UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549









Form
10-K










(Mark
One)





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




For the
fiscal year ended December 31, 2009




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: 001-33797







INTERNET
BRANDS, INC.


(Exact name of registrant as specified
in its charter)
















Delaware
              (State or other jurisdiction of
      incorporation or organization)
            95-4711621
              (I.R.S. Employer Identification
      No.)




909
North Sepulveda Blvd., 11th Floor


El Segundo, CA 90245


(Address of principal executive
offices)




Registrant's
telephone number, including area code: (310) 280-4000




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







Title
      of class
            
            Name
      of exchange
              on
      which registeredClass A
      Common Stock
              (par
      value $0.001 per share)
            
            NASDAQ
      Global Select Market


Securities
Registered Pursuant to Section 12(g) of the Act: None




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.




Yes   ̈     No  x




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.




Yes   ̈    No  x




Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.




Yes  x    No   ̈








Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes   ̈    No  x




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.   ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer    ̈
            
            
            
            Accelerated filer
            
            xNon-accelerated
      filer     ̈
            
            (Do
      not check if smaller reporting company)
            
            Smaller Reporting Company
            
             ̈




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).




Yes   ̈    No  x




The
aggregate market value of the voting stock held by non-affiliates of the
registrant on June 30, 2009 was approximately $195,986,000 based on the closing
stock price as reported by the NASDAQ Global Select Market. For purposes of this
computation, all officers, directors, and 10% beneficial owners of the
registrant have been excluded in that such persons may be deemed to be
affiliates. Such determination should not be deemed to be an admission that such
officers, directors or 10% beneficial owners are, in fact, affiliates of the
registrant.




The
number of shares outstanding of the registrant's Class A common stock and
Class B common stock as of February 26, 2010 was 42,750,798 and
3,025,000, respectively.




Documents
Incorporated by Reference




Portions
of the registrant’s definitive Proxy Statement relating to its 2010 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K, where indicated. Such Proxy Statement will be filed
with the U.S. Securities and Exchange Commission within 120 days after the end
of the fiscal year to which this report relates.







-2-






INTERNET
BRANDS, INC.


FORM
10-K


FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2009






TABLE
OF CONTENTS




PagePART
      IItem 1.
            
            Business
            
            4Item 1A.
            
            Risk Factors
            
            12Item 1B.
            
            Unresolved Staff
      Comments
            
            23Item 2.
            
            Properties
            
            23Item 3.
            
            Legal Proceedings
            
            23Item 4.
            
            Submission of Matters to a Vote
      of Security Holders
            
            24PART
      IIItem 5.
            
            Market for Registrant's Common
      Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities
            
            25Item 6.
            
            Selected Financial
      Data
            
            27Item 7.
            
            Management's Discussion and
      Analysis of Financial Condition and Results of Operation
            
            30Item 7A.
            
            Quantitative and Qualitative
      Disclosures About Market Risk
            
            44Item 8.
            
            Financial Statements and
      Supplementary Data
            
            45Item 9.
            
            Changes in and Disagreements with
      Accountants on Accounting and Financial Disclosure
            
            80Item 9A.
            
            Controls and
      Procedures
            
            80Item 9B.
            
            Other Information
            
            82PART
      IIIItem 10.
            
            Directors, Executive Officers and
      Corporate Governance
            
            83Item 11.
            
            Executive
      Compensation
            
            84Item 12.
            
            Security Ownership of Certain
      Beneficial Owners and Management and Related Stockholder
      Matters
            
            84Item 13.
            
            Certain Relationships and Related
      Transactions, and Director Independence
            
            84Item 14.
            
            Principal Accountant Fees and
      Services
            
            84PART
      IVItem 15.
            
            Exhibits and Financial Statement
      Schedules
            
            86Signatures












-3-


The Business section and other parts of this Annual Report on Form 10-K (“Form
10-K”) contain forward-looking statements that involve risks and uncertainties.
Many of the forward-looking statements are located in “Management’s Discussion
and Analysis of Financial Condition and Results of Operation,” under Part II,
Item 7 of this Form 10-K. Forward-looking statements provide current
expectations of future events based on certain assumptions and include any
statement that does not directly relate to any historical or current fact.
Forward-looking statements can also be identified by words such as
“anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,”
“predicts,” and similar terms. Forward-looking statements are not guarantees of
future performance and the Company’s actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to, those discussed in the
subsection entitled “Risk Factors” under Part I, Item 1A of this Form 10-K,
which are incorporated herein by reference. The Company assumes no obligation to
revise or update any forward-looking statements for any reason, