changes in fair value recognized in earnings each reporting period. The election, called the fair value option, will enable entities to achieve an offset accounting effect for changes in fair
value of certain related assets and liabilities without having to apply complex hedge accounting provisions. SFAS 159 is effective as of the beginning of the Companys 2008 fiscal year. The Company has evaluated the provisions of SFAS 159 and
did not elect the fair value option at this time.

Recently Issued Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141R, Business Combinations (SFAS 141R), which revised SFAS 141. SFAS 141R requires the acquiring
entity in a business combination to recognize all the assets acquired and liabilities assumed in the transaction and any noncontrolling interest in the acquiree; establishes the acquisition-date fair value as the measurement objective for all assets
acquired and liabilities assumed; requires the acquirer to disclose all information needed to evaluate and understand the nature and financial effect of the business combination; and requires the acquirer to expense acquisition-related costs in the
periods in which the costs are incurred and the services are received except for the costs to issue debt or equity securities. SFAS 141R is effective for fiscal years beginning on or after December 15, 2008, and is effective for the Company at
the beginning of fiscal year 2009. Early adoption is prohibited. We are currently reviewing the provisions of SFAS 141R to determine the impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes new
accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling
interest. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008, and is effective for the Company at the beginning of fiscal year 2009. Earlier adoption is prohibited. We are currently reviewing the provisions of
SFAS 160 to determine the impact on our consolidated financial statements.

In April 2008, the FASB issued FSP 142-3, Determination of the Useful Life
of Intangible Assets (FSP FAS 142-3) which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and is effective for the Company at the beginning of fiscal year 2009. Early adoption is prohibited. We are
currently reviewing the provisions of FSP FAS 142-3 to determine the impact on our consolidated financial statements.

In May 2008, the FASB issued SFAS
No. 162, The Hierarchy of Generally Accepted Accounting Principles (SFAS No. 162) which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial
statements. SFAS No. 162 is effective November 15, 2008. The implementation of this standard will not have a material impact on our consolidated financial position and results of operations.

2. Fair Value of Financial Instruments

The Companys estimates
of fair value for financial assets and financial liabilities are based on the framework established in SFAS 157. The framework is based on the inputs used in valuation and gives the highest priority to quoted prices in active markets and requires
that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the FAS 157 hierarchy is based on whether the significant inputs into the valuation are observable. In



10



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##### Table of Contents

determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and
the lowest priority to unobservable inputs that reflect the Companys significant market assumptions. The three levels of the hierarchy are as follows:



|        |  |                                                                                                                                                                                                                                                                                                                            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1 |  | Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.                                                                                                                                                                                          
|        | 
|Level 2 |  | Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant
inputs are observable (e.g., interest rates, yield curves, default rates, etc.) or can be corroborated by observable market data.
|        | 
|Level 3 |  | Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Companys own assumptions about the assumptions that market participants would
use.                                                                                                                            

The Companys assets measured at fair value on a recurring basis subject to the disclosure requirements of
SFAS 157 at September 30, 2008, were as follows (in thousands):



|                                         |  |                             |        |                                                            |   |                                           |  |                                      |        |  |   |  
|---------------------------------------- |  | --------------------------- | ------ | ---------------------------------------------------------- | - | ----------------------------------------- |  | ------------------------------------ | ------ |  | - | -
|                                         |  | Balance atSeptember 30,2008 |        | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |   | SignificantOtherObservableInputs(Level 2) |  | SignificantUnobservedInputs(Level 3)
|Cash equivalents:                        |  |                             |        |                                                            |   |                                           |  |                                      |        |  |   |  
|Money market funds                       |  | $                           | 8,482  |                                                            | $ | 8,482                                     |  | $                                    |       |  | $ | 
|Commercial paper                         |  |                             | 998    |                                                            |   |                                          |  |                                      | 998    |  |   | 
|                                         |  |                             |        |                                                            |   |                                           |  |                                      |        |  |   |  
|                                         |  |                             | 9,480  |                                                            |   | 8,482                                     |  |                                      | 998    |  |   | 
|Short-term investments:                  |  |                             |        |                                                            |   |                                           |  |                                      |        |  |   |  
|Corporate bonds                          |  |                             | 6,288  |                                                            |   |                                          |  |                                      | 6,288  |  |   | 
|Zero Coupon Municipal Bonds - California |  |                             | 974    |                                                            |   |                                          |  |                                      | 974    |  |   | 
|Commercial paper                         |  |                             | 3,686  |                                                            |   |                                          |  |                                      | 3,686  |  |   | 
|U.S. government debt securities          |  |                             | 1,200  |                                                            |   |                                          |  |                                      | 1,200  |  |   | 
|Certificates of deposit                  |  |                             | 5,000  |                                                            |   |                                          |  |                                      | 5,000  |  |   | 
|                                         |  |                             |        |                                                            |   |                                           |  |                                      |        |  |   |  
|                                         |  |                             | 17,148 |                                                            |   |                                          |  |                                      | 17,148 |  |   | 
|Long-term investments:                   |  |                             |        |                                                            |   |                                           |  |                                      |        |  |   |  
|Corporate bonds                          |  |                             | 1,017  |                                                            |   |                                          |  |                                      | 1,017  |  |   | 
|                                         |  |                             |        |                                                            |   |                                           |  |                                      |        |  |   |  
|Total assets measured at fair value      |  | $                           | 27,645 |                                                            | $ | 8,482                                     |  | $                                    | 19,163 |  | $ | 
|                                         |  |                             |        |                                                            |   |                                           |  |                                      |        |  |   |  

The fair value of our available-for-sale securities in an unrealized loss position was approximately $9.3 million,
with an unrealized loss of approximately $0.1 million. All of the securities in a loss position are investment-grade debt securities. The Company has the intent and ability to hold these securities until the market values recover or the
securities mature and has concluded that for those securities in an unrealized loss position, no other-than-temporary loss exists at September 30, 2008. As of September 30, 2008, the Company did not hold auction rate securities or
collateralized debt obligations.

Valuation of Investments

For investments that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. The Company receives the quoted market
prices from a third party, nationally recognized pricing service (pricing service). When quoted market prices are unavailable, the Company utilizes a pricing service to determine an estimate of fair value, which is mainly for its fixed maturity
investments. The fair value estimates provided from this pricing service are included in the amount disclosed in Level 2 of the hierarchy. The Company bases all of its estimates of fair value for assets on the bid price as it represents what a third
party market participant would be willing to pay in an arms length transaction.

The Company utilizes a pricing service to estimate fair value
measurements of its fixed maturities investments. The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed maturities other than U.S. Treasury securities generally do not
trade on a daily basis, the pricing service prepares



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##### Table of Contents

estimates of fair value measurements for these securities using its proprietary pricing applications which include available relevant market information,
benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Additionally, the pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios.

The pricing service evaluates each asset class based on relevant market information, relevant credit information, perceived market movements and sector news. The market
inputs utilized in the pricing evaluation, listed in the approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data and
industry and economic events. The extent of the use of each market input depends on the asset class and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For
some securities additional inputs may be necessary.

The pricing service utilized by the Company has indicated that they will only produce an estimate of
fair value if there is objectively verifiable information to produce a valuation. If the pricing service discontinues pricing an investment, the Company would be required to produce an estimate of fair value using some of the same methodologies as
the pricing service, but would have to make assumptions for market based inputs that are unavailable due to market conditions.

The fair value estimates of
the Companys fixed maturity investments are based on observable market information rather than market quotes. Accordingly, the estimates of fair value for such fixed maturities, other than money market securities, provided by the pricing
service are included in the amount disclosed in Level 2 of the hierarchy. The estimated fair value of money market securities are included in the amount disclosed in Level 1 as the estimates are based on unadjusted market prices.

3. Discontinued Operations

Foreign Operations

In 2004, the Companys management made the decision to cease operating and liquidate its foreign legal entities, and reclassified its financial statements to reflect
these foreign entity expenses as discontinued.

During the three and nine months ended September 30, 2008, the loss related to the liquidation of the
Companys foreign legal entities was not significant. During the three months ended September 30, 2007 the Company recorded the reversal of the cumulative translation adjustment of approximately $0.5 million. For the three and nine months
ended September 30, 2007, the gain related to the liquidation of the Companys foreign legal entities was approximately $0.5 million and $0.4 million, respectively. The Company expects to complete the dissolution of these entities in the
fourth quarter of 2008.

Consumer Products

In 2007,
the Companys management made the decision to exit certain consumer products activities and to sell or otherwise dispose of the various related websites and assets associated with those activities and has reclassified its financial statements
to reflect these consumer activities as discontinued.

During 2007, the Company sold FindArticles, the assets relating to Grub, the websites and trademark
associated with Zeal, and completed the shutdown of the Wisenut website and search functionality.

In the first quarter of 2008, the Companys
management made the decision to exit the remaining consumer products activities and to sell or otherwise dispose of the remaining consumer assets. Additionally, during the first quarter of 2008, Furl assets have been accounted for under the guidance
of SFAS 144Accounting for the Impairment or Disposal of Long-Lived assets (SFAS 144) as assets held for sale, and these, together with, the various related websites and assets associated with the consumer products
activities previously disposed of, and the foreign operations previously disposed of, met the discontinued operations criteria in accordance with the provisions of SFAS No. 144. The results of operations of assets to be disposed of, and of
previously disposed assets, including related gains (losses) have been classified as discontinued operations for all periods presented in the accompanying Unaudited Condensed Consolidated Statements of Operations.

In the second quarter of 2008, the Company sold the intellectual property rights to the Wisenut trademark and related domain names for proceeds of
approximately $0.2 million and realized approximately $0.2 million as a gain on sale of assets that is included in discontinued operations. The proceeds from the sale were collected in July 2008.



12



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##### Table of Contents

At September 30, 2008, the Company continues to own the Wisenut search engine technology and its intellectual
property rights in such technology and other assets, and owns and operates Furl.

The following table reflects revenue, gross profit, operating expenses,
pre-tax loss from discontinued operations and gain (loss) on disposal of discontinued operations for the three and nine months ended September 30, 2008 and September 30, 2007 (in thousands):



|                                                  |  |                                 |      |   |                                |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                  |  | Three Months EndedSeptember 30, |      |   | Nine Months EndedSeptember 30, |  
|                                                  |  | 2008                            |      |   | 2007                           |   |        | 2008 |  |   | 2007   |  
|Revenue                                           |  | $                               | 26   |   |                                | $ | 1,342  |      |  | $ | 78     |   |  | $ | 3,776  |  
|                                                  |  |                                 |      |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                      |  | $                               | 18   |   |                                | $ | 579    |      |  | $ | 49     |   |  | $ | 1,246  |  
|Product development expenses                      |  |                                 | 162  |   |                                |   | 838    |      |  |   | 682    |   |  |   | 2,856  |  
|General and administrative expenses               |  |                                 | 5    |   |                                |   | 56     |      |  |   | 40     |   |  |   | 140    |  
|Impairment charges                                |  |                                 |     |   |                                |   | 1,645  |      |  |   | 381    |   |  |   | 1,645  |  
|Non-operating income, net                         |  |                                 |     |   |                                |   | 516    |      |  |   | 9      |   |  |   | 516    |  
|                                                  |  |                                 |      |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Pretax net loss (excluding gain on disposal)      |  |                                 | (149 | ) |                                |   | (1,444 | )    |  |   | (1,045 | ) |  |   | (2,879 | )
|Gain (loss) on disposal                           |  |                                 | 144  |   |                                |   | 24     |      |  |   | 597    |   |  |   | (101   | )
|                                                  |  |                                 |      |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net loss from discontinued operations, net of tax |  | $                               | (5   | ) |                                | $ | (1,420 | )    |  | $ | (448   | ) |  | $ | (2,980 | )
|                                                  |  |                                 |      |   |                                |   |        |      |  |   |        |   |  |   |        |  

At September 30, 2008, certain assets relating to Furl have been accounted for under the guidance of SFAS 144
as assets held for sale, and have been classified as such on the Companys Unaudited Condensed Consolidated Balance Sheet as follows (in thousands):



|                            |  |                   |      
|--------------------------- |  | ----------------- | -----
|                            |  | September 30,2008
|Property and equipment, net |  | $                 | 70   
|Capitalized software, net   |  |                   | 586  
|Goodwill                    |  |                   | 257  
|Intangibles, net            |  |                   | 97   
|                            |  |                   |      
|Total assets held for sale  |  | $                 | 1,010
|                            |  |                   |      

Assets held for sale under the guidance of SFAS 144 are subject to periodic review. During the second quarter of
2008, management estimated that a goodwill impairment of approximately $0.4 million existed pursuant to an interim preliminary goodwill impairment assessment. The estimate was based on recent precedent transactions in the social networking
technology industry, adjusted for the current market for this type of asset and the status of the sales process. During the third quarter of 2008, management concluded that no adjustment to the approximate $0.4 million impairment recorded in the
second quarter was warranted, however, management did conclude the impairment should be allocated among the individual assets held for sale. As such, approximately $0.2 million of the impairment previously attributed to goodwill in the second
quarter of 2008 has been attributed to capitalized software.

4. Other Current Assets

Other current assets consisted of the following (in thousands):



|                        |  |                   |     |                  |   |      
|----------------------- |  | ----------------- | --- | ---------------- | - | -----
|                        |  | September 30,2008 |     | December 31,2007
|Escrow agreement assets |  | $                 |    |                  | $ | 1,025
|Other current assets    |  |                   | 411 |                  |   | 603  
|                        |  |                   |     |                  |   |      
|Total                   |  | $                 | 411 |                  | $ | 1,628
|                        |  |                   |     |                  |   |      

Escrow agreement assets relate to monies held in escrow in relation to the sale of certain assets associated with
the consumer products activities, which were collected in May 2008.



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5. Property and Equipment

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



|                                               |  |                   |         |   |                  |   |         |  
|---------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                               |  | September 30,2008 |         |   | December 31,2007 |  
|Computer equipment                             |  | $                 | 15,835  |   |                  | $ | 15,187  |  
|Furniture and fixtures                         |  |                   | 1,151   |   |                  |   | 1,126   |  
|Software                                       |  |                   | 3,771   |   |                  |   | 3,771   |  
|Leasehold improvements                         |  |                   | 2,901   |   |                  |   | 2,736   |  
|                                               |  |                   |         |   |                  |   |         |  
|Total                                          |  |                   | 23,658  |   |                  |   | 22,820  |  
|Less accumulated depreciation and amortization |  |                   | (20,430 | ) |                  |   | (19,419 | )
|                                               |  |                   |         |   |                  |   |         |  
|Property and equipment, net                    |  | $                 | 3,228   |   |                  | $ | 3,401   |  
|                                               |  |                   |         |   |                  |   |         |  

Depreciation expense on property and equipment for the three and nine months ended September 30, 2008,
including property and equipment under capital lease, was approximately $0.6 million and $1.7 million, respectively. Depreciation expense on property and equipment for the three and nine months ended September 30, 2007 was approximately $0.6
million and $1.9 million, respectively. Equipment under capital lease amounted to approximately $2.5 million as of September 30, 2008 and approximately $1.1 million as of December 31, 2007. Depreciation expense on equipment under capital
lease was approximately $0.2 million and $0.4 million for the three and nine months ended September 30, 2008 and was not significant for the three and nine months ended September 30, 2007. Additionally, accumulated depreciation on
equipment under capital lease was approximately $0.5 million as of September 30, 2008 and $0.1 million as of December 31, 2007.

As of September
30, 2008, certain property and equipment and capitalized software relating to Furl have been accounted for as assets held for sale, and have been classified as such on the Companys Unaudited Consolidated Balance Sheet. During the
third quarter of 2008, management concluded that capitalized software was impaired approximately $0.2 million as described in Notes 3 and 6. Property and equipment and capitalized software classified as assets held for sale consisted of
the following (in thousands):



|                            |  |                   |       |  
|--------------------------- |  | ----------------- | ----- | -
|                            |  | September 30,2008 |      
|Computer equipment          |  | $                 | 387   |  
|Accumulated depreciation    |  |                   | (317  | )
|                            |  |                   |       |  
|Property and equipment, net |  | $                 | 70    |  
|                            |  |                   |       |  
|Capitalized software        |  | $                 | 1,025 |  
|Accumulated depreciation    |  |                   | (286  | )
|Impairment                  |  |                   | (153  | )
|                            |  |                   |       |  
|Capitalized software, net   |  | $                 | 586   |  
|                            |  |                   |       |  



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6. Goodwill and Intangible Assets

The Companys intangible assets consist primarily of purchased technology and have estimated useful lives of two to seven years. Goodwill and intangible assets are as follows (in thousands):



|                              |  |                   |       |   |                  |   |        |  
|----------------------------- |  | ----------------- | ----- | - | ---------------- | - | ------ | -
|                              |  | September 30,2008 |       |   | December 31,2007 |  
|Goodwill                      |  | $                 | 9,810 |   |                  | $ | 10,296 |  
|                              |  |                   |       |   |                  |   |        |  
|Intangible assets:            |  |                   |       |   |                  |   |        |  
|Purchased technology          |  | $                 | 358   |   |                  | $ | 964    |  
|Less accumulated amortization |  |                   | (52   | ) |                  |   | (885   | )
|                              |  |                   |       |   |                  |   |        |  
|Net purchase technology       |  |                   | 306   |   |                  |   | 79     |  
|                              |  |                   |       |   |                  |   |        |  
|Trade names                   |  |                   |      |   |                  |   | 1,062  |  
|Less accumulated amortization |  |                   |      |   |                  |   | (894   | )
|                              |  |                   |       |   |                  |   |        |  
|Net trade names               |  |                   |      |   |                  |   | 168    |  
|                              |  |                   |       |   |                  |   |        |  
|Other intangibles             |  |                   |      |   |                  |   | 930    |  
|Less accumulated amortization |  |                   |      |   |                  |   | (930   | )
|                              |  |                   |       |   |                  |   |        |  
|Net other intangibles         |  |                   |      |   |                  |   |       |  
|                              |  |                   |       |   |                  |   |        |  
|Intangible assets, net        |  | $                 | 306   |   |                  | $ | 247    |  
|                              |  |                   |       |   |                  |   |        |  

Intangible asset amortization expense was not significant for the three and nine months ended September 30,
2008, and approximately $0.3 million and $1.2 million for the three and nine months ended September 30, 2007, respectively, and was recorded primarily in product development expense.

As a result of classifying revenue and expenses generated by various related websites and assets associated with the consumer products activities as discontinued
operations, amortization expense of intangibles related to those consumer assets has been reclassified to discontinued operations for the 2008 and 2007, respectively.

For the purpose of assessing goodwill impairment, the Company regularly reviews the impact of any changes to its business. In the first quarter of 2008, the Company classified Furl assets as assets held for
sale. Approximately $0.5 million of goodwill was assigned to the Furl assets based on the estimated relative fair value of the assets and was classified as assets held for sale. During the second quarter of 2008, management
estimated that the goodwill assigned to Furl was impaired based on a preliminary analysis of goodwill impairment performed due to the existence of indicators of impairment. During the third quarter of 2008, management concluded that no adjustment to
the approximate $0.4 million impairment recorded in the second quarter was warranted, however, management did conclude the impairment should be allocated among the individual assets held for sale. As such, approximately $0.2 million of the
impairment previously attributed to goodwill in the second quarter of 2008 has been attributed to capitalized software.

At September 30, 2008 certain
net intangible assets relating to Furl have been accounted for as assets held for sale, and have been classified as such on the Companys Unaudited Condensed Consolidated Balance Sheet (in thousands):



|                         |  |                   |        |  
|------------------------ |  | ----------------- | ------ | -
|                         |  | September 30,2008 |       
|Goodwill                 |  | $                 | 257    |  
|                         |  |                   |        |  
|Purchased technology     |  | $                 | 886    |  
|Trade name               |  |                   | 1,062  |  
|Other intangibles        |  |                   | 930    |  
|Accumulated amortization |  |                   | (2,781 | )
|                         |  |                   |        |  
|Intangible assets, net   |  | $                 | 97     |  
|                         |  |                   |        |  



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7. Accrued Expenses and Other Accrued Liabilities

Accrued expenses and other accrued liabilities consisted of the following (in thousands):



|                                                     |  |                   |       |                  |   |      
|---------------------------------------------------- |  | ----------------- | ----- | ---------------- | - | -----
|                                                     |  | September 30,2008 |       | December 31,2007
|Accrued compensation and related expenses            |  | $                 | 1,140 |                  | $ | 2,015
|Accrued distribution and partner costs               |  |                   | 2,967 |                  |   | 3,541
|Accrued professional services                        |  |                   | 1,500 |                  |   | 1,921
|Other                                                |  |                   | 428   |                  |   | 960  
|                                                     |  |                   |       |                  |   |      
|Total accrued expenses and other current liabilities |  | $                 | 6,035 |                  | $ | 8,437
|                                                     |  |                   |       |                  |   |      

8. Restructuring Charges

During the third quarter of 2008, the Company took actions aimed at further streamlining and focusing the organization on its search advertising business. As a result of the reorganization, the Company incurred
charges of approximately $0.2 million with the termination of five employees. All liabilities associated with this action are expected to be paid during the fourth quarter of 2008.

9. Lease Restructuring and Other Long-Term Liabilities

Lease restructuring and other long-term liabilities consist
of the following (in thousands):



|                                                                            |  |                   |        |   |                  |   |        |  
|--------------------------------------------------------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | -
|                                                                            |  | September 30,2008 |        |   | December 31,2007 |  
|Lease restructuring                                                         |  | $                 | 1,449  |   |                  | $ | 2,498  |  
|Sublease deposits                                                           |  |                   | 244    |   |                  |   | 265    |  
|                                                                            |  |                   |        |   |                  |   |        |  
|Total restructuring and other long-term liabilities                         |  |                   | 1,693  |   |                  |   | 2,763  |  
|Less: current portion                                                       |  |                   | (1,160 | ) |                  |   | (1,256 | )
|                                                                            |  |                   |        |   |                  |   |        |  
|Lease restructuring and other long term liabilities, net of current portion |  | $                 | 533    |   |                  | $ | 1,507  |  
|                                                                            |  |                   |        |   |                  |   |        |  

Lease Restructuring

During 2003, the Company vacated portions of its leased headquarter office facilities, and incurred lease restructuring costs related to closing these facilities.

As of September 30, 2008 and December 31, 2007, the lease restructuring liability was approximately $1.7 million and $2.8 million, respectively. Of this
amount, approximately $1.2 million was included in the current portion of lease restructuring and other long-term liabilities as of September 30, 2008 and approximately $1.3 million was included in the current portion of lease restructuring and
other long-term liabilities as of December 31, 2007.

In the second quarter of 2008 the Company subleased approximately 6,500 square feet for which
the Company previously took a restructuring charge in 2004. The additional sublease resulted in a reduction of approximately $0.1 million in the lease restructuring liability with the offset being a lease restructuring credit. The Company does not
currently expect to incur significant further lease restructuring charges or receive additional benefits related to closing redundant leased facilities in 2008 as it has sublet most of its unused space.



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##### Table of Contents

The following table sets forth lease restructuring activity during the period ended September 30, 2008 (in
thousands):



|                                               |  |                         |       |  
|---------------------------------------------- |  | ----------------------- | ----- | -
|                                               |  | LeaseRestructuringCosts |      
|Balance at December 31, 2007                   |  | $                       | 2,763 |  
|Amounts paid and charged against the liability |  |                         | (335  | )
|                                               |  |                         |       |  
|Balance at March 31, 2008                      |  |                         | 2,428 |  
|Amounts paid and charged against the liability |  |                         | (307  | )
|Lease restructuring credit                     |  |                         | (135  | )
|                                               |  |                         |       |  
|Balance at June 30, 2008                       |  |                         | 1,986 |  
|Amounts paid and charged against the liability |  |                         | (293  | )
|                                               |  |                         |       |  
|Balance at September 30, 2008                  |  | $                       | 1,693 |  
|                                               |  |                         |       |  

10. Long-Term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations consist of the following (in thousands):



|                                                                     |  |                   |       |   |                  |   |       |  
|-------------------------------------------------------------------- |  | ----------------- | ----- | - | ---------------- | - | ----- | -
|                                                                     |  | September 30,2008 |       |   | December 31,2007 |  
|Note payable                                                         |  | $                 | 79    |   |                  | $ | 126   |  
|Capital lease obligations                                            |  |                   | 2,114 |   |                  |   | 1,009 |  
|                                                                     |  |                   |       |   |                  |   |       |  
|Total long-term debt and capital lease obligations                   |  |                   | 2,193 |   |                  |   | 1,135 |  
|Less: current portion                                                |  |                   | (779  | ) |                  |   | (365  | )
|                                                                     |  |                   |       |   |                  |   |       |  
|Long-term debt and capital lease obligations, net of current portion |  | $                 | 1,414 |   |                  | $ | 770   |  
|                                                                     |  |                   |       |   |                  |   |       |  

Capital Leases

On April 6, 2007, the Company entered into a master equipment lease agreement with CNB for an amount of up to $5.0 million for the purchase of computer equipment. This lease line of credit expired on March 30, 2008 and was
available for equipment leases with rental terms from 36 to 48 months. Interest on the capital lease was calculated using an interest rate of 7.38% per annum. As of March 31, 2008, the Company had drawn down approximately $1.5 million from
the available $5.0 million lease line of credit.

On April 1, 2008 the Company renewed its master equipment lease agreement with CNB for an amount of
up to $3.5 million for the purchase of technical equipment. The renewed lease line of credit expires on December 30, 2008. Interest on the capital lease is calculated using an interest rate of 6.40% per annum. As of September 30,
2008, the Company had drawn down approximately $1.1 million from the renewed $3.5 million lease line of credit.

11. Commitments and Contingencies

Operating Leases

The Company leases office
space under a non-cancellable operating lease that expires in the fourth quarter of 2009, certain of which space is sublet under cancellable and non-cancellable subleases.

As of September 30, 2008, future minimum payments under the note payable, all capital and operating leases and minimum sublease rental income are as follows (in thousands):



|                                                                |  |              |     |   |               |   |       |                 |  |                              |       |  |       |        |   |  |   |      
|--------------------------------------------------------------- |  | ------------ | --- | - | ------------- | - | ----- | --------------- |  | ---------------------------- | ----- |  | ----- | ------ | - |  | - | -----
|                                                                |  | Note Payable |     |   | CapitalLeases |   |       | OperatingLeases |  | MinimumSubleaseRental Income |       |  | Total
|Three months ending December 31, 2008                           |  | $            | 19  |   |               | $ | 206   |                 |  | $                            | 1,192 |  | $     | (688   | ) |  | $ | 729  
|Fiscal years ending December 31:                                |  |              |     |   |               |   |       |                 |  |                              |       |  |       |        |   |  |   |      
|2009                                                            |  |              | 66  |   |               |   | 825   |                 |  |                              | 4,412 |  |       | (2,447 | ) |  |   | 2,856
|2010                                                            |  |              |    |   |               |   | 788   |                 |  |                              |      |  |       |       |   |  |   | 788  
|2011                                                            |  |              |    |   |               |   | 457   |                 |  |                              |      |  |       |       |   |  |   | 457  
|2012                                                            |  |              |    |   |               |   | 39    |                 |  |                              |      |  |       |       |   |  |   | 39   
|                                                                |  |              |     |   |               |   |       |                 |  |                              |       |  |       |        |   |  |   |      
|Total minimum payments                                          |  |              | 85  |   |               |   | 2,315 |                 |  | $                            | 5,604 |  | $     | (3,135 | ) |  | $ | 4,869
|                                                                |  |              |     |   |               |   |       |                 |  |                              |       |  |       |        |   |  |   |      
|Less: amount representing interest                              |  |              | (6  | ) |               |   | (201  | )               |  |                              |       |  |       |        |   |  |   |      
|                                                                |  |              |     |   |               |   |       |                 |  |                              |       |  |       |        |   |  |   |      
|Present value of net minimum payments                           |  |              | 79  |   |               |   | 2,114 |                 |  |                              |       |  |       |        |   |  |   |      
|Less: current portion                                           |  |              | (67 | ) |               |   | (712  | )               |  |                              |       |  |       |        |   |  |   |      
|                                                                |  |              |     |   |               |   |       |                 |  |                              |       |  |       |        |   |  |   |      
|Long-term portion of note payable and capital lease obligations |  | $            | 12  |   |               | $ | 1,402 |                 |  |                              |       |  |       |        |   |  |   |      
|                                                                |  |              |     |   |               |   |       |                 |  |                              |       |  |       |        |   |  |   |      



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The Company has outstanding standby letters of credit (SBLC) related to security of its building lease and
security for payroll processing services of approximately $1.1 million at September 30, 2008. The SBLC contains two financial covenants. As of September 30, 2008, the Company was in compliance with both financial covenants.

Guarantees and Indemnities

During its normal course of
business, the Company has made certain guarantees, indemnities and commitments under which it may be required to make payments in relation to certain transactions. These indemnities include intellectual property and other indemnities to the
Companys customers and distribution network partners in connection with the sales of its products, and indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease.

On September 4, 2008, the Company agreed to indemnify one of its Publisher Solutions customers pursuant to an indemnification agreement contained in an AdCenter for
Publishers contract. The obligation arose from a Complaint, which was filed on October 16, 2007 in the United States District Court for the Eastern Division of Texas against IAC Search & Media and others, alleges that the
Companys AdCenter for Publisher violates the plaintiffs patent and seeks injunctive relief and unspecified damages. See Performance Pricing v. Google, Inc. et. al., Civil Action No. 2:07 cv 00432-LED, United States District
Court for the Eastern District of Texas. The Company intends to defend this matter vigorously. However, since the dispute is at an early stage, the Company cannot predict the outcome of the dispute.

Further, the Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was,
serving, at the Companys request, in such capacity, to the maximum extent permitted under the laws of the State of Delaware. The maximum potential amount of future payments the Company could be required to make under these indemnification
agreements is unlimited. However, the Company maintains directors and officers insurance coverage that may contribute, up to certain limits, a portion of any future amounts paid, for indemnification of directors and officers. The Company believes
the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal. Historically, the Company has not incurred any losses or recorded any liabilities related to performance under these types of
indemnities.

Legal Proceedings

The Company is
involved, from time to time, in various legal proceedings arising from the normal course of business activities. Although the results of litigation and claims cannot be predicted with certainty, the Company does not expect resolution of these
matters to have a material adverse impact on its consolidated results of operations, cash flows or financial position unless stated otherwise. However, an unfavorable resolution of a matter could, depending on its amount and timing, materially
affect its future results of operations, cash flows or financial position in a future period. Regardless of the outcome, litigation can have an adverse impact on the Company because of defense costs, diversion of management resources and other
factors.

Lanes Gifts and Collectibles, L.L.C., v. Yahoo! Inc

On March 14, 2005 the Company was served with the second amended complaint in a class action lawsuit in the Circuit Court of Miller County, Arkansas. The complaint names eleven search engines and web publishers
as defendants, including the Company, and alleges breach of contract, restitution/unjust enrichment/money had and received, and civil conspiracy claims in connection with contracts allegedly entered into with plaintiffs for Internet pay-per-click
advertising. The named plaintiffs on the second amended complaint are Lanes Gifts and Collectibles, L.L.C., U.S. Citizens for Fair Credit Card Terms, Inc., Savings 4 Merchants, Inc., and Max Caulfield d/b/a Caulfield Investigations.

On March 30, 2005 the case was removed to United States District Court for the Western District of Arkansas. On April 4, 2005 plaintiffs U.S.
Citizens for Fair Credit Card Terms, Inc. and Savings 4 Merchants, Inc. filed a motion of voluntary dismissal without prejudice. The motion was granted on April 7, 2005. Plaintiffs Lanes Gifts and Collectibles, L.L.C. and Max Caulfield
d/b/a Caulfield Investigations filed a motion to remand the case to state court on April 13, 2005, which was granted in September 2005. In July 2005, defendants, including the Company, petitioned the Eighth Circuit Court of Appeals for an
appeal of the remand order, and moved to stay the proceedings while the appeal is pending. The petition was denied on September 8, 2005 and the case was remanded to the Circuit Court of Miller County, Arkansas. The Company was served with
discovery requests on October 7, 2005. The Company has filed and/or joined motions to dismiss on the basis of failure to state a claim upon which relief can be granted, lack of personal jurisdiction, and improper venue. Pursuant to the
courts initial scheduling order, plaintiffs had until January 27, 2006 to respond to the motions to dismiss for lack of personal jurisdiction and improper venue; and until September 9, 2006 to respond to the



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motion to dismiss on the basis of failure to state a claim upon which relief can be granted. However the court entered an order staying all proceedings for a
period of 60 days on January 9, 2006. On March 8, 2006, the Court entered an order extending the stay until September 30, 2006. On April 1, 2006, the Court further extended the stay until April 20, 2006. On April 20,
2006 the Court preliminarily approved a class settlement among plaintiffs, defendant Google, Inc., and certain defendants who display Google advertisements on their networks (the Google Settlement). The Google Settlement purports to
release Google of all claims and also purports to release certain defendants, including the Company, for any claims associated with the display of Google advertisements on their networks. On July 24 and 25, 2006, the Court had a final
settlement hearing on the Google Settlement, and on July 26, 2006, the Court approved the settlement. On April 21, 2006, the Court ordered the remaining defendants, including the Company, to mediation and further stayed the proceedings to
September 21, 2006. The Court further extended the stay as to LookSmart until August 16, 2006. The parties thereafter stipulated that the stay would remain in effect while the parties continue to comply with the Courts order
regarding mediation. On January 10, 2007, the Court further extended the stay until May 1, 2007. On or about November 20, 2007, the Plaintiffs and the Company entered into a Stipulation and Settlement Agreement (the Settlement
Agreement) to settle the matter in its entirety. On or about November 29, 2007, the Court preliminarily approved the Settlement Agreement and on February 29, 2008 the court entered an order to approve as final the Settlement
Agreement. Pursuant to the Settlement Agreement, the Company has agreed to establish a Settlement Fund in the amount of up to approximately $2.5 million to be allocated as follows: (a) the Class Member Fund which should not exceed approximately
$2.0 million in advertising credits, (b) the Fees Award to Class Counsel, which shall not exceed the amount of approximately $0.6 million; and (c) the Incentive Award (as hereinafter defined) to the three Class Representatives, which shall
not exceed a collective immaterial amount. In the event that the total of the credit claims paid is less than approximately $0.8 million, the difference between the total amount of the credit claims paid and approximately $0.8 million will be paid
to charities in the form of advertising credits. Should the total of the credit claims paid to the Settlement Class Members as a group plus any amounts allocated to charities be more than approximately $0.8 million but less than approximately $2.5
million, then the amount if any shall be retained by the Company. Settlement payments from the Class Member Fund will be paid out in advertising credits to members of the Class who file timely claims to participate in the settlement. On
December 28, 2007, the Company provided the notices to class members required by the Settlement Agreement who had until February 11, 2008 to file claims. On April 8, 2008, the Company made the Fee Award to Counsel and the Incentive
Award payments to plaintiffs counsel. On April 29, 2008, the Company began to issue advertising credits to the Class Members who filed timely claims. The Company recorded an estimate in accrued liabilities of the amount of the loss on
settlement which management has determined is probable and estimable during the year ended December 31, 2007. This estimate may change as a result of the cost of the final settlement arrangement. In addition, during 2007 the Company recovered
settlement proceeds from the insurance carrier, which exceeded the recorded estimate of the amount of loss on settlement. Due to the uncertainty relating to the ultimate settlement amount, the excess settlement proceeds have been recorded as an
accrued liability at December 31, 2007 and at September 30, 2008.

Upon the completion of the thirty day appeals period, which ended on
March 30, 2008, the Company on April 7, 2008 paid approximately $0.6 million of legal fees to the plaintiffs counsel representing the Fees Award to Class Counsel and the Incentive Award as is stipulated in the Settlement Agreement.

12. Stockholders Equity

Common Stock

On February 13, 2008, the Company repurchased approximately 5.2 million of its shares via a modified Dutch Auction tender offer
(Offer) at $3.40 per share for a total cost of approximately $17.9 million. The common stock accepted for purchase represented approximately 22.5% of our common stock issued and outstanding as of February 13, 2008. Shares acquired
pursuant to the Offer were canceled and returned to the status of authorized but unissued stock and are available for the Company to issue without further stockholder action, except as required by applicable law or the rules of the NASDAQ or any
securities exchange on which the shares may be listed, for various purposes including, without limitation, acquisitions of other businesses, raising additional capital and the satisfaction of obligations under existing or future employee benefit or
compensation programs or stock plans or compensation programs for directors. The Company has no current plans for issuance of the shares purchased in the Offer.

On February 26, 2008, the Companys Board of Directors authorized a stock repurchase program pursuant to which up to $5.0 million of its outstanding common stock may be repurchased through December 31, 2008. Under the
program, the Company may purchase shares of common stock through the open market at the prevailing market price or in privately negotiated transactions. Repurchases may also be made under a rule 10b5-1 plan, which would permit shares to be



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repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The timing and amount of repurchase transactions under
this program will depend on market conditions and corporate considerations, and will be made in compliance with applicable federal and state securities laws and regulations. The Company intends to finance any such stock repurchases from its existing
cash, cash equivalents, and short-term investments balances. The stock repurchase program may be suspended or discontinued at any time.

On
February 29, 2008, the Company agreed to purchase approximately 0.8 million shares at an average price of $3.51 per share, for a total price of approximately $2.8 million, as part of the repurchase program authorized on February 26,
2008. This trade settled on March 5, 2008. On April 10, 2008, the Company canceled the approximately 0.8 million shares, and returned the shares to the status of authorized but unissued stock which is available for the Company to
issue without further stockholder action, except as required by applicable law or the rules of the NASDAQ or any securities exchange on which the shares may be listed, for various purposes including, without limitation, acquisitions of other
businesses, raising additional capital and the satisfaction of obligations under existing or future employee benefit or compensation programs or stock plans or compensation programs for directors.

Stock Option Plans

In October 2000, the Company acquired Zeal
Media, Inc. and assumed all the stock options outstanding under the 1999 Zeal Media, Inc. Stock Plan (the Zeal Plan). In April 2002, the Company acquired Wisenut, Inc. and assumed all the stock options outstanding under the Wisenut, Inc.
1999 Stock Incentive Plan (the Wisenut Plan). On September 19, 2007, the stockholders approved the LookSmart 2007 Equity Incentive Plan (the 2007 Plan). The Company has reserved approximately 5.8 million and
8.3 million shares of common stock for issuance under its stock option plans at September 30, 2008 and 2007, respectively. Except for the one time share grants to certain executive officers that become exercisable over a two year period,
outstanding stock options generally become exercisable over a three or four year period from the grant date and have a term of ten years. Under the 2007 Plan, the Company may grant incentive stock options, nonqualified stock options, stock
appreciation rights and stock rights to employees, directors and consultants. For more information regarding these transactions, see the Companys filings with the Securities and Exchange Commission on Form 8-K.

As of September 30, 2008, approximately 4.4 million stock options were outstanding and approximately 1.3 million shares remained available for grant under
the Companys plans.

Employee Stock Purchase Plan

In July 1999, the stockholders approved the 1999 Employee Stock Purchase Plan (the ESPP Plan). At September 30, 2008, a total of approximately 0.5 million shares of common stock were reserved for issuance under the
ESPP Plan, plus annual increases at the Boards discretion effective on January 1 of each year, beginning in 2000. As of September 30, 2008, approximately 0.5 million shares have been issued under the ESPP Plan and approximately
0.1 million shares remain available for issuance.

Share-Based Compensation

The Company accounts for employee stock options under SFAS 123R and its related interpretations. For the three and nine months ended September 30, 2008, the Company
recorded share-based compensation of approximately $0.7 million and $2.4 million, respectively, and approximately $0.6 million and $1.8 million for the three and nine months ended September 30, 2007.

Valuation Assumptions

The Company estimates the fair value of stock
options using a Black-Scholes valuation model, consistent with the provisions of SFAS 123R. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model with the following assumptions:



| |  |  | Volatility: The volatility factor was based on the Companys historical stock prices over the most recent period commensurate with the estimated expected term
of the stock options.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Risk-Free Interest Rate: The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S.
Treasury issues with an equivalent remaining term of the share-based awards.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Expected Term: The Companys expected term represents the period that the Companys share-based awards are expected to be outstanding and was determined
based on historical experience of similar awards, giving consideration to the contractual terms of the share-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its share-based
awards.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expected Dividend: The Black-Scholes valuation model calls for a single expected dividend yield as an input. The Company has not issued any dividends, and does not
expect to issue dividends in the foreseeable future.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Annual Forfeiture Rate: When estimating pre-vesting forfeitures, the Company considers voluntary termination behavior as well as potential future workforce
reduction programs.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The weighted average grant-date fair value of options granted in the three and nine months ended September 30,
2008 was $1.93 and $2.20 per share, respectively, and $1.87 and $2.38 per share for the three and nine months ended September 30, 2007, respectively.

The aggregate intrinsic value of options exercised for the three and nine months ended September 30, 2008 and 2007 was not significant. The Company issues new shares of common stock upon exercise of stock options. No income tax
benefits have been realized from exercised stock options. Total unrecognized share-based compensation expense was approximately $4.1 million as of September 30, 2008, and the weighted average period over which it is expected to be recognized is
2.5 years.

Stock option activity under the plans during the periods indicated is as follows (in thousands except per share data):



|                              |  |                                   |   |  |                                        |     
|----------------------------- |  | --------------------------------- | - |  | -------------------------------------- | ----
|                              |  | OutstandingOptionsNumber ofShares |   |  | WeightedAverageExercise PricePer Share
|Balance at December 31, 2007  |  | 4,341                             |   |  | $                                      | 4.65
|Granted                       |  | 927                               |   |  |                                        | 3.55
|Exercised                     |  | (6                                | ) |  |                                        | 2.71
|Expired/forfeited             |  | (490                              | ) |  |                                        | 4.10
|                              |  |                                   |   |  |                                        |     
|Balance at March 31, 2008     |  | 4,772                             |   |  |                                        | 4.50
|Granted                       |  | 26                                |   |  |                                        | 4.06
|Exercised                     |  | (37                               | ) |  |                                        | 3.17
|Expired/forfeited             |  | (121                              | ) |  |                                        | 4.41
|                              |  |                                   |   |  |                                        |     
|Balance at June 30, 2008      |  | 4,640                             |   |  |                                        | 4.51
|Granted                       |  | 233                               |   |  |                                        | 3.17
|Exercised                     |  | (3                                | ) |  |                                        | 2.69
|Expired/forfeited             |  | (422                              | ) |  |                                        | 3.95
|                              |  |                                   |   |  |                                        |     
|Balance at September 30, 2008 |  | 4,448                             |   |  | $                                      | 4.49
|                              |  |                                   |   |  |                                        |     



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The following table summarizes information about stock options outstanding at September 30, 2008 (in thousands
except per share data):



|                         |  |                                         |  |                                                    |  |                              |  |                         |      |                                         |   |                              |  |                         |  |   |      |  |   |  
|------------------------ |  | --------------------------------------- |  | -------------------------------------------------- |  | ---------------------------- |  | ----------------------- | ---- | --------------------------------------- | - | ---------------------------- |  | ----------------------- |  | - | ---- |  | - | -
|                         |  | Outstanding                             |  | Exercisable                                       
|Range of Exercise Prices |  | NumberOutstandingas ofSeptember 30,2008 |  | WeightedAverageRemainingContractualLife (in years) |  | WeightedAverageExercisePrice |  | AggregateIntrinsicValue |      | NumberExercisableas ofSeptember 30,2008 |   | WeightedAverageExercisePrice |  | AggregateIntrinsicValue
|$  2.27                  |  | $    3.19                               |  | 747                                                |  | 7.63                         |  | $                       | 2.91 |                                         | $ | 1                            |  | 469                     |  | $ | 2.92 |  | $ | 
|$  3.20                  |  | $    3.20                               |  | 1,140                                              |  | 8.73                         |  | $                       | 3.20 |                                         |   |                             |  | 273                     |  | $ | 3.20 |  |   | 
|$  3.21                  |  | $    4.32                               |  | 1,134                                              |  | 8.65                         |  | $                       | 3.72 |                                         |   |                             |  | 691                     |  | $ | 3.71 |  |   | 
|$  4.33                  |  | $  20.55                                |  | 1,427                                              |  | 4.77                         |  | $                       | 6.96 |                                         |   |                             |  | 1,115                   |  | $ | 7.64 |  |   | 
|                         |  |                                         |  |                                                    |  |                              |  |                         |      |                                         |   |                              |  |                         |  |   |      |  |   |  
|$  2.27                  |  | $  20.55                                |  | 4,448                                              |  | 7.26                         |  | $                       | 4.49 |                                         | $ | 1                            |  | 2,548                   |  | $ | 5.23 |  | $ | 
|                         |  |                                         |  |                                                    |  |                              |  |                         |      |                                         |   |                              |  |                         |  |   |      |  |   |  

Aggregate intrinsic value represents the total pretax intrinsic value, based on the Companys closing stock
price on September 30, 2008 of $2.55 per share, which would have been received by option holders had all option holders exercised their options on that date.

As of September 30, 2008, the number of vested shares and unvested shares that were expected to vest was approximately 4.0 million, with a weighted-average exercise price of $4.59 per share, a weighted-average remaining
contractual life of 7.3 years, and an aggregate intrinsic value of an immaterial amount.

As of September 30, 2007 there were approximately
3.4 million options outstanding and approximately 1.7 million options exercisable.

13. Comprehensive Loss

The components of comprehensive loss are as follows (in thousands):



|                                                    |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                    |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                    |  | 2008                            |        |   | 2007                           |   |        | 2008 |  |   | 2007   |  
|Net loss                                            |  | $                               | (1,721 | ) |                                | $ | (4,319 | )    |  | $ | (2,385 | ) |  | $ | (9,812 | )
|Other comprehensive gain (loss):                    |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Change in unrealized gain (loss) on securities, net |  |                                 | (118   | ) |                                |   | 15     |      |  |   | (134   | ) |  |   | 12     |  
|Change in translation adjustment                    |  |                                 |       |   |                                |   | 516    |      |  |   |       |   |  |   | 516    |  
|                                                    |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Comprehensive loss                                  |  | $                               | (1,839 | ) |                                | $ | (3,788 | )    |  | $ | (2,519 | ) |  | $ | (9,284 | )
|                                                    |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  

14. Related Party Transactions

The Company compensated one of its board members, Jean-Yves Dexmier, fees totaling approximately $0.1 million in connection with his board services for the Company and in connection with a Board Services Agreement
whereby Mr. Dexmier provided additional board services to the Company.

15. Subsequent Events

Subsequent to September 30, 2008, the credit and liquidity crisis in the United States and throughout the global financial system has resulted in substantial
volatility in the financial markets and the banking system. These and other economic events may have an adverse impact on the Companys investments. We have continued to monitor this subsequent event activity and have concluded that our
assessment of other-than-temporary impairment as of September 30, 2008 has not changed.

Subsequent to September 30, 2008, the Companys
market capitalization dropped below its net book value. That condition has not been sustained for an extended period of time and has been significantly impacted by extreme volatility in the United States and global equity markets. The Companys
annual assessment of the carrying value of goodwill may be impacted if the decline in the Companys market capitalization is sustained.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Forward-Looking Statements

The following discussion should be read in conjunction with the Unaudited Condensed
Consolidated Financial Statements and the Notes to those statements which appear elsewhere in this Quarterly Report on Form 10-Q. The following discussion contains forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as believes, intends, expects, anticipates, plans, may,
will and similar expressions to identify forward-looking statements. Discussions containing forward-looking statements may be found in the material set forth under Managements Discussion and Analysis of Financial Condition
and Results of Operations and in other sections of this report. All forward-looking statements, including, but not limited to, projections, expectations or estimates concerning our business, including demand for our products and services, mix
of revenue sources, ability to control and/or reduce operating expenses, anticipated gross margins and operating results, cost savings, product development efforts, general outlook of our business and industry, future profits or losses, competitive
position, share-based compensation, and adequate liquidity to fund our operations and meet our other cash requirements, are inherently uncertain as they are based on our expectations and assumptions concerning future events. These forward-looking
statements are subject to numerous known and unknown risks and uncertainties. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking
statements for many reasons, including but not limited to, the possibility that we may fail to maintain or grow our listings advertiser base, that existing and potential distribution partners may opt to work with, or favor the products of,
competitors if our competitors offer more favorable products or pricing terms, that we may be unable to grow sources of revenue other than our search advertising revenue, that we may be unable to attain or maintain customer acceptance of our
publisher solutions products, that changes in the distribution network composition may lead to decreases in query volumes, that we may be unable to maintain or improve our query volume, match rate, number of paid clicks, average revenue per click,
conversion rate or other ad network metrics, that we may be unable to achieve or maintain profitability, that we may be unable to attract and retain key personnel, that we may have unexpected increases in costs and expenses, or that one or more of
the other risks described below in the section entitled Risk Factors and elsewhere in this report may occur.

All forward-looking
statements in this report are made as of the date hereof, based on information available to us as of the date hereof, and except as required by applicable law, we assume no obligation to update any forward-looking statements.

Business Overview

LookSmart is a search advertising network
solutions company that provides relevant solutions for search advertisers and publishers. LookSmart was organized in 1996 and is incorporated in the State of Delaware.

LookSmart offers search advertisers targeted, pay-per-click (PPC) search, and contextual search advertising via a monitored search advertising distribution network (AdCenter). The Companys extensive
search advertising distribution network includes publishers and search partners within certain vertical market segments in the United States and certain other countries. The Companys application programming interface (API) allows search
advertisers and their advertising agencies to connect any type of marketing or reporting software with minimal effort, for easier access, management, and optimization of search advertising campaigns. The advertiser network service offering provided
90% and 88% of total revenues in the quarters ended September 30, 2008, and 2007, respectively.

LookSmart also offers publishers licensed
private-label search advertiser network solutions based on its AdCenter platform technology (Publisher Solutions). Publisher Solutions consist of hosted auction-based ad serving with an ad backfill capability that allows search engines,
networks, media companies, social networking sites, retail sites, directories, ISPs and portals to manage their advertiser relationships, distribution channels and accounts. The publisher solutions service offering has provided 10%, and 12% of total
revenues in the quarters ended September 30, 2008, and 2007, respectively.

In 2007, the Companys management made the decision to exit certain
consumer products activities and to sell or otherwise dispose of the various related websites and assets associated with those activities. During 2007 the Company sold FindArticles, the assets relating to Grub, the websites and trademark associated
with Zeal and completed the shutdown of the Wisenut website and search functionality. In the first quarter of 2008, the Companys management made the decision to exit the remaining consumer products activities and to sell or otherwise dispose
of the remaining consumer assets. Additionally, during the first quarter of 2008 Furl assets have been accounted for under the guidance of Statement of



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Financial Accounting Standards No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144) as assets
held for sale. The results of operations of consumer product activities, including related gains (losses), have been classified as discontinued operations for all periods presented in the accompanying Unaudited Condensed Consolidated
Statements of Operations included in this filing. See Notes 3, 5 and 6 for further details. At September 30, 2008, the Company continues to own the Wisenut search engine technology and its intellectual property rights in such technology and
other assets, and owns and operates Furl.

Critical Accounting Policies and Estimates

Our financial condition and results of operations are based upon certain critical accounting policies, which include estimates, assumptions, and judgments on the part of management. We base our estimates on various
factors and information which may include, but are not limited to, history and prior experience, experience of other enterprises in the same industry, new related events, current economic conditions and information from third party professionals
that is believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates, judgments and
assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the period presented. Actual results may differ from those estimates. In
managements opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented. All adjustments are of a normal or recurring nature.

The following discussion highlights those policies and the underlying estimates and assumptions, which we consider critical to an understanding of the financial information in this report.

Investments

We account for investments in securities under
SFAS 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS 115). SFAS 115 requires the classification of investments in debt and equity securities with readily determinable fair values as
held-to-maturity, available-for-sale, or trading.

We invest our excess cash primarily in debt instruments of
high-quality corporate and government issuers. All highly liquid instruments with maturities at the date of purchase greater than ninety days are considered investments. All instruments with maturities greater than one year from the balance sheet
date are considered long-term investments unless management intends to liquidate such securities in the current operating cycle. Such securities are classified as short-term investments. These securities are classified as available-for-sale and
carried at fair value in accordance with SFAS 157, Fair Value Measures (SFAS 157).

Changes in value of these investments are primarily
related to changes in interest rates and are considered to be temporary in nature. Except for declines in fair value that are not considered temporary, net unrealized gains or losses on these investments are reported as a component of accumulated
comprehensive income (loss) in stockholders equity. We recognize realized gains and losses upon sale of investments using the specific identification method.

Revenue Recognition

Our online search advertising revenue is primarily composed of per-click fees that we charge customers. The
per-click fee charged for keyword-targeted listings is calculated based on the results of online bidding for keywords or page content, up to a maximum cost per keyword or page content set by the customer. Revenue also includes revenue share from
licensing of private-labeled versions of our products.

Revenues associated with online advertising products, including Advertiser Networks, are generally
recognized once collectability is established, delivery of services has occurred, all performance obligations have been satisfied, and no refund obligations exist. We pay distribution network partners based on clicks on the advertisers ad that
are displayed on the websites of these distribution network partners. These payments are called traffic acquisition costs (TAC) and are included in cost of revenues. In accordance with Emerging Issues Task Force Issue No. 99-19,
Reporting Revenue Gross as a Principal Versus Net as an Agent (EITF 99-19), the revenue derived from these arrangements that involve traffic supplied by distribution network partners is reported gross of the payment to the
distribution network partners. This revenue is reported gross due to the fact that we are the primary obligor to the advertisers who are the customers of the advertising service.



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We also enter into agreements to provide private-labeled versions of our products, including licenses to the AdCenter.
These license arrangements include multiple elements: revenue-sharing based on the publishers customers monthly revenue generated through the AdCenter application; upfront fees; and other license fees. We recognize revenue in accordance
with Securities and Exchange Commission Staff Accounting Bulletin No. 104,Revenue Recognition in Financial Statements (SAB 104), and Financial Accounting Standards Board Emerging Issues Task Force No. 00-21,Revenue
Arrangements with Multiple Deliverables (EITF 00-21). We recognize upfront fees over the term of the arrangement or the expected period of performance, other license fees over the term of the license, and revenue-sharing portions
over the period in which such revenue is earned. In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the resulting receivable
is reasonably assured.

Affiliate revenue is included in online advertising revenue and is based on commissions received for participation in affiliate
programs. Affiliate programs are programs operated by affiliate network services or online merchants, in which merchants pay traffic providers on a cost-per-acquisition basis. By participating in affiliate programs, we generate revenue when Internet
consumers make a purchase from a participating merchants website after clicking on the merchants listing in our search results. Revenues from affiliates are earned on a per-sale basis or as a percentage of sales rather than a per-click
basis. Revenue is recognized in the period in which a merchant finalizes a sale and reports to us via our affiliate network.

We provide a provision
against revenue for estimated reductions resulting from billing adjustments and customer refunds. The amounts of these provisions are evaluated periodically based upon customer experience and historical trends.

Deferred revenue is recorded when payments are received in advance of performance in underlying agreements. Customer deposits are recorded when customers make
prepayments for online advertising.

Allowance for Doubtful Accounts

Determining collectability of accounts receivable requires significant judgment on the part of management and includes performing initial and ongoing credit evaluations of customers. We maintain an allowance for
doubtful accounts for estimated losses resulting from customers failing to make required payments. This valuation allowance is reviewed on a periodic basis to determine whether a provision or reversal is required. The review is based on factors
including the application of historical collection rates to current receivables. We will record a reduction of our allowance for doubtful accounts if there is a significant improvement in collection rates or economic conditions are more favorable
than we anticipated. Additional allowances for doubtful accounts may be required if there is deterioration in past due balances, if economic conditions are less favorable than we anticipated or for customer-specific circumstances, such as
bankruptcy. Managements judgment is required in the periodic review of whether a provision or reversal is warranted.

Valuation of Goodwill and
Intangible Assets

We have recorded goodwill and intangible assets in connection with our business acquisitions. Management exercises judgment in
the assessment of the related useful lives, fair value and recoverability of these assets. The majority of intangible assets are amortized over three to seven years, the period of expected benefit. Goodwill is not amortized. In accordance with SFAS
142, we periodically re-assess the valuation and asset lives of intangible assets to conform to changes in managements estimates of future performance. Management considers existing and anticipated competitive and economic conditions in such
assessments. Goodwill is reviewed for impairment at least annually and as a result of any event that significantly changes our business. The Company uses market capitalization, as well as cash flow forecasts and other market value indicators to
review goodwill for impairment. Cash flow forecasts used in evaluation of goodwill are based on trends of historical performance and managements estimate of future performance.

Deferred Taxes

We recognize deferred tax assets and liabilities based on the differences between the
financial statement carrying values and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income,
and the expected timing of the reversals of existing temporary differences.



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If our future taxable income is significantly higher than expected and/or we are able to utilize our tax credits, we may be required to reverse all or a
significant part of our valuation allowance against such deferred tax assets which could substantially reduce our effective tax rate for such period. Therefore, any significant changes in statutory tax rates or the amount of our valuation allowance
could have a material impact on the value of our deferred tax assets and liabilities, and our reported financial results.

We establish reserves for
tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return
positions are in accordance with applicable tax laws. Effective January 1, 2007, we adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty for Income Taxes-an interpretation of FASB Statement No. 109
(FIN 48).

Internal Use Software Development Costs

We account for internal use software development costs in accordance with American Institute of Certified Public Accountants (AICPA) Statement of Position No. 98-1,Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use (SOP 98-1). In accordance with the capitalization criteria of SOP 98-1, we have capitalized external direct costs of materials and services consumed in developing and obtaining
internal-use computer software and the payroll and payroll-related costs of employees who devote time to the internal use computer software project.

Managements judgment is required in determining the point at which various projects enter the stages at which costs may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining the estimated useful
lives over which the costs are amortized. We expect to continue to invest in internally developed software and to capitalize costs in accordance with SOP 98-1.

Restructuring Charges, net

We have recorded a restructuring accrual related to closing certain leased facilities in accordance with
SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. Managements judgment is required in estimating when the redundant facilities will be subleased and at what rate they will be subleased.

Share-Based Compensation

We account for share-based
compensation costs in accordance with SFAS 123R,Share-Based Payment, which revised SFAS 123,Accounting for Share-based Compensation. SFAS 123R requires all share-based payment transactions with employees, including grants of employee
stock options and employee stock purchases related to the Employee Stock Purchase Plan to be recognized as compensation expense over the requisite service period based on their relative fair values. SFAS 123R is a very complex accounting standard,
the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility and expected option lives, as well as expected option forfeiture rates, to value
equity-based compensation. SFAS 123R requires the recognition of the fair value of stock compensation in net income (loss).

Recent Accounting
Pronouncements

For a description of recent accounting pronouncements, see Note 1 (Summary of Significant Accounting Policies) in the Notes to the
Unaudited Condensed Consolidated Financial Statements.



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Results of Operations

Overview of the Three and Nine Months Ended September 30, 2008

The following table sets forth selected information concerning
our results of operations as a percentage of consolidated net revenue for the periods indicated:



|                                                    |  |                                 |    |  |                                |    |  |       |    |  |       |   
|--------------------------------------------------- |  | ------------------------------- | -- |  | ------------------------------ | -- |  | ----- | -- |  | ----- | --
|                                                    |  | Three Months EndedSeptember 30, |    |  | Nine Months EndedSeptember 30, |   
|                                                    |  | 2008                            |    |  | 2007                           |    |  | 2008  |    |  | 2007  |   
|Revenue                                             |  | 100.0                           | %  |  | 100.0                          | %  |  | 100.0 | %  |  | 100.0 | % 
|Cost of revenue                                     |  | 59.9                            | %  |  | 55.8                           | %  |  | 59.4  | %  |  | 55.5  | % 
|                                                    |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Gross profit                                        |  | 40.1                            | %  |  | 44.2                           | %  |  | 40.6  | %  |  | 44.5  | % 
|Operating expenses:                                 |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Sales and marketing                                 |  | 16.0                            | %  |  | 16.7                           | %  |  | 13.3  | %  |  | 17.0  | % 
|Product development                                 |  | 18.5                            | %  |  | 27.2                           | %  |  | 17.2  | %  |  | 24.8  | % 
|General and administrative                          |  | 16.9                            | %  |  | 28.3                           | %  |  | 15.6  | %  |  | 24.8  | % 
|Restructuring costs                                 |  | 1.4                             | %  |  | 2.0                            | %  |  | 0.2   | %  |  | 0.6   | % 
|                                                    |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Total operating expenses                            |  | 52.8                            | %  |  | 74.2                           | %  |  | 46.3  | %  |  | 67.2  | % 
|Loss from operations                                |  | (12.7                           | %) |  | (30.0                          | %) |  | (5.7  | %) |  | (22.7 | %)
|Non-operating income, net                           |  | 1.5                             | %  |  | 4.3                            | %  |  | 1.8   | %  |  | 4.1   | % 
|                                                    |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Loss from continuing operations before income taxes |  | (11.2                           | %) |  | (25.7                          | %) |  | (3.9  | %) |  | (18.6 | %)
|Income tax expense (credit)                         |  | 0.0                             | %  |  | 0.0                            | %  |  | 0.0   | %  |  | 0.0   | % 
|                                                    |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Loss from continuing operations                     |  | (11.2                           | %) |  | (25.7                          | %) |  | (3.9  | %) |  | (18.6 | %)
|Loss from discontinued operations, net of tax       |  | 0.0                             | %  |  | (12.6                          | %) |  | (0.9  | %) |  | (8.1  | %)
|                                                    |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Net loss                                            |  | (11.2                           | %) |  | (38.3                          | %) |  | (4.8  | %) |  | (26.7 | %)
|                                                    |  |                                 |    |  |                                |    |  |       |    |  |       |   

Revenues

Revenues are derived from the Companys two service offerings or products: Advertiser Networks and Publisher Solutions.

The
Company recognized approximately $15.4 and $50.0 million of total revenue during the three and nine months ended September 30, 2008, respectively, up 37% and 36%, respectively, from the approximate $11.3 million and $36.7 million recognized
during the three and nine months ended September 30, 2007, respectively. The approximate $4.1 million and $13.3 million increases in total revenue for the three and nine months ending September 30, 2008 as compared to the comparable
periods of 2007 was primarily driven by increasing paid clicks.

For the three and nine months ended September 30, 2008, IAC Search and Media
(IAC) represented approximately $1.4 million and $4.0 million, or 92% and 87%, respectively, of the Publisher Solutions revenue. Our contract with IAC expires December 31, 2009. IAC is currently soliciting bids for a new contract.

In August 2007, the Companys management made the decision to exit certain consumer products activities and to sell or otherwise dispose of various
related websites and assets associated those activities. In March 2008, the Companys management made the decision to exit the remaining consumer products activities and to sell or otherwise dispose of the remaining consumer assets. In 2008,
the results of operations to be disposed of and previously disposed assets, including related gains (losses), have been classified as discontinued operations.

Total revenues, and revenues from Advertiser Networks and Publisher Solutions for the three and nine months ended September 30, 2008 and 2007 were as follows (in thousands):



|                             |  |                                 |        |        |   |        |                                |    |        |  |   |        |  |   |        |  |    |  
|---------------------------- |  | ------------------------------- | ------ | ------ | - | ------ | ------------------------------ | -- | ------ |  | - | ------ |  | - | ------ |  | -- | -
|                             |  | Three Months EndedSeptember 30, |        | Change |   |        | Nine Months EndedSeptember 30, |    | Change | 
|                             |  | 2008                            |        | 2007   |   |        | 2008                           |    | 2007   | 
|Online advertising revenues: |  |                                 |        |        |   |        |                                |    |        |  |   |        |  |   |        |  |    |  
|Advertiser Networks          |  | $                               | 13,901 |        | $ | 9,968  |                                | 39 | %      |  | $ | 45,441 |  | $ | 32,805 |  | 39 | %
|Publisher Solutions          |  |                                 | 1,522  |        |   | 1,319  |                                | 15 | %      |  |   | 4,618  |  |   | 3,898  |  | 18 | %
|                             |  |                                 |        |        |   |        |                                |    |        |  |   |        |  |   |        |  |    |  
|Total revenues               |  | $                               | 15,423 |        | $ | 11,287 |                                | 37 | %      |  | $ | 50,059 |  | $ | 36,703 |  | 36 | %
|                             |  |                                 |        |        |   |        |                                |    |        |  |   |        |  |   |        |  |    |  



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We recognized approximately $13.9 million and $45.4 million of Advertiser Networks revenue during the three and nine
months ended September 30, 2008, respectively; both up 39% from the approximate $10.0 million and $32.8 million recognized during the three and nine months ended September 30, 2007, respectively. Revenues from Advertiser Networks increased
in the third quarter of 2008 by approximately $3.9 million and in the first nine months of 2008 by approximately $12.6 million compared to the same periods in 2007 primarily as a result of an increase in revenue from new advertising customers,
up-selling on existing large advertisers, an increase in the volume of total paid clicks as a result of increase in advertisers, improvements in quality of our platform, performance optimization and better match rate. Total paid clicks totaled
approximately 184 million for the third quarter of 2008, as compared to approximately 83 million for the third quarter of 2007, an increase of 122%, with average RPC decreasing to $0.08 from $0.12. Total paid clicks totaled approximately
531 million for the nine months ended September 30, 2008, as compared to approximately 297 million for the comparable period of 2007, an increase of 79%, with average RPC decreasing to $0.09 from $0.11. The decreased 2008 PRC as
compared to 2007 is primarily a result of shifts in the mix of direct and intermediary sales channels.

We recognized approximately $1.5 million of
Publisher Solutions revenue during the three months ended September 30, 2008, a 15% increase from the approximate $1.3 million recognized during the three months ended September 30, 2007. During the nine months ended September 30,
2008, we recognized approximately $4.6 million of Publisher Solutions revenue during the nine months ended September 30, 2008, up 18%, or approximately $0.7 million, from the approximate $3.9 million recognized in the same period of the prior
year. Publisher Solutions revenue increases for the three and nine months ended September 30, 2008 as compared to the same periods in 2007 are attributed to increases by one significant publisher customer partially offset by reduced revenue
from other publishers.

Revenue amounts reflect the reclassification of insignificant amounts in 2008, and approximately $1.3 million and $3.8 million of
revenue of various related websites and assets associated with the consumer products activities to discontinued operations for the three and nine months ended September 30, 2007, respectively. See Note 3 to the Unaudited Condensed Consolidated
Financial Statements for further details.

Cost of Revenues and Gross Margin

Cost of revenues, consisting of traffic acquisition costs (TAC), costs paid to our distribution network partners, connectivity costs, hosting expenses, commissions paid to advertising agencies, and credit
card fees were as follows (in thousands):



|                                                                      |  |                                 |       |   |        |   |       |                                |      |    |        |      |   |        |   |  |   |        |   |  |    |  
|--------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ------ | - | ----- | ------------------------------ | ---- | -- | ------ | ---- | - | ------ | - |  | - | ------ | - |  | -- | -
|                                                                      |  | Three Months EndedSeptember 30, |       |   | Change |   |       | Nine Months EndedSeptember 30, |      |    | Change |     
|                                                                      |  | 2008                            |       |   | 2007   |   |       |                                | 2008 |    |        | 2007 |   |       
|Traffic acquisition costs                                             |  | $                               | 8,688 |   |        | $ | 5,873 |                                |      | 48 | %      |      | $ | 28,143 |   |  | $ | 19,266 |   |  | 46 | %
|Other costs                                                           |  |                                 | 551   |   |        |   | 425   |                                |      | 30 | %      |      |   | 1,572  |   |  |   | 1,105  |   |  | 42 | %
|                                                                      |  |                                 |       |   |        |   |       |                                |      |    |        |      |   |        |   |  |   |        |   |  |    |  
|Total cost of revenues                                                |  | $                               | 9,239 |   |        | $ | 6,298 |                                |      | 47 | %      |      | $ | 29,715 |   |  | $ | 20,371 |   |  | 46 | %
|                                                                      |  |                                 |       |   |        |   |       |                                |      |    |        |      |   |        |   |  |   |        |   |  |    |  
|Total cost of revenues as percentage of total revenue                 |  |                                 | 59.9  | % |        |   | 55.8  | %                              |      |    |        |      |   | 59.4   | % |  |   | 55.5   | % |  |    |  
|Traffic acquisition costs as percentage of online advertising revenue |  |                                 | 62.5  | % |        |   | 58.9  | %                              |      |    |        |      |   | 61.9   | % |  |   | 58.7   | % |  |    |  

Our total cost of revenue during the three months ended September 30, 2008 was approximately $9.2 million, up
approximately $2.9 million, or 47% from the approximate $6.3 million in the three months ended September 30, 2007. Total cost of revenue for the nine months ended September 30, 2008 was approximately $29.7 million, up approximately $9.3
million, or 46% from the approximate $20.4 million in the nine months ended September 30, 2007.

Total cost of revenue amounts reflect the
reclassification of insignificant amounts in 2008, and $0.8 million and $2.5 million of various related websites and assets associated with the consumer products activities to discontinued operations for the three and nine months ended
September 30, 2007, respectively. See Note 3 to the Unaudited Condensed Consolidated Financial Statements for further details.



28



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##### Table of Contents

Our TAC during the three months ended September 30, 2008 were approximately $8.7 million, up approximately $2.8
million, or 48% from the approximate $5.9 million in the three months ended September 30, 2007. TAC for the first nine months of 2008 was approximately $28.1 million, up 46%, or approximately $8.9 million, from the approximate $19.3 million in
first nine months of 2007. TAC increased in both comparable periods primarily due to higher paid click volumes, rising industry demands for quality search queries and a deliberate operating decision to improve traffic quality by allowing higher TAC
in order to drive top-line advertising revenues and bottom-line profit contribution in the Advertiser Network.

Our other costs of revenue during the three
months ended September 30, 2008 was approximately $0.6 million, up approximately $0.1 million, or 30%, from the approximate $0.4 million in the three months ended September 30, 2007. For the first nine months of 2008 other costs of revenue
expense were approximately $1.6 million, up 42%, or approximately $0.5 million, from the approximate $1.1 million in the first nine months of 2007. The increased other costs for both comparable periods was primarily due to higher line rental
charges.

Gross margin of 40.1% in the third quarter of 2008 declined 4.1 percentage points from the 44.2% gross margin in the third quarter of 2007, with
year-to-date gross margin of 40.6% down 3.9 percentage points from the 44.5% achieved in the first nine months of 2007 due to relatively higher TAC as discussed above.

Operating Expenses

Operating expenses consisting of sales and marketing, product development, general and
administrative, and restructuring charges were as follows (in thousands):



|                           |  |                                 |       |        |   |       |                                |     |        |  |   |        |  |   |        |  |     |   
|-------------------------- |  | ------------------------------- | ----- | ------ | - | ----- | ------------------------------ | --- | ------ |  | - | ------ |  | - | ------ |  | --- | --
|                           |  | Three Months EndedSeptember 30, |       | Change |   |       | Nine Months EndedSeptember 30, |     | Change | 
|                           |  | 2008                            |       | 2007   |   |       | 2008                           |     | 2007   | 
|Sales and marketing        |  | $                               | 2,471 |        | $ | 1,880 |                                | 31  | %      |  | $ | 6,681  |  | $ | 6,232  |  | 7   | % 
|Product development        |  |                                 | 2,865 |        |   | 3,076 |                                | (7  | %)     |  |   | 8,603  |  |   | 9,114  |  | (6  | %)
|General and administrative |  |                                 | 2,599 |        |   | 3,197 |                                | (19 | %)     |  |   | 7,833  |  |   | 9,110  |  | (14 | %)
|Restructuring charges, net |  |                                 | 211   |        |   | 224   |                                | (6  | %)     |  |   | 76     |  |   | 224    |  | (66 | %)
|                           |  |                                 |       |        |   |       |                                |     |        |  |   |        |  |   |        |  |     |   
|Total operating expense    |  | $                               | 8,146 |        | $ | 8,377 |                                | (3  | %)     |  | $ | 23,193 |  | $ | 24,680 |  | (6  | %)
|                           |  |                                 |       |        |   |       |                                |     |        |  |   |        |  |   |        |  |     |   

Share-based compensation expense was allocated as follows (in thousands):



|                                                       |  |                                 |     |   |        |   |     |                                |      |     |        |      |   |       |   |  |   |       |   |  |     |   
|------------------------------------------------------ |  | ------------------------------- | --- | - | ------ | - | --- | ------------------------------ | ---- | --- | ------ | ---- | - | ----- | - |  | - | ----- | - |  | --- | --
|                                                       |  | Three Months EndedSeptember 30, |     |   | Change |   |     | Nine Months EndedSeptember 30, |      |     | Change |     
|                                                       |  | 2008                            |     |   | 2007   |   |     |                                | 2008 |     |        | 2007 |   |      
|Sales and marketing                                    |  | $                               | 106 |   |        | $ | 52  |                                |      | 104 | %      |      | $ | 322   |   |  | $ | 165   |   |  | 95  | % 
|Product development                                    |  |                                 | 197 |   |        |   | 143 |                                |      | 38  | %      |      |   | 546   |   |  |   | 419   |   |  | 30  | % 
|General and administrative                             |  |                                 | 408 |   |        |   | 415 |                                |      | (2  | %)     |      |   | 1,469 |   |  |   | 1,085 |   |  | 35  | % 
|Loss from discontinued operations                      |  |                                 | 12  |   |        |   | 36  |                                |      | (67 | %)     |      |   | 35    |   |  |   | 136   |   |  | (74 | %)
|                                                       |  |                                 |     |   |        |   |     |                                |      |     |        |      |   |       |   |  |   |       |   |  |     |   
|Total share-based compensation                         |  |                                 | 723 |   |        |   | 646 |                                |      | 12  | %      |      |   | 2,372 |   |  |   | 1,805 |   |  | 31  | % 
|Less amounts capitalized as software development costs |  |                                 | (28 | ) |        |   | (17 | )                              |      | 65  | %      |      |   | (82   | ) |  |   | (70   | ) |  | 17  | % 
|                                                       |  |                                 |     |   |        |   |     |                                |      |     |        |      |   |       |   |  |   |       |   |  |     |   
|Total share-based compensation expense                 |  | $                               | 695 |   |        | $ | 629 |                                |      | 10  | %      |      | $ | 2,290 |   |  | $ | 1,735 |   |  | 32  | % 
|                                                       |  |                                 |     |   |        |   |     |                                |      |     |        |      |   |       |   |  |   |       |   |  |     |   

Sales and Marketing

Sales and marketing expenses include salaries, commissions, share-based compensation and other costs of employment for our sales force, sales administration, customer service staff and marketing personnel, overhead, facilities, allocation
of depreciation and the provision for doubtful trade receivables. Sales and marketing expenses also include the costs of advertising, trade shows, public relations activities and various other activities supporting our customer acquisition efforts.

Our sales and marketing expense during the three months ended September 30, 2008 was approximately $2.5 million, up 31% from the approximate $1.9
million in the three months ended September 30, 2007. Sales and marketing expenses in the third quarter of 2008 increased approximately $0.6 million compared to the third quarter of 2007 primarily due to development of our corporate rebranding
efforts and our vertical management network strategy.



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##### Table of Contents

Our sales and marketing expense during the nine months ended September 30, 2008 was approximately $6.7 million, up
7% from approximately $6.2 million year-to-date in 2007. Sales and marketing expenses year-to-date increased approximately $0.4 million compared to the same nine month period in 2007, due to lower overall marketing spend partially offset by spending
on our vertical managed network strategy.

Product Development

Product development costs include all costs related to the continued development and enhancement of our core technology product, the AdCenter platform. The AdCenter is used to operate both our own Advertiser Network and other
publishers client networks, and is licensed to publishers to operate their own network. These costs include salaries and associated costs of employment, including share-based compensation, overhead, facilities and amortization of intangible
assets. Costs related to the development of software for internal use in the business, including salaries and associated costs of employment are capitalized after certain milestones have been achieved. Software licensing and computer equipment
depreciation related to supporting product development functions are also included in product development expenses.

Capitalized software development costs
include the costs to develop software for internal use, excluding costs associated with research and development, training and testing and were as follows (in thousands):



|                                       |  |                                 |       |   |        |   |       |                                |      |     |        |      |   |       |   |  |   |       |   |  |    |   
|-------------------------------------- |  | ------------------------------- | ----- | - | ------ | - | ----- | ------------------------------ | ---- | --- | ------ | ---- | - | ----- | - |  | - | ----- | - |  | -- | --
|                                       |  | Three Months EndedSeptember 30, |       |   | Change |   |       | Nine Months EndedSeptember 30, |      |     | Change |     
|                                       |  | 2008                            |       |   | 2007   |   |       |                                | 2008 |     |        | 2007 |   |      
|Product development costs              |  | $                               | 3,174 |   |        | $ | 3,180 |                                |      | (0  | %)     |      | $ | 9,562 |   |  | $ | 9,750 |   |  | (2 | %)
|Capitalized software development costs |  |                                 | (309  | ) |        |   | (104  | )                              |      | 197 | %      |      |   | (959  | ) |  |   | (636  | ) |  | 51 | % 
|                                       |  |                                 |       |   |        |   |       |                                |      |     |        |      |   |       |   |  |   |       |   |  |    |   
|Total product development expenses     |  | $                               | 2,865 |   |        | $ | 3,076 |                                |      | (7  | %)     |      | $ | 8,603 |   |  | $ | 9,114 |   |  | (6 | %)
|                                       |  |                                 |       |   |        |   |       |                                |      |     |        |      |   |       |   |  |   |       |   |  |    |   

Our product development expense during the three months ended September 30, 2008 was approximately $2.9
million, down 7% from approximately $3.1 million in the three months ended September 30, 2007. Product development expenses in the three months ended September 30, 2008 decreased approximately $0.2 million compared to the same period in
2007 primarily due to lower direct and temporary labor costs and increased capitalized software development cost partially offset by higher depreciation expense due to increased equipment purchases and capitalized software development costs.

Our product development expense during the nine months ended September 30, 2008 was approximately $8.6 million down 6% from approximately $9.1
million year-to-date in 2007. Product development expenses year-to-date decreased approximately $0.5 million compared to the same period in 2007 primarily due to lower direct and temporary labor costs, reduced facilities and increased capitalized
software development cost. The cost reductions were partially offset by higher depreciation expense due to increased equipment purchases and capitalized software development costs.

Total product development costs reflect the reclassification of approximately $0.2 million and $0.7 million, and $0.8 million and $2.9 million of product development costs of various related websites and assets
associated with the consumer products activities to discontinued operations for the three and nine months ended September 30, 2008 and 2007, respectively. See Note 3 to the Unaudited Condensed Consolidated Financial Statements for further
details.

General and Administrative

General and
administrative expenses include costs of executive management, human resources, finance, legal and facilities personnel. These costs include salaries and associated costs of employment, including share-based compensation, overhead, facilities and
allocation of depreciation. General and administrative expenses also include legal, insurance, tax and accounting, consulting and professional services fees.

Our general and administrative expense during the three months ended September 30, 2008 was approximately $2.6 million, down 19% from approximately $3.2 million in the three months ended September 30, 2007. General and
administrative expenses in the third quarter of 2008 decreased approximately $0.6 million compared to the third quarter of 2007 primarily due to lower labor and bonus costs partially offset by additional legal expense.



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##### Table of Contents

Our general and administrative expense during the nine months ended September 30, 2008 was approximately $7.8
million, down 14% from approximately $9.1 million year-to-date in 2007. General and administrative expenses year-to-date decreased approximately $1.3 million compared to 2007, due to lower labor, bonus and facilities costs partially offset by higher
share-based compensation expense.

Total general and administrative costs reflect the reclassification of insignificant amounts in 2008, and approximately
$0.1 million and $0.1 million of general and administrative costs of various related websites and assets associated with the consumer products activities to discontinued operations for the three and nine months ended September 30, 2007,
respectively. See Note 3 to the Unaudited Condensed Consolidated Financial Statements for further details.

Restructuring Charges, net

In the third quarter of 2008 we completed a reorganization to better align the Companys resources and improve operating efficiencies. As
such, we incurred approximately $0.2 million in pre-tax charges associated with the termination of five employees. All liabilities associated with the plan are expected to be paid during the fourth quarter of 2008.

During 2003, we vacated portions of our leased headquarter office facilities, and incurred lease restructuring costs related to these facilities. In the second quarter
of 2008, we subleased approximately 6,500 square feet for which we previously took a restructuring charge. The additional sublease income resulted in a onetime reduction of approximately $0.1 million in the deferred rent liability with the offset as
a reduction to restructuring costs.

In September 2007, we implemented a restructuring plan to streamline the business and eliminated 12 positions.
Severance charges associated with the reduction in force were $0.2 million.

Loss from Operations(in thousands)



|                     |  |                                 |        |   |        |   |        |                                |      |     |        |      |   |        |   |  |   |        |   |  |     |   
|-------------------- |  | ------------------------------- | ------ | - | ------ | - | ------ | ------------------------------ | ---- | --- | ------ | ---- | - | ------ | - |  | - | ------ | - |  | --- | --
|                     |  | Three Months EndedSeptember 30, |        |   | Change |   |        | Nine Months EndedSeptember 30, |      |     | Change |     
|                     |  | 2008                            |        |   | 2007   |   |        |                                | 2008 |     |        | 2007 |   |       
|Loss from operations |  | $                               | (1,962 | ) |        | $ | (3,388 | )                              |      | (42 | %)     |      | $ | (2,849 | ) |  | $ | (8,348 | ) |  | (66 | %)

Our loss from operations during the three months ended September 30, 2008 was approximately $2.0 million,
down from losses of approximately $3.4 million in the three months ended September 30, 2007. For the nine months ended September 30, 2008, our losses from operations were approximately $2.8 million, down from losses of approximately $8.3
million in the nine months ended September 30, 2007. Loss from operations decreased approximately $1.4 million and $5.5 million, respectively, in the three and nine months of 2008 compared to 2007 due to the factors discussed above.

Non-Operating Income, net

Non-operating income (loss), net
is primarily comprised of interest income and was as follows (in thousands).



|                          |  |                                 |     |        |   |     |                                |     |        |  |   |     |  |   |       |  |     |   
|------------------------- |  | ------------------------------- | --- | ------ | - | --- | ------------------------------ | --- | ------ |  | - | --- |  | - | ----- |  | --- | --
|                          |  | Three Months EndedSeptember 30, |     | Change |   |     | Nine Months EndedSeptember 30, |     | Change | 
|                          |  | 2008                            |     | 2007   |   |     | 2008                           |     | 2007   | 
|Non-operating income, net |  | $                               | 239 |        | $ | 489 |                                | (51 | %)     |  | $ | 919 |  | $ | 1,522 |  | (40 | %)

Interest income decreased in the third quarter of 2008 compared to the third quarter of 2007 primarily due to
lower investment balances as the Company utilized its capital to repurchase its stock in the first quarter of 2008, a decrease in interest rates, and a change in the mix of its investment portfolio. During the first nine months of 2008, the Company
repurchased a total of approximately 6.0 million shares of its common stock for a total cost of approximately $20.8 million. These shares represented 26.0% of the total shares outstanding as of December 31, 2007.



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##### Table of Contents

Income Tax Expense

The effective tax rate in upcoming quarters and for the year ended December 31, 2008 may vary due to a variety of factors, including, but not limited to being subject to Alternative Minimum Tax. For the purposes of calculating its
estimated periodic tax obligations, we currently estimate our full-year 2008 tax rate to be insignificant. The effective tax rate for the year ended December 31, 2007 was 7.6%. The majority of the tax expense in 2007 was attributable to
alternative minimum federal and state taxes. The realized effective tax rate in 2007 was primarily related to the gain on sale of FindArticles in the fourth quarter of 2007. Income tax expense (credit) was as follows (in thousands):



|                            |  |                                 |    |        |      |   |                                |      |        |      |  |   |   |  |   |   |  |    |  
|--------------------------- |  | ------------------------------- | -- | ------ | ---- | - | ------------------------------ | ---- | ------ | ---- |  | - | - |  | - | - |  | -- | -
|                            |  | Three Months EndedSeptember 30, |    | Change |      |   | Nine Months EndedSeptember 30, |      | Change |     
|                            |  | 2008                            |    |        | 2007 |   |                                | 2008 |        | 2007 | 
|Income tax expense (credit) |  | $                               | (7 | )      |      | $ |                               |      | 0      | %    |  | $ | 7 |  | $ | 6 |  | 17 | %

Loss from Discontinued Operations, Net of Tax

In 2007, the Companys management made the decision to exit certain consumer products activities and to sell or otherwise dispose of the various related websites and
assets associated with those activities. During 2007, the Company sold FindArticles, the assets relating to Grub, the websites associated with Zeal, and completed the shutdown of the Wisenut website and search functionality. In the first quarter of
2008, the Companys management made the decision to exit the remaining consumer products activities and to sell or otherwise dispose of the remaining consumer assets. Additionally, during the second quarter of 2008, Furl assets have been
accounted for under the guidance of SFAS 144 as assets held for sale, and these, together with the various related websites and assets associated with the consumer products activities previously disposed of, met the discontinued
operations criteria in accordance with the provisions of SFAS No. 144. The results of operations of assets to be disposed of, and of previously disposed assets, including related gains (losses) have been classified as discontinued operations
for all periods presented in the accompanying Unaudited Condensed Consolidated Statements of Operations.

Loss from discontinued operations, net of tax,
was as follows (in thousands):



|                                              |  |                                 |    |   |        |   |        |                                |      |      |        |      |   |      |   |  |   |        |   |  |     |   
|--------------------------------------------- |  | ------------------------------- | -- | - | ------ | - | ------ | ------------------------------ | ---- | ---- | ------ | ---- | - | ---- | - |  | - | ------ | - |  | --- | --
|                                              |  | Three Months EndedSeptember 30, |    |   | Change |   |        | Nine Months EndedSeptember 30, |      |      | Change |     
|                                              |  | 2008                            |    |   | 2007   |   |        |                                | 2008 |      |        | 2007 |   |     
|Loss from discontinued operations, net of tax |  | $                               | (5 | ) |        | $ | (1,420 | )                              |      | (100 | %)     |      | $ | (448 | ) |  | $ | (2,980 | ) |  | (85 | %)

The following table reflects revenue, gross profit, operating expenses, pre-tax income (loss) from discontinued
operations and gain (loss) on sale of discontinued operations for the three and nine months ended September 30, 2008 and September 30, 2007 (in thousands):



|                                                  |  |                                 |      |   |                                |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                  |  | Three Months EndedSeptember 30, |      |   | Nine Months EndedSeptember 30, |  
|                                                  |  | 2008                            |      |   | 2007                           |   |        | 2008 |  |   | 2007   |  
|Revenue                                           |  | $                               | 26   |   |                                | $ | 1,342  |      |  | $ | 78     |   |  | $ | 3,776  |  
|                                                  |  |                                 |      |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                      |  | $                               | 18   |   |                                | $ | 579    |      |  | $ | 49     |   |  | $ | 1,246  |  
|Product development expenses                      |  |                                 | 162  |   |                                |   | 838    |      |  |   | 682    |   |  |   | 2,856  |  
|General and administrative expenses               |  |                                 | 5    |   |                                |   | 56     |      |  |   | 40     |   |  |   | 140    |  
|Impairment charges                                |  |                                 |     |   |                                |   | 1,645  |      |  |   | 381    |   |  |   | 1,645  |  
|Non-operating income, net                         |  |                                 |     |   |                                |   | 516    |      |  |   | 9      |   |  |   | 516    |  
|                                                  |  |                                 |      |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Pretax net loss (excluding gain on disposal)      |  |                                 | (149 | ) |                                |   | (1,444 | )    |  |   | (1,045 | ) |  |   | (2,879 | )
|Gain (loss) on disposal                           |  |                                 | 144  |   |                                |   | 24     |      |  |   | 597    |   |  |   | (101   | )
|                                                  |  |                                 |      |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net loss from discontinued operations, net of tax |  | $                               | (5   | ) |                                | $ | (1,420 | )    |  | $ | (448   | ) |  | $ | (2,980 | )
|                                                  |  |                                 |      |   |                                |   |        |      |  |   |        |   |  |   |        |  



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##### Table of Contents

At September 30, 2008, certain assets relating to Furl have been accounted for as assets held for sale,
and have been classified as such on the Companys Unaudited Condensed Consolidated Balance Sheet (in thousands):



|                            |  |                   |      
|--------------------------- |  | ----------------- | -----
|                            |  | September 30,2008
|Property and equipment, net |  | $                 | 70   
|Capitalized software, net   |  |                   | 586  
|Goodwill                    |  |                   | 257  
|Intangibles, net            |  |                   | 97   
|                            |  |                   |      
|Total assets held for sale  |  | $                 | 1,010
|                            |  |                   |      

At September 30, 2008, the Company continues to own the Wisenut search engine technology and its intellectual
property rights in such technology and other assets, and owns and operates Furl.

General and administrative expenses included in discontinued operations
are expenses relating to the liquidation of our foreign legal entities. We expect to complete the dissolution of these entities in the fourth quarter of 2008.

During the second quarter of 2008, management estimated that the goodwill assigned to Furl was impaired approximately $0.4 million pursuant to an interim preliminary goodwill impairment assessment. The estimate was based on recent precedent
transactions in the social networking technology industry, adjusted for the current market for this type of asset and the status of the sales process. During the third quarter of 2008, management concluded that no adjustment to the approximately
$0.4 million impairment recorded in the second quarter was warranted, however, management did conclude the impairment should be allocated among the individual assets held for sale. As such, approximately $0.2 million of the impairment previously
attributed to goodwill in the second quarter of 2008 has been attributed to capitalized software.

In September 2007, we completed the shutdown of the
Wisenut website and search functionality. As a result of the abandonment of the Wisenut assets, management determined that the associated assets, consisting primarily of intangible assets and capitalized software, were impaired as of the end of
September 30, 2007. The assets were written down to their estimated net realizable value and an impairment charge in the amount of $1.6 million was recognized during the three months ended September 30, 2007.

In the third quarter of 2007, we completed the substantial liquidation of our Australian subsidiary. As a result, we recorded the reversal of the cumulative translation
adjustment of approximately $0.5 million which has been recorded as non-operating income.

The gain (loss) on disposal consists of the following (in
thousands):



|                      |  |                                 |     |                                |   |      |  |      |     |  |   |      |  
|--------------------- |  | ------------------------------- | --- | ------------------------------ | - | ---- |  | ---- | --- |  | - | ---- | -
|                      |  | Three Months EndedSeptember 30, |     | Nine Months EndedSeptember 30, |  
|                      |  | 2008                            |     | 2007                           |   | 2008 |  | 2007 |    
|Other consumer assets |  | $                               | 144 |                                | $ | 24   |  | $    | 377 |  | $ | (101 | )
|Wisenut               |  |                                 |    |                                |   |     |  |      | 220 |  |   |     |  
|                      |  |                                 |     |                                |   |      |  |      |     |  |   |      |  
|                      |  | $                               | 144 |                                | $ | 24   |  | $    | 597 |  | $ | (101 | )
|                      |  |                                 |     |                                |   |      |  |      |     |  |   |      |  

Liquidity and Capital Resources

LookSmarts primary sources of liquidity during the nine months ended September 30, 2008 were existing cash, cash equivalents, short term investments, as well as cash received from the collection of accounts
receivable.



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Cash, Cash Equivalents and Short-term Investments

Cash, cash equivalent and short-term investment balances are (in thousands):



|                          |  |                   |        |   |                  |   |        |        |  |   |         |  
|------------------------- |  | ----------------- | ------ | - | ---------------- | - | ------ | ------ |  | - | ------- | -
|                          |  | September 30,2008 |        |   | December 31,2007 |   |        | Change | 
|Cash and cash equivalents |  | $                 | 11,824 |   |                  | $ | 35,743 |        |  | $ | (23,919 | )
|Short-term investments    |  |                   | 17,148 |   |                  |   | 20,464 |        |  |   | (3,316  | )
|                          |  |                   |        |   |                  |   |        |        |  |   |         |  
|Total                     |  | $                 | 28,972 |   |                  | $ | 56,207 |        |  | $ | (27,235 | )
|                          |  |                   |        |   |                  |   |        |        |  |   |         |  
|% of total assets         |  |                   | 50     | % |                  |   | 70     | %      |  |   |         |  
|                          |  |                   |        |   |                  |   |        |        |  |   |         |  
|Total Assets              |  | $                 | 57,709 |   |                  | $ | 80,293 |        |  |   |         |  
|                          |  |                   |        |   |                  |   |        |        |  |   |         |  

Financial Condition

We believe our current cash, cash equivalents and short term investments, anticipated cash flow from operations and future seasonal borrowings, if any, will be sufficient to meet our working capital and capital
requirements through at least September 30, 2009, if not longer. We may seek to raise additional capital through public or private debt or equity financings in order to fund our operations and capital expenditures, take advantage of favorable
business opportunities, develop and upgrade our technology infrastructure, develop new product and service offerings, take advantage of favorable conditions in capital markets or respond to competitive pressures. In addition, unanticipated
developments in the short term, such as the entry into agreements requiring large cash payments or the acquisition of businesses with negative cash flows, may necessitate additional financing. We cannot be assured that additional financing will be
available on terms favorable to us, or at all. If we issue additional equity or convertible debt securities, our existing stockholders may experience substantial dilution.

Cash, cash equivalents and short-term investments decreased to approximately $29.0 million as of September 30, 2008 from approximately $56.2 million at December 31, 2007 primarily due the Companys use
of capital to buy back its stock in the first nine months of 2008, an increase in trade accounts receivable, lower accrued expenses, and an increase in long-term investments. In the first quarter of 2008, the Company repurchased approximately
6.0 million shares for a total cost of approximately $20.8 million. This amount is included in the cash used in financing activities.

In summary, our
overall uses of cash and cash equivalents during the nine months ended September 30, 2008 as compared to the nine months ended September 30, 2007 were (in thousands):



|                                                    |  |               |         |   |      |   |         |        |  |   |         |  
|--------------------------------------------------- |  | ------------- | ------- | - | ---- | - | ------- | ------ |  | - | ------- | -
|                                                    |  | September 30, |        
|                                                    |  | 2008          |         |   | 2007 |   |         | Change | 
|Net cash used in operating activities               |  | $             | (5,240  | ) |      | $ | (2,882  | )      |  | $ | (2,358  | )
|Net cash provided by (used in) investing activities |  |               | 2,318   |   |      |   | (11,374 | )      |  |   | 13,692  |  
|Net cash provided by (used in) financing activities |  |               | (20,997 | ) |      |   | 276     |        |  |   | (21,273 | )
|                                                    |  |               |         |   |      |   |         |        |  |   |         |  
|Decrease in cash and cash equivalents               |  | $             | (23,919 | ) |      | $ | (13,980 | )      |  | $ | (9,939  | )
|                                                    |  |               |         |   |      |   |         |        |  |   |         |  

We believe that our cash flow is seasonal and a somewhat larger portion of our revenue historically occurs in the
last quarter of the year as our customers expand search advertising for the holiday selling season. Cash used in operations is typically the highest in the first quarter as we see reduced demand for our service offerings. As discussed in Operating
Activities below, cash used in operations in the third quarter of 2008 was negatively impacted by an unanticipated delay in payments from one customer of approximately $2.0 million that were received the first day after the end of the quarter. The
following table summarizes our quarterly cash provided by or (used in) operating activities that illustrate the seasonality of our business (in thousands):



|            |  |                                     |        |   |      |   |        |      |  |   |        |  
|----------- |  | ----------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|            |  | Cash Flow From Operating Activities |       
|            |  | 2008                                |        |   | 2007 |   |        | 2006 | 
|1st Quarter |  | $                                   | (2,052 | ) |      | $ | (1,967 | )    |  | $ | (3,953 | )
|2nd Quarter |  |                                     | 1,141  |   |      |   | 79     |      |  |   | (1,971 | )
|3rd Quarter |  |                                     | (4,329 | ) |      |   | (994   | )    |  |   | (2,222 | )
|4th Quarter |  |                                     | N/A    |   |      |   | 936    |      |  |   | 1,834  |  
|            |  |                                     |        |   |      |   |        |      |  |   |        |  
|Total       |  | $                                   | (5,240 | ) |      | $ | (1,946 | )    |  | $ | (6,312 | )
|            |  |                                     |        |   |      |   |        |      |  |   |        |  



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We have outstanding standby letters of credit (SBLC) of approximately $1.1 million at September 30, 2008
related to security of a building lease and security for payroll processing services. The SBLC contains two financial covenants. As of September 30 2008, we were in compliance with both required covenants.

On April 6, 2007, the Company entered into a master equipment lease agreement with CNB for an amount up to $5.0 million for the purchase of computer equipment. This
line of credit expired on March 30, 2008 and was available for equipment leases with rental terms from 36 to 48 months. Interest on the capital lease was calculated using an interest rate of 7.38% per annum. As of March 30, 2008, we
had drawn down approximately $1.5 million from the available $5.0 million lease line of credit.

On April 1, 2008, the Company renewed the master
equipment lease agreement with CNB, which expired on March 30, 2008, for an amount of up to $3.5 million for the purchase of technical equipment. The renewed lease line of credit expires on December 30, 2008. Interest on the capital lease
is calculated using an interest rate of 6.40% per annum. As of September 30, 2008, we had drawn down approximately $1.1 million from the renewed $3.5 million lease line of credit.

Operating Activities

We used approximately $5.2 million in
operating activities during the nine months ended September 30, 2008. This compares to us using approximately $2.9 million in operating activities during the same period in the prior year. Therefore, in absolute dollars, we used approximately
$2.4 million more in operations during the nine months ended September 30, 2008 compared to the same period in the prior year. This increase in operating cash use was due to an increase in costs and expenses of approximately $7.6 million
combined with increased payments on accounts payable and accrued liabilities of approximately $3.1 million. These payments were partially offset by an increase in cash collections from customers of approximately $9.0 million. The aggregated balance
of accounts payable and accrued liabilities decreased approximately $2.0 million in the nine months ended September 30, 2008 as compared to an increase of approximately $1.1 million in the nine months ended September 30, 2007. The decrease
in accounts payable and accrued liabilities in the nine months ended September 30, 2008 is primarily due to changing the payment of employee bonuses from annual to quarterly and the payment of legal fees associated with the Lanes Gifts
settlement. Although cash collections from customers increased approximately $9.0 million in the nine months ended September 30, 2008 compared to the comparable period in 2007, the cash collections was approximately $4.3 million less than the
revenue increase for the comparable periods. Accounts receivables increased by approximately $4.6 million in the nine months ended September 30, 2008 compared to a decrease of approximately $0.3 million in the nine months ended
September 30, 2007 primarily due to an expected increase resulting from increased invoiced customer revenue and an unanticipated delay in payments from three customers. Payments from one customer, totaling approximately $2.0 million, was
received the first day after the end of the quarter.

Investing Activities

Investing activities provided approximately $2.3 million during the nine months ended September 30, 2008. This compares to us using approximately $11.4 million in investing activities during the same period in
the prior year. Therefore, in absolute dollars, we generated approximately $13.7 million more in investing activities during the nine months ended September 30, 2008 compared to the same period in the prior year. The increase in cash provided
by investing activities was primarily due to an increase in proceeds from the sale of investments of approximately $17.5 million for the nine months ended September 30, 2008 as compared to the comparable period in 2007 that was partially offset
by an increase in purchases of investments of approximately $5.1 million over the same periods. In addition, we generated proceeds of approximately $1.7 million from the sale of certain consumer assets in the first nine months of 2008 where we had
no such proceeds during the same period in the prior year.

We currently maintain no short or long-term investments in Auction Rate Securities.

Financing Activities

We used approximately $21.0 million
in financing activities during the nine months ended September 30, 2008 compared to generating approximately $0.3 million in financing activities during the same period in the prior year. Therefore, in absolute dollars, we used approximately
$21.3 million more in financing activities during the nine months ended September 30, 2008 compared to the same period in the prior year. This increase in financing cash use was primarily due our stock repurchase program. During the nine months
ended September 30, 2008, we used approximately $20.8 million in repurchasing our common stock via the combination of a modified Dutch Auction tender offer and stock repurchase program, as more fully described in Note 11 to the Unaudited
Consolidated Financial Statements, compared to no such expenditures during the same period in the prior year.



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Fair Value Measurement

Our estimates of fair value for financial assets and financial liabilities are based on the framework established in SFAS 157,Fair Value Measures. The framework is based on the inputs used in valuation and gives the highest priority
to quoted prices in active markets and requires that observable inputs be used in the valuations when available. The disclosure of fair value estimates in the FAS 157 hierarchy is based on whether the significant inputs into the valuation are
observable. In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted prices in active markets and the lowest priority to unobservable inputs that reflect the Companys
significant market assumptions. The three levels of the hierarchy are as follows:



|        |  |                                                                                                                                                                                                                                                                                                                            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1 |  | Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.                                                                                                                                                                                          
|        | 
|Level 2 |  | Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant
inputs are observable (e.g., interest rates, yield curves, default rates, etc.) or can be corroborated by observable market data.
|        | 
|Level 3 |  | Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Companys own assumptions about the assumptions that market participants would
use.                                                                                                                            

Valuation of Investments

For investments that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these prices in the amounts disclosed in Level 1 of the hierarchy. The Company
receives the quoted market prices from a third party, nationally recognized pricing service (pricing service). When quoted market prices are unavailable, the Company utilizes a pricing service to determine an estimate of fair value, which is mainly
for its fixed maturity investments. The fair value estimates provided from this pricing service are included in the amount disclosed in Level 2 of the hierarchy. The Company bases all of its estimates of fair value for assets on the bid price as it
represents what a third party market participant would be willing to pay in an arms length transaction.

We utilize a pricing service to estimate
fair value measurements of our fixed maturities investments. The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed maturities other than U.S. Treasury securities generally
do not trade on a daily basis, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications which include available relevant market information, benchmark curves, benchmarking of
like securities, sector groupings and matrix pricing. Additionally, the pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios.

The pricing service evaluates each asset class based on relevant market information, relevant credit information, perceived market movements and sector news. The market inputs utilized in the pricing evaluation,
listed in the approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data and industry and economic events. The extent of the
use of each market input depends on the asset class and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities additional inputs may be necessary.

The pricing service we utilize has indicated that they will only produce an estimate of fair value if there is objectively verifiable information to
produce a valuation. If the pricing service discontinues pricing an investment, we would be required to produce an estimate of fair value using some of the same methodologies as the pricing service, but would have to make assumptions for market
based inputs that are unavailable due to market conditions.

The fair value estimates of our fixed maturity investments are based on observable market
information rather than market quotes. Accordingly, the estimates of fair value for such fixed maturities, other than money market securities, provided by the pricing service are included in the amount disclosed in Level 2 of the hierarchy. The
estimated fair value of our money market securities are included in the amount disclosed in Level 1 as the estimates are based on unadjusted market prices.



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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4), investments in special-purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any
derivative contracts or synthetic leases.

Contractual Obligations and Commercial Commitments

In comparison with our Annual Report on Form 10-K for the year ended December 31, 2007, we believe that there have been no significant changes in contractual
obligations or commercial commitments.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

We
believe that our market risk exposure is primarily related interest rate risk and the market value of certain investments that we hold. We manage these market risks through our normal investing and operating activities. We do not enter into
derivatives for trading or other speculative purposes, nor do we use leveraged financial instruments.

Uncertainties in Credit Markets

The credit and liquidity crisis in the United States and throughout the global financial system has resulted in substantial volatility in the financial markets and the
banking system. These and other economic events may have an adverse impact on the Companys investments. We continue to monitor this issue and have concluded that our assessment of other-than-temporary impairment as of September 30, 2008
has not changed, but we may be required to record impairment charges if there are further reductions in the fair value of these investments in future periods.

Interest Rate Risk

Our exposure to market risk for interest rate changes relates primarily to our cash equivalents, short-term and
long-term investments. We had no derivative financial instruments as of September 30, 2008 or December 31, 2007. We invest our excess cash in debt instruments of high-quality corporate issuers with original maturities greater than three
months and effective maturities less than two years. The amount of credit exposure to any one issue, issuer and type of instrument is limited. These securities are subject to interest rate risk and vary in value as market interest rates fluctuate.
During the three and nine months ended September 30, 2008, the effects of changes in interest rates on the fair market value of our marketable investment securities and our earnings were not significant. Further, we believe that the impact on
the fair market value of our securities and our earnings from a hypothetical 10% change in interest rates would not be significant.

Our interest rate risk
relates primarily to our investment portfolio, which consisted of approximately $9.5 million in cash equivalents and approximately $17.1 million and $1.0 million in short and long-term investments, respectively, as of September 30, 2008. In a
declining interest rate environment, as short-term investments mature, reinvestment occurs at less favorable market rates. Given the short term nature of certain investments, anticipated declining interest rates will negatively impact our investment
income.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining disclosure controls and
procedures (as defined in rules promulgated under the Securities Exchange Act of 1934, as amended) for our Company. Based on their evaluation as of the end of the period covered by this report, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q is (i) recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commissions (SEC) rules and Form 10-Q, and (ii) is accumulated and communicated to the Companys management, including our principal executive officer and principal
financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

During the period covered by this report, there were no changes in the Companys internal control over financial reporting that have materially affected, or could be
reasonably likely to materially affect, the registrants internal control over financial reporting. During the course of our general evaluation of internal controls for the quarter ended September 30, 2008,



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there were no significant deficiencies identified in the design and operation of our internal controls. For the year ended December 31, 2007, there were
two significant deficiencies identified in the design and operation of our internal controls. During the nine months ended September 30, 2008 we remediated these significant deficiencies and will continue our work to reduce the occurrence of future
significant deficiencies.

Limitations on the Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of
fraud, if any, within a Company have been detected. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the Chief Executive Officer and the Chief Financial Officer have concluded
that these controls and procedures are effective at the reasonable assurance level.

PART II



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

Lanes Gifts and Collectibles, L.L.C.,
v. Yahoo! Inc

On March 14, 2005 the Company was served with the second amended complaint in a class action lawsuit in the Circuit Court of Miller
County, Arkansas. The complaint names eleven search engines and web publishers as defendants, including the Company, and alleges breach of contract, restitution/unjust enrichment/money had and received, and civil conspiracy claims in connection with
contracts allegedly entered into with plaintiffs for Internet pay-per-click advertising. The named plaintiffs on the second amended complaint are Lanes Gifts and Collectibles, L.L.C., U.S. Citizens for Fair Credit Card Terms, Inc., Savings 4
Merchants, Inc., and Max Caulfield d/b/a Caulfield Investigations.

On March 30, 2005 the case was removed to United States District Court for the
Western District of Arkansas. On April 4, 2005 plaintiffs U.S. Citizens for Fair Credit Card Terms, Inc. and Savings 4 Merchants, Inc. filed a motion of voluntary dismissal without prejudice. The motion was granted on April 7, 2005.
Plaintiffs Lanes Gifts and Collectibles, L.L.C. and Max Caulfield d/b/a Caulfield Investigations filed a motion to remand the case to state court on April 13, 2005, which was granted in September 2005. In July 2005, defendants, including
the Company, petitioned the Eighth Circuit Court of Appeals for an appeal of the remand order, and moved to stay the proceedings while the appeal is pending. The petition was denied on September 8, 2005 and the case was remanded to the Circuit
Court of Miller County, Arkansas. The Company was served with discovery requests on October 7, 2005. The Company has filed and/or joined motions to dismiss on the basis of failure to state a claim upon which relief can be granted, lack of
personal jurisdiction, and improper venue. Pursuant to the courts initial scheduling order, plaintiffs had until January 27, 2006 to respond to the motions to dismiss for lack of personal jurisdiction and improper venue; and until
September 9, 2006 to respond to the motion to dismiss on the basis of failure to state a claim upon which relief can be granted. However the court entered an order staying all proceedings for a period of 60 days on January 9, 2006. On
March 8, 2006, the Court entered an order extending the stay until September 30, 2006. On April 1, 2006, the Court further extended the stay until April 20, 2006. On April 20, 2006 the Court preliminarily approved a class
settlement among plaintiffs, defendant Google, Inc., and certain defendants who display Google advertisements on their networks (the Google Settlement). The Google Settlement purports to release Google of all claims and also purports to
release certain defendants, including the Company, for any claims associated with the display of Google advertisements on their networks. On July 24 and 25, 2006, the Court had a final settlement hearing on the Google Settlement, and on
July 26, 2006, the Court approved the settlement. On April 21, 2006, the Court ordered the remaining defendants, including the Company, to mediation and further stayed the proceedings to September 21, 2006. The Court further extended
the stay as to LookSmart until August 16, 2006. The parties thereafter stipulated that the stay would remain in effect while the parties continue to comply with the Courts order regarding mediation. On January 10, 2007, the Court
further extended the stay until May 1, 2007. On or about November 20, 2007, the Plaintiffs and the Company entered into a Stipulation and Settlement Agreement (the Settlement Agreement) to settle the matter in its entirety. On
or about November 29, 2007, the Court preliminarily approved the Settlement Agreement and on February 29, 2008 the court entered an order to approve as final the Settlement Agreement. Pursuant to the Settlement Agreement, the Company has
agreed to establish a Settlement Fund in the amount of up to approximately $2.5 million to be allocated as follows: (a) the Class Member Fund which should not



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exceed approximately $2.0 million in advertising credits, (b) the Fees Award to Class Counsel, which shall not exceed the amount of approximately $0.6
million; and (c) the Incentive Award (as hereinafter defined) to the three Class Representatives, which shall not exceed a collective immaterial amount. In the event that the total of the credit claims paid is less than approximately $0.8
million, the difference between the total amount of the credit claims paid and approximately $0.8 million will be paid to charities in the form of advertising credits. Should the total of the credit claims paid to the Settlement Class Members as a
group plus any amounts allocated to charities be more than approximately $0.8 million but less than approximately $2.5 million, then the amount if any shall be retained by the Company. Settlement payments from the Class Member Fund will be paid out
in advertising credits to members of the Class who file timely claims to participate in the settlement. On December 28, 2007, the Company provided the notices to class members required by the Settlement Agreement who had until February 11,
2008 to file claims. On April 8, 2008, the Company made the Fee Award to Counsel and the Incentive Award payments to plaintiffs counsel. On April 29, 2008, the Company began to issue advertising credits to the Class Members who filed
timely claims. The Company recorded an estimate in accrued liabilities of the amount of the loss on settlement which management has determined is probable and estimable during the year ended December 31, 2007. This estimate may change as a
result of the cost of the final settlement arrangement. In addition, during 2007 the Company recovered settlement proceeds from the insurance carrier, which exceeded the recorded estimate of the amount of loss on settlement. Due to the uncertainty
relating to the ultimate settlement amount, the excess settlement proceeds have been recorded as an accrued liability at December 31, 2007 and at September 30, 2008.

Upon the completion of the thirty day appeals period, which ended on March 30, 2008, the Company on April 7, 2008 paid approximately $0.6 million of legal fees to the plaintiffs counsel representing
the Fees Award to Class Counsel and the Incentive Award as is stipulated in the Settlement Agreement.

Additionally, we are involved, from time to time, in
various legal proceedings arising from the normal course of business activities. Although the results of litigation and claims cannot be predicted with certainty, we do not expect resolution of these matters to have a material adverse impact on our
consolidated results of operations, cash flows or financial position unless stated otherwise. However, an unfavorable resolution of a matter could, depending on its amount and timing, materially affect our future results of operations, cash flows or
financial position in a future period. Regardless of the outcome, litigation can have an adverse impact on us because of defense costs, diversion of management resources and other factors.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

Other than certain updates to our risk factors,
including our risk factors regarding concentrations of search advertisers and distribution network partners, our ability to attract and retain key personnel, and our potential liability for claims related to our products and services as set forth
below, there have been no material changes to the risk factors that are included in our Annual Report on Form 10-K for the year ended December 31, 2007 that could affect our business, results of operations or financial condition.

You should carefully consider the risks described below before making an investment decision regarding our common stock. If any of the following risks actually occur,
our business, financial condition and results of operations could be harmed. In that case, the trading price of our common stock could decline and our investors could lose all or part of their investment. Additional risks not presently known to us
or that we currently deem immaterial may also impair our business operations.

Risks Related to our Business

Our financial results are highly concentrated in the online search advertising business; if we are unable to grow online search advertising revenues and find
alternative sources of revenue, our financial results will suffer

The display of search advertisements accounted for substantially all of our revenues
for the three months ended September 30, 2008. Our success depends upon search advertisers choosing to use, and distribution network partners choosing to distribute, our search advertising networks products. Search advertisers and distribution
network partners may not adopt our products at projected rates, or changes in market conditions, such as the current financial crisis, may adversely affect the use or distribution of search advertisements. Because of our revenue concentration in the
online search advertising business, such shortfalls or changes could have a negative impact on our financial results. Also, many of our products are offered to website publishers who use them to display or generate revenue from their online
advertisements. Our overall revenue is concentrated with one customer representing 19% and one customer representing 13% of overall revenue for the three



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months ended September 30, 2008. If we are unable to generate significant revenue from our online listings advertising business, or if market conditions
adversely affect the use or distribution of online listings advertisements generally, or for some of our larger customers specifically, our results of operations, financial condition and/or liquidity will suffer.

We rely primarily on our network of distribution network partners to generate quality search queries and paid clicks; if we are unable to maintain or expand the scope
and quality of this network, our ability to generate revenue may be seriously harmed

The success of our online search advertisement products depends in
large part on the size and quality of our distribution network of search queries. We may be unable to maintain or add distribution network partners of satisfactory quality in our distribution network at reasonable revenue-sharing rates, or at all.
Our distribution network is concentrated, with the six largest distribution network partners in total accounting for approximately 65% of our revenue for the three months ended September 30, 2008. If we lose any significant portion of our
distribution network, we would need to find alternative sources of quality click traffic to replace the lost paid clicks. In the past, we have lost portions of our distribution network, and chose to remove portions with unacceptable quality.
Although alternate sources of click traffic are currently available in the market, they may not be available at reasonable prices, they will likely be subject to competition from various paid search providers, and they may be of lower quality. There
is fierce competition among advertising networks to sign agreements with traffic providers. We may be unable to negotiate and sign agreements with quality traffic providers on favorable terms, if at all. If we are unsuccessful in maintaining and
expanding our distribution network, then our ability to generate revenue may be seriously harmed.

We have generated significant losses in the past and
we may be unable to achieve operating profitability in the foreseeable future, and if we achieve profitability, we may be unable to maintain it, which could result in a decline in our stock price

We had net losses of approximately $1.7 million for the three months ended September 30, 2008, and as of September 30, 2008 our accumulated deficit was
approximately $216.4 million. We may be unable to achieve and maintain profitability in the foreseeable future. Our ability to achieve and maintain profitability will depend on our ability to generate additional revenue and contain our expenses. In
order to generate additional revenue, we will need to expand our network of distribution network partners, increase the amount our search advertisers spend on our advertising network, expand our advertiser base, offer our publisher products to
additional publisher customers and experience an increase in paid clicks across our network and publisher products. We may be unable to accomplish some or any of these goals because of the risks identified in this report or for unforeseen reasons.
Also, we may be unable to contain our costs due to the need to make revenue sharing payments to our distribution network partners, to invest in product development, and market our products. Because of the foregoing factors, and others outlined in
this report, we may be unable to achieve profitability in the future, which could result in a decline in our stock price.

If we experience downward
pressure on our revenue per click and/or match rate, or we are unable to rebuild our revenue per click and/or match rate, our financial results will suffer

We have experienced, and may in the future experience, downward pressure on our average revenue per click and average match rate, which is the rate at which paid listings are matched against search queries, due to various market segment,
customer, and channel factors. We may experience decreases in revenue per click or average match rate in the future for many reasons, including the erosion of our advertiser base, the reduction in average advertiser spend, the reduction in the
number of listings purchased by search advertisers, changes in the composition of our distribution network or other reasons. If our revenue per click or average match rate falls for any reason, or if we are unable to grow our revenue per click and
average match rate, then we may be unable to achieve our financial projections and our stock price would likely suffer.

Our growth depends on our
ability to retain and grow our listings advertiser base; if our search advertiser base and average advertiser spend falls, our financial results will suffer

Our growth depends on our ability to build a search advertiser base that corresponds with the characteristics of our distribution network. Our distribution network, which currently consists of a diversified network of small distribution
sources, may change as new distribution sources are added and old distribution sources are removed. Search advertisers may view these changes to the distribution network negatively, and existing or potential search advertisers may elect to purchase
fewer or no listings advertisements for display on our distribution network. If this occurs, it is likely that our average revenue per click and average match rate may decline and our stock price would likely suffer.



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Our growth depends upon our ability to offer and support our technology services to online publishers, and there are
risks associated with introducing new products and services

To maintain and grow our revenue, part of our strategy is to host syndicated technology
services for publishers and to offer new networks in selected verticals. Our development, testing and implementation efforts for these products and services have required, and are expected to continue to require, substantial investments of our time.
Also, we do not have significant experience offering services to online publishers, and we may not gain acceptance of our offerings. We may be unable to successfully implement syndicated publisher solutions or new vertical networks, or our
implementation of a solution or new network, may interfere with our ability to operate our other products and services or other implementations, or a publisher customer may decide not to use or continue to use our solution or to increase their
reliance on other online advertising service providers at the expense of our solution. These failures could have an adverse effect on our business and results of operations.

If we do not introduce new and upgraded products and services and successfully adapt to our rapidly changing industry, our financial condition may suffer

The online search advertising industry is rapidly evolving and very turbulent, and we will need to continue developing new and upgraded products and services, and adapt
to new business environments and competition in order to maintain and grow revenue and reach our profitability goals. New search advertising technologies could emerge that make our services comparatively less useful or new business methods could
emerge that divert web traffic away from our Advertising Network. Competition from other web businesses may prevent us from attracting substantial traffic to our services. Also, we may inaccurately predict the direction of the online search
advertising market, which could lead us to make investments in technologies and products that do not generate sufficient returns. We may face platform and resource constraints that prevent us from developing upgraded products and services. We may
fail to successfully identify new products or services, or fail to bring new products or services to market in a timely and efficient manner. Rapid industry change makes it difficult for us to accurately anticipate customer needs for our products,
particularly over longer periods.

We face intense competitive pressures, which could materially and adversely affect our financial results

We compete in the relatively new and rapidly evolving online search advertising industry, which presents many uncertainties that could require us to
further refine our business model. We compete with large companies that provide paid placement products, paid inclusion products, and other forms of search marketing as well as contextually-targeted advertising products and other types of online
advertisements. We compete for search advertisers on the basis of the quality and composition of our network, the price per click charged to search advertisers, the volume of clicks that we can deliver to search advertisers, tracking and reporting
of campaign results, customer service and other factors. We also compete for distribution network partners and for ad placement on those partners sites on the basis of the relevance of our ads and the price per click charged to search
advertisers. We also experience competition for offering our publisher products to website publishers. Some of our competitors have larger distribution networks and proprietary traffic bases, longer operating histories, greater brand recognition
higher revenues per click, better relevance and conversion rates, or better products and services than we have.

Our acquisition of businesses and
technologies may be costly and time-consuming; acquisitions may also dilute our existing stockholders

From time to time we evaluate corporate
development opportunities, and when appropriate, we intend to make acquisitions of or significant investments in, complementary companies or technologies to increase our technological capabilities to expand our service offerings, and to extend the
operating scale of our network businesses. Acquisitions and their integration may divert the attention of management from the day-to-day operations of LookSmart. It may be difficult to retain key management and technical personnel of the acquired
company during the transition period following an acquisition. Acquisitions or other strategic transactions may also result in dilution to our existing stockholders if we issue additional equity securities and may increase our debt. We may also be
required to amortize significant amounts of intangible assets, record impairment of goodwill in connection with future or past acquisitions, or divest non-performing assets at below-market prices, which would adversely affect our operating results.
Integration of acquired companies and technologies into LookSmart is likely to be expensive, time-consuming and strain our managerial resources. We may not be successful in integrating any acquired businesses or technologies and these transactions
may not achieve anticipated business benefits.



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Our success depends on our ability to attract and retain key personnel; if we were unable to attract and retain key
personnel in the future, our business could be materially and adversely impacted

Our success depends on our ability to identify, attract, retain and
motivate highly skilled development, technical, sales, and management personnel. We have a limited number of key development, technical, sales and management personnel performing critical company functions, and the loss of the services of any of our
key employees, particularly any of our executive team members or key technical personnel, could adversely affect our business. The combination of depressed capital markets, stock volatility and small market capitalization may not allow us to offer
competitive equity based compensation to attract and retain key personnel. Also, our September 2007 restructuring has placed additional burdens on all remaining personnel, including our remaining Finance staff. In recent years, we have experienced
significant turnover in our management team. Our Current Chief Financial Officer joined us in August 2008 and our Chief Executive Officer joined us in that role in August 2007, and the management team as a whole has had only a limited time to work
together. Previously, both our Chief Executive Officer and Chief Technical Officer resigned in August 2007 and in September 2007 our Chief Financial and Operating Officer announced his resignation as of November 2007. The employment of a new Chief
Financial Officer in December 2007 ended in January 2008. We cannot assure you that we will be able to retain our key employees or that we can identify attract and retain highly skilled personnel in the future.

We face capacity constraints on our software and infrastructure systems that may be costly and time-consuming to resolve

We use proprietary and licensed software and databases to receive and analyze advertisements, campaigns and budgets, match search queries to advertising, analyze webpage
information to match advertising to relevant content, integrate third-party ads, detect invalid clicks, serve ads in high volume, and track, analyze and report on advertising responses and campaigns. Any of these software systems may contain
undetected errors, defects or bugs or may fail to operate with other software applications. The following developments may strain our capacity and result in technical difficulties with our website or the websites of our distribution network
partners:



| |  |  | customization of our matching algorithms and ad serving technologies,
| | - |  | ---------------------------------------------------------------------



| |  |  | substantial increases in the number of queries to our database,
| | - |  | ---------------------------------------------------------------



| |  |  | substantial increases in the number of searches in our advertising databases, or
| | - |  | --------------------------------------------------------------------------------



| |  |  | the addition of new products or new features or changes to our products.
| | - |  | ------------------------------------------------------------------------

If we experience difficulties with our software and infrastructure systems or if we fail to address these difficulties in a timely manner, we may lose the confidence of search advertisers and distribution network
partners, our revenue may decline and our business could suffer. In addition, as we expand our service offerings and enter into new business areas, we may be required to significantly modify and expand our software and infrastructure systems. If we
fail to accomplish these tasks in a timely manner, our business will likely suffer.

Risks Related to Operating in our Industry

Economic conditions, political events, and other circumstances could materially adversely affect the Company.

The Companys operations and performance depend significantly on worldwide economic conditions and their impact on levels of consumer spending, which have recently
deteriorated significantly in many countries and regions, including without limitation the United States, and may remain depressed for the foreseeable future. For example, some of the factors that could influence the levels of consumer spending
include continuing increases in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer
spending behavior. These and other economic factors could have a material adverse effect on demand for the Companys products and services and on the Companys financial condition and operating results.

Cyclical and seasonal fluctuations in the economy, in internet usage and in traditional retail shopping have affected, and are likely to continue to affect, our
business

Both cyclical and seasonal fluctuations in internet usage and traditional retail seasonality have affected, and are likely to continue to
affect, our business. Internet usage generally slows during the summer months, and commercial queries typically increase significantly in the fourth quarter of each year. These seasonal trends have caused, and may continue to cause, fluctuations in
our quarterly results, including fluctuations in sequential revenue growth rates.

If we fail to prevent, detect and remove invalid search queries and
clicks, we could lose the confidence of our search advertisers, thereby causing our business to suffer

Invalid clicks, most often due to click
fraud, are an ongoing problem for the Internet search advertising industry, and we are exposed to the risk of invalid clicks on our paid listings. Invalid clicks occur when a person or robotic software causes a click on a paid listing to occur
for some reason other than to view the underlying content. We continue to invest significant time and resources in preventing, detecting and eliminating invalid traffic from our distribution network.



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However, the perpetrators of click fraud have developed sophisticated methods to evade detection, and we are unlikely to detect and remove all invalid
traffic from our search network. We are subject to advertiser complaints and litigation regarding invalid clicks, and we may be subject to advertiser complaints, claims, litigation or inquiries in the future. For example, in March 2005 the Company
was served with the second amended complaint in a class action lawsuit (Lanes Gifts and Collectibles, L.L.C., v. Yahoo! Inc. ) alleging that the Company engaged in click fraud and seeking damages as a result. We have from time to time
credited invoices or refunded revenue to our customers due to suspicious traffic, and we expect to continue to do so in the future. If our systems to detect invalid traffic are insufficient, or if we find new evidence of past invalid clicks, we may
have to issue credits or refunds retroactively to our search advertisers, and we may still have to pay revenue share to our distribution network partners. This could negatively affect our profitability and hurt our brand. If traffic consisting of
invalid clicks is not detected and removed from our advertising network, the affected search advertisers may experience a reduced return on their investment in our online advertising because the invalid clicks will not lead to actual sales for the
search advertisers. This could lead the search advertisers to become dissatisfied with our products, which could lead to loss of search advertisers and revenue and could materially and adversely affect our financial results.

Any failure in the performance of our key operating systems could materially and adversely affect our revenues

Any system failure that interrupts our hosted products or services, whether caused by computer viruses, software failure, power interruptions, intruders and hackers, or
other causes, could harm our financial results. For example, our system for tracking and invoicing clicks is dependent upon a proprietary software platform. If we lose key personnel or experience a failure of software, this system may fail. In such
event, we may be unable to track paid clicks and invoice our customers, which would materially and adversely affect our financial results and business reputation. Moreover, our services are governed by Service Level Agreements that, if not met,
require the payment of credits to our customers depending upon the level of service interruption.

The occurrence of a natural disaster or unanticipated
problems at our principal headquarters or at a third-party facility could cause interruptions or delays in our business, loss of data or could render us unable to provide some services. Our California facilities exist on or near known earthquake
fault zones and a significant earthquake could cause an interruption in our services. We do not have back-up sites for our main customer operations center, which is located at our San Francisco, California office. An interruption in our ability to
serve advertisements, track paid clicks, bill and collect invoices, and provide customer support would materially and adversely affect our financial results.

Our business and operations depend on Internet service providers and third party technology providers, and any failure or system downtime experienced by these companies could materially and adversely affect our revenues

Our consumers, distribution network partners and customers depend on Internet service providers, online service providers and other third parties for access to our
services. These service providers have experienced significant outages in the past and could experience outages, delays and other operating difficulties in the future. The occurrence of any or all of these events could adversely affect our
reputation, brand and business, which could have a material adverse effect on our financial results.

We have an agreement with Savvis Communications, Inc.
to house equipment for web serving and networking and to provide network connectivity services. We also have agreements with third-party click tracking and ad-serving technology providers. We also have an agreement with AboveNet Communications, Inc.
to provide network connectivity services. We do not presently maintain fully redundant click tracking, customer account and web serving systems at separate locations. Accordingly, our operations depend on Savvis and AboveNet to protect the systems
in their data centers from system failures, earthquake, fire, power loss, water damage, telecommunications failure, hackers, vandalism and similar events. Neither Savvis nor AboveNet guarantees that our Internet access will be uninterrupted,
error-free or secure. We have developed a 30-day disaster recovery plan to respond in the event of a catastrophic loss of our critical, revenue-generating systems. We have an agreement with Raging Wire, Inc. in Sacramento, California to provide
co-location and networking services for our critical systems in such an event. Although we maintain property insurance and business interruption insurance, such insurance may not protect against some risks and we cannot guarantee that our insurance
will be adequate to compensate us for all losses that may occur as a result of a catastrophic system failure. Also, if our third-party click tracking or ad-serving technology providers experience service interruptions, errors or security breaches,
our ability to track, realize and record revenue would suffer.



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We may face liability for claims related to our products and services, and these claims may be costly to resolve

Internet users, search advertisers, other customers, and companies in the Internet, technology and media industries frequently enter into litigation based
on allegations related to defamation, negligence, personal injury, breach of contract, unfair advertising, unfair competition, invasion of privacy or other claims. Lawsuits are filed against us from time to time. As we enter foreign markets, our
potential liability could increase. In addition, we are obligated in some cases to indemnify our customers or distribution network partners in the event that they are subject to claims that our services infringe on the rights of others.

Litigating these claims could consume significant amounts of time and money, divert managements attention and resources, cause delays in integrating acquired
technology or releasing new products, or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on acceptable terms, if at all. Our insurance may not adequately cover claims of
this type, if at all. If a court were to determine that some aspect of our services infringed upon or violated the rights of others, we could be prevented from offering some or all of our services, which would negatively impact our revenue and
business. For any of the foregoing reasons, litigation involving our listings business and technology could have a material adverse effect on our business, operating results and financial condition.

We could be subject to infringement claims that may be costly to defend, result in the payment of settlements or damages or cause us to change the way we conduct our
business

Internet, technology, media companies and patent holding companies often possess a significant number of patents. Further, many of these
companies and other parties are actively developing online advertising, search, indexing, electronic commerce and other Web-related technologies, as well as a variety of online business models and methods. We believe that these parties will
continue to take steps to protect these technologies, including, but not limited to, seeking patent protection. As a result, we may face claims of infringement of patents and other intellectual property rights held by others. Also, as we expand
our business, acquire and maintain our customer base, and develop new technologies, products and services, we may become increasingly subject to intellectual property infringement claims. In the event that there is a claim or determination that
we infringe third-party proprietary rights such as patents, copyrights, trademark rights, trade secret rights or other third party rights such as publicity and privacy rights, we could incur substantial monetary liability, be required to enter into
costly royalty or licensing agreements or be prevented from using the rights, which could require us to change our business practices in the future and limit our ability to compete effectively. We may also incur substantial expenses in
defending against third-party infringement claims regardless of the merit of such claims. In addition, many of our agreements with our customers, partners and affiliates require us to indemnify them for certain third-party intellectual property
infringement claims or determinations, which could increase our costs in defending such claims and our damages. For example, in October of 2007, we agreed to indemnify one of our Publisher Solutions customers relating to a patent infringement suit
filed against it pursuant to an AdCenter for Publishers agreement between it and the Company. The occurrence of any of these results could harm our brand and negatively impact our operating results.

Litigation, regulation, legislation or enforcement actions directed at or materially affecting us may adversely affect the commercial use of our products and services
and our financial results

New lawsuits, laws, regulations and enforcement actions applicable to the online industry may limit the delivery, appearance
and content of our advertising or our publisher customers advertisers or otherwise adversely affect our business. If such laws are enacted, or if existing laws are interpreted to restrict the types and placements of advertisements we or our
publishers customers can carry, it could have a material and adverse effect on our financial results. For example, in 2002, the Federal Trade Commission, in response to a petition from a private organization, reviewed the way in which search
engines disclose paid placement or paid inclusion practices to Internet consumers and issued guidance on what disclosures are necessary to avoid misleading consumers about the possible effects of paid placement or paid inclusion listings on the
search results. In 2003, the United States Department of Justice issued statements indicating its belief that displaying advertisements for online gambling might be construed as aiding and abetting an illegal activity under federal law. In 2004, the
United States Congress considered new laws regarding sale of pharmaceutical products over the Internet and the use of adware to distribute advertisements on the Internet. In 2007, the Federal Trade Commission proposed new regulations relating to
online behavioral targeting. Moreover, as we enter into foreign markets, we may become subject to additional regulation and legislation. If any new law or government agency were to require changes in the labeling, delivery or content of our
advertisements, or if we are subject to legal proceedings regarding these issues, it may reduce the desirability of our services or the types of advertisements that we can run, and our business could be materially and adversely harmed. In addition,
many of our agreements with our customers, partners and affiliates require us to indemnify them for certain claims related to online advertising laws, regulations and enforcement actions, which could increase our costs in defending such claims and
our damages.



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In addition, legislation or regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002
(Section 404), present ongoing compliance risks, and a failure to comply with these new laws and regulations could materially harm our business. As we continue our Section 404 compliance efforts we may identify significant
deficiencies, or material weaknesses, in the design and operation of our internal control over financial reporting. We may be unable to remediate any of these matters in a timely fashion, and/or our independent registered public accounting firm may
not agree with our remediation efforts in connection with their Section 404 attestation. Such failures could impact our ability to record, process, summarize and report financial information, and could impact market perception of the quality of
our financial reporting, which could adversely affect our business and our stock price.

Privacy-related regulation of the Internet could limit the ways
we currently collect and use personal information, which could decrease our advertising revenues or increase our costs

Internet user privacy has become
an issue both in the United States and abroad. The United States Congress and Federal Trade Commission is considering new legislation and regulations to regulate Internet privacy, and the Federal Trade Commission and government agencies in some
states and countries have investigated some Internet companies, and lawsuits have been filed against some Internet companies, regarding their handling or use of personal information. Any laws imposed to protect the privacy of Internet consumers may
affect the way in which we collect and use personal information. We could incur additional expenses if new laws or court judgments, in the United States or abroad, regarding the use of personal information are introduced or if any agency chooses to
investigate our privacy practices.

Our search advertisers and partners may place information, known as cookies, on a users hard drive, generally
without the users knowledge or consent. This technology enables web site operators to target specific consumers with a particular advertisement, to limit the number of times a user is shown a particular advertisement, and to track certain
behavioral data.

Although some Internet browsers allow consumers to modify their browser settings to remove cookies at any time or to prevent cookies from
being stored on their hard drives, many consumers are not aware of this option or are not knowledgeable enough to use this option. Some privacy advocates and governmental bodies have suggested limiting or eliminating the use of cookies. If this
technology is reduced or limited, the Internet may become less attractive to search advertisers and sponsors, which could result in a decline in our revenue.

We and some of our distribution network partners or search advertisers retain information about our consumers. If others were able to penetrate the network security of these user databases and access or misappropriate this information, we
and our distribution network partners or search advertisers could be subject to liability. These claims may result in litigation, our involvement in which, regardless of the outcome, could require us to expend significant time and financial
resources. In addition, many of our agreements with our customers, partners and affiliates require us to indemnify them for certain claims related to privacy laws, regulations and enforcement actions which could increase our costs in defending such
claims and damages.

Online commerce security risks, including security breaches, identity theft, service disrupting attacks and viruses, could harm our
reputation and the conduct of our business, which could have a material adverse effect on our financial results

A fundamental requirement for online
commerce and communications is the secure storage and transmission of confidential information over public networks. Although we have developed and use systems and processes that are designed to protect customer information and prevent fraudulent
credit card transactions and other security breaches, our security measures may not prevent security breaches or identity theft that could harm our reputation and business. Currently, a significant number of our customers provide credit card and
other financial information and authorize us to bill their credit card accounts directly for all transaction fees charged by us. We rely on encryption and authentication technology to provide the security and authentication to effect secure
transmission of confidential information, including customer credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in a compromise or breach of the technology used by us
to protect transaction data. In addition, any party who is able to illicitly obtain a users password could access the users transaction data. An increasing number of websites have reported breaches of their security. Any compromise of
our security could damage our reputation and expose us to a risk of litigation and possible liability. The coverage limits of our insurance policies may not be adequate to reimburse us for losses caused by security breaches.



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Additionally, our servers are vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions,
and we have experienced denial-of-service type attacks on our system that have made all or portions of our websites unavailable for periods of time. We may need to expend significant resources to protect against security breaches or to
address problems caused by breaches. Disruptions in our services and damage caused by viruses and other attacks could cause a loss of user confidence in our systems and services, which could lead to reduced usage of our products and services and
materially adversely affect our business and financial results.

New tax treatment of companies engaged in Internet commerce may adversely affect the
commercial use of our search service and our financial results

Tax authorities at the international, federal, state and local levels are currently
reviewing the appropriate tax treatment of companies engaged in Internet commerce. New or revised state tax regulations may subject us or our search advertisers to additional state sales, income and other taxes. We cannot predict the effect of
current attempts to impose sales, income or other taxes on commerce over the Internet. New or revised taxes and, in particular, sales taxes, would likely increase the cost of doing business online and decrease the attractiveness of advertising and
selling goods and services over the Internet. Any of these events could have an adverse effect on our business and results of operations.

Our ability
to retain existing credit facilities or obtain new credit facilities may adversely affect the way we conduct our business

In March 2008 our capital
lease line expired. In April 2008 we renewed our capital lease line, which will expire on December 30, 2008. We may need to renew this lease line or we may need to enter into additional credit facilities to operate the business. There is no
guarantee that we will be successful in securing a new credit facility or renewing the existing line of credit due to the current market conditions.

Risks Related to the Capital Market

Our quarterly revenues and operating results may fluctuate for many reasons, each of which may
negatively affect our stock price

Our revenues and operating results will likely fluctuate significantly from quarter to quarter as a result of a
variety of factors, including without limitation:



| |  |  | change in the composition of our Advertiser Network customer base,
| | - |  | ------------------------------------------------------------------



| |  |  | change in composition of our AdCenter customer base,
| | - |  | ----------------------------------------------------



| |  |  | changes in our distribution network, particularly the gain or loss of key distribution network partners, or changes in the implementation of search results on
partner websites,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in the number of search advertisers who purchase our listings, or the amount of spending per customer,
| | - |  | --------------------------------------------------------------------------------------------------------------



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| |  |  | the revenue-per-click we receive from search advertisers, or other factors that affect the demand for, and prevailing prices of, Internet advertising and marketing
services,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | change in our traffic acquisition costs (TAC) related to our Advertiser Network,
| | - |  | --------------------------------------------------------------------------------



| |  |  | systems downtime on our Advertiser Network, our website or the websites of our distribution network partners,
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | the effect of SFAS 123R, which became effective January 1, 2006, and requires that we account for the fair value of stock awards granted to employees as
compensation expense.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Due to the above factors, we believe that period-to-period comparisons of our financial results are not
necessarily meaningful, and you should not rely on past financial results as an indicator of our future performance. If our financial results in any future period fall below the expectations of securities analysts and investors, the market price of
our securities would likely decline.

Our stock price is extremely volatile, and such volatility may hinder investors ability to resell their
shares for a profit or avoid a loss

The stock market has experienced significant price and volume fluctuations in recent years, and the stock prices of
Internet companies have been extremely volatile. The low trading volume of our common stock may adversely affect its liquidity and reduce the number of market makers and/or large investors willing to trade in our common stock, making wider
fluctuations in the quoted price of our common stock more likely to occur. Also, because we have made significant changes as a result of the expiration of our contractual relationship with Microsofts MSN in the first quarter of 2004, it is
extremely difficult to evaluate our business and prospects. You should evaluate our business in light of the risks, uncertainties, expenses, delays and difficulties associated with managing and growing a relatively new business, many of which are
beyond our control.

Our stock price may fluctuate, and you may not be able to sell your shares for a profit, as a result of a number of factors including
without limitation:



| |  |  | changes in the market valuations of Internet companies in general and comparable companies in particular,
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | quarterly fluctuations in our operating results,
| | - |  | ------------------------------------------------



| |  |  | the termination or expiration of our distribution agreements,
| | - |  | -------------------------------------------------------------



| |  |  | our potential failure to meet our forecasts or analyst expectations on a quarterly basis,
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | the relatively thinly traded volume of our publicly traded shares, which means that small changes in the volume of trades may have a disproportionate impact on our
stock price,
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the loss of key personnel, or our inability to recruit experienced personnel to fill key positions,
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | changes in ratings or financial estimates by analysts or the inclusion/removal of our stock from certain stock market indices used to drive investment choices,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | announcements of new distribution network partnerships, technological innovations, acquisitions or products or services by us or our competitors,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the sales of substantial amounts of our common stock in the public market by our stockholders, or the perception that such sales could occur,
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | conditions or trends in the Internet that suggest a decline in rates of growth of advertising-based Internet companies.
| | - |  | -----------------------------------------------------------------------------------------------------------------------

In the past, securities class action litigation has often been instituted after periods of volatility in the market price of a Companys securities. A securities
class action suit against us could result in substantial costs and the diversion of managements attention and resources, regardless of the merits or outcome of the case.



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We may need additional capital in the future to support our operations and, if such additional financing is not
available to us, on reasonable terms or at all, our liquidity and results of operations will be materially and adversely impacted

Although we believe
that our working capital will provide adequate liquidity to fund our operations and meet our other cash requirements for the foreseeable future, unanticipated developments in the short term, such as the entry into agreements which require large cash
payments or the acquisition of businesses with negative cash flows, may necessitate additional financing. We may seek to raise additional capital through public or private debt or equity financings in order to:



| |  |  | fund the additional operations and capital expenditures,
| | - |  | --------------------------------------------------------



| |  |  | take advantage of favorable business opportunities, including geographic expansion or acquisitions of complementary businesses or technologies,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | develop and upgrade our technology infrastructure beyond current plans,
| | - |  | -----------------------------------------------------------------------



| |  |  | develop new product and service offerings,
| | - |  | ------------------------------------------



| |  |  | take advantage of favorable conditions in capital markets, or
| | - |  | -------------------------------------------------------------



| |  |  | respond to competitive pressures.
| | - |  | ---------------------------------

The capital
markets, and in particular the public equity market for Internet companies, have historically been volatile. It is difficult to predict when, if at all, it will be possible for Internet companies to raise capital through these markets. We cannot
assure you that the additional financing will be available on terms favorable to us, or at all. If we issue additional equity or convertible debt securities, our existing stockholders may experience substantial dilution.

A significant market downturn may lead to a decline in the value of securities we hold in our investment portfolio

During 2008, the global markets for fixed-income securities, particularly the markets for financial instruments collateralized by sub-prime mortgages, experienced
significant disruption. This disruption affected the liquidity and pricing of securities traded in these markets, as well as the returns of, and levels of redemptions in, investment vehicles investing in those instruments. This downturn may
adversely affect the value and liquidity of securities we hold in our investment portfolio.

Provisions of Delaware corporate law and provisions of our
charter and bylaws may discourage a takeover attempt

Our charter and bylaws and provisions of Delaware law may deter or prevent a takeover attempt,
including an attempt that might result in a premium over the market price for our common stock. Our board of directors has the authority to issue shares of preferred stock and to determine the price, rights, preferences and restrictions, including
voting rights, of those shares without any further vote or action by the stockholders. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the
effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. In addition, our charter and bylaws provide for a classified board of directors. These provisions, along with Section 203 of the
Delaware General Corporation Law, prohibiting certain business combinations with an interested stockholder, could discourage potential acquisition proposals and could delay or prevent a change of control.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



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|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

None.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None.



|ITEM 6. | EXHIBITS
|------- | --------

Please see the exhibit index following the signature page
of this report.



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SIGNATURE

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

LOOKSMART, LTD.

Dated: November 7, 2008



|    |  |                                             
|--- |  | --------------------------------------------
|    | 
|By: |  | /s/ Stephen C. Markowski                    
|    |  | Stephen C. Markowski Chief Financial
Officer



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EXHIBIT INDEX

Exhibit

Number Description of Document



|      |  |                                                                                                                                                                                                                                                                                                                
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1   |  | Restated Certificate of Incorporation (Filed with the Companys Quarterly Report on Form 10-Q filed with the SEC on November 14, 2005).                                                                                                                                                                        
|      | 
|3.2   |  | Bylaws (Filed with the Companys Quarterly Report on Form 10-Q filed with the SEC on August 14, 2000).                                                                                                                                                                                                         
|      | 
|4.1   |  | Form of Specimen Stock Certificate (Filed with the Companys Quarterly Report on Form 10-Q filed with the SEC on November 14, 2005).                                                                                                                                                                           
|      | 
|4.2   |  | Forms of Stock Option Agreement used by the Registrant in connection with grants of stock options to employees, directors and other service providers in connection with the Amended and Restated
1998 Stock Plan (Filed with the Companys Current Report on Form 8-K filed with the SEC on October 22, 2004).
|      | 
|4.3   |  | Form of cover sheet for use with Stock Option Agreement for grants of stock options to executives in connection with the Companys Executive Team Incentive Plan, Plan Year 2006 (Filed with
the Companys Quarterly Report on Form 10-Q filed with the SEC on May 10, 2006).                                  
|      | 
|4.4   |  | Form of Indemnification Agreement entered into between the Registrant and each of its directors and officers (Filed with the Companys Registration Statement on Form S-1 (File No.
333-80581) filed with the SEC on September 14, 1999).                                                                      
|      | 
|4.5   |  | Form of cover sheet for use with stock option agreement for grants of stock options to executives in connection with the Companys Executive Team Incentive Plan, Plan Year 2007 (Filed with
the Companys Current Report on Form 8-K filed with the SEC on March 2, 2007).                                    
|      | 
|10.1  |  | Form of Indemnification Agreement entered into between the Registrant and each of its directors and officers (Filed with the Companys Registration Statement on Form S-1 (File No.
333-80581) filed with the SEC on September 14, 1999).                                                                      
|      | 
|10.2  |  | Amended and Restated 1998 Stock Plan (Filed with the Companys Registration Statement on Form S-1 (File No. 333-80581) filed with the SEC on September 14, 1999).                                                                                                                                              
|      | 
|10.3  |  | 1999 Employee Stock Purchase Plan as amended (Filed with the Companys Registration Statement on Form S-8 (File No. 333-129987) filed with the SEC on November 29, 2005).                                                                                                                                      
|      | 
|10.5  |  | LookSmart, Ltd. Executive Team Incentive Plan, Plan Year 2007 (Filed with the Companys Current Report on Form 8-K filed with the SEC on March 2, 2007).                                                                                                                                                       
|      | 
|10.6  |  | LookSmart, Ltd. 2008 Executive Team Incentive Plan (Filed with the Companys Current Report on Form 8-K filed with the SEC on February 19, 2008).                                                                                                                                                              
|      | 
|10.7  |  | Zeal Media, Inc. 1999 Stock Plan (Filed with the Companys Registration Statement on Form S-8 filed with the SEC on December 7, 2000).                                                                                                                                                                         
|      | 
|10.8  |  | Wisenut, Inc. 1999 Stock Incentive Plan (Filed with the Companys Registration Statement on Form S-8 filed with the SEC on April 18, 2002).                                                                                                                                                                    
|      | 
|10.9  |  | LookSmart 2007 Equity Incentive Plan (Filed with the Companys Definitive Proxy Statement and Amended Definitive Proxy Statement with the SEC on April 30 and September 11, 2007,
respectively).                                                                                                               
|      | 
|10.12 |  | Lease Agreement with Rosenberg SOMA Investments III, LLC for property located at 625 Second Street, San Francisco, California, dated May 5, 1999 (Filed with the Companys Registration
Statement on Form S-1 (File No. 333-80581) filed with the SEC on September 14, 1999).                                  



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##### Table of Contents

|       |  |                                                                                                                                                                                                                                         
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.13  |  | LookSmart, Ltd. Form Change of Control/Severance Agreement (Filed with The Companys Quarterly report on Form 10-Q filed with the SEC on November 9, 2007).                                                                             
|       | 
|10.14  |  | Employment Offer Letter between the Company and its Chief Financial Officer dated November 15, 2007 (Filed with the Companys Current Report on Form 8-K/A filed with the SEC on December 27,
2007).                                    
|       | 
|10.15  |  | Preferred Shares Rights Agreement dated November 15, 2007 between the Company and Mellon Investor Services LLC (Filed with the Companys Current Report on Form 8-K with the SEC on November
21, 2007).                                 
|       | 
|10.16  |  | Asset Purchase Agreement between the Company and CNET Networks, Inc. dated November 5, 2007 (Filed with the Companys Current Report on Form 8-K with the SEC on November 7,
2007).                                                     
|       | 
|10.17  |  | Amendment to LookSmart Preferred Shares Rights Agreement dated July 8, 2008 (Filed with the Companys Current Report on Form 8-K with the SEC on July 8, 2008).                                                                         
|       | 
|10.31  |  | Fourth Addendum to AdCenter License, Hosting and Support Agreement between the Registrant and IAC Search & Media dated September 14, 2007 (Filed with the Companys Quarterly Report
on Form 10-Q filed with the SEC on August 9, 2007).
|       | 
|10.32  |  | Sponsored Links Master Terms and Conditions between the Registrant and eBay, Inc. dated March 12, 2007 (Filed with the Companys Quarterly Report on Form 10-Q filed with the SEC on
August 9, 2007).                                   
|       | 
|10.33+ |  | LookSmart Reseller Terms and Conditions with MeziMedia dated September 7, 2005. (Filed with the Companys Quarterly Report on Form 10-Q filed with the SEC on May 10, 2007).                                                            
|       | 
|10.34  |  | Co-Location Services Agreement between the Registrant and Savvis Communications Corporation dated March 29, 2008 (Filed with the Companys Quarterly Report on Form 10-Q with the SEC on
May 12, 2008).                                 
|       | 
|10.35+ |  | Second Addendum to AdCenter License, Hosting and Support Agreement between the Registrant and IAC Search & Media dated May 16, 2006 (Filed with the Companys Form 10-Q with the SEC on
August 8, 2006).                                
|       | 
|10.36+ |  | Third Addendum to AdCenter License, Hosting and Support Agreement between the Registrant and IAC Search & Media dated January 1, 2007. (Filed with the Companys Annual Report on
Form 10-K on March 16, 2007).                         
|       | 
|10.37+ |  | AdCenter License, Hosting and Support Agreement between the Registrant and Ask Jeeves, Inc. dated May 16, 2005 (Filed with the Companys Quarterly Report on Form 10-Q filed with the SEC on
May 10, 2006).                             
|       | 
|10.38+ |  | Addendum to AdCenter License, Hosting and Support Agreement between the Registrant and Ask Jeeves, Inc. dated January 20, 2006 (Filed with the Companys Quarterly Report on Form 10-Q filed
with the SEC on May 10, 2006).             
|       | 
|10.39+ |  | Paid Listings License Agreement between the Registrant and SearchFeed.com dated April 15, 2006 (Filed with the Companys Quarterly Report on Form 10-Q filed with the SEC on May 10, 2006).                                             
|       | 
|10.40+ |  | License Agreement between the Registrant and SearchFeed.com dated November 23, 2003, as Amended on March 29, 2004 and March 21, 2005 (Filed with the Companys Annual Report on Form 10-K
filed with the SEC on March 15, 2006).        
|       | 
|10.41  |  | Promotion letter between the Company and its Vice-President, Technology dated September 7, 2007 (Filed with the Companys Current Report on Form 8-K with the SEC on September 12, 2007).                                               
|       | 
|10.42  |  | Amendment to employment offer between the Company and its Chief Financial Officer dated August 27, 2007 (Filed with the Companys Current Report on Form 8-K with the SEC on September 4,
2007).                                        
|       | 
|10.43  |  | Employment offer letter between the Registrant and its Vice President, East Coast dated March 22, 2007 (Filed with the Companys Quarterly Report on Form 10-Q filed with the SEC on
May 10, 2007).                                     
|       | 
|10.44  |  | Employment offer letter between the Registrant and its Vice President, Publisher Sales dated March 23, 2007 (Filed with the Companys Quarterly Report on Form 10-Q filed with the
SEC on May 10, 2007).                                



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##### Table of Contents

|        |  |                                                                                                                                                                                                                                                                       
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.45   |  | Promotion letter between the Registrant and its Vice President, Finance and Principal Accounting Officer dated July 10, 2007. (Filed with the Companys Current Report on Form 8-K filed
with the SEC on July 16, 2007).                                              
|        | 
|10.46   |  | Severance Agreement and General Release between the Company and Dave Hills dated August 2, 2007 (Filed with the Companys Current Report on Form 8-K filed with the SEC on
August 7, 2007).                                                                           
|        | 
|10.47+  |  | Paid Listings License Agreement between the Registrant and Kontera Technologies, Inc. dated July 17, 2006. (Filed with the Companys Quarterly Report on Form 10-Q with the SEC on November
9, 2007).                                                                 
|        | 
|10.48+  |  | License Agreement between the Registrant and Oversee.net dated April 1, 2004 (Filed with the Companys Quarterly Report on Form 10-Q filed with the SEC on November 9,
2007).                                                                                         
|        | 
|10.49   |  | Letter from Oversee.net to the Registrant dated January 21, 2008 terminating Agreement between Registrant and Oversee.net dated April 1, 2004 effective September 30, 2008 (Filed with the
Companys Annual Report on Form 10-K filed with the SEC on March 17, 2008).
|        | 
|10.50+  |  | Backfill Agreement between the Registrant and Internext Media Corp. dated February 8, 2008 (Filed with the Companys Quarterly Report on Form 10-Q on May 12, 2008).                                                                                                  
|        | 
|10.51* |  | Paid Listings License Agreement between the Registrant and PeakClick GMBM dated April 15, 2006                                                                                                                                                                        
|        | 
|10.52* |  | Advertiser Terms and Conditions between the Registrant and MeziMedia dated September 26, 2008.                                                                                                                                                                        
|        | 
|10.59   |  | Employment offer letter between the Registrant and its General Counsel and Senior Vice President dated as of July 11, 2005 (Filed with the Companys Current Report on Form 8-K filed
with the SEC on July 14, 2005).                                                 
|        | 
|10.60   |  | Employment offer letter between the Registrant and its Chief Financial Officer dated August 1, 2008 (Filed with the Companys Current Report on Form 8-K filed with the SEC on August 5,
2008).                                                                       
|        | 
|10.63   |  | Promotion letter between the Registrant and its Vice-President, Advertising Sales dated November 15, 2006 (Filed with the Companys Current Report on Form 8-K filed with the SEC on
November 21, 2006).                                                              
|        | 
|31.1*   |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                    
|        | 
|31.2*   |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                    
|        | 
|32.1*   |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                        



|(*) | Filed herewith
|--- | --------------



|() | Material in the exhibit marked with a  has been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted
portions have been filed separately with the Securities and Exchange Commission.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(+) | Confidential treatment has been granted with respect to portions of the exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



53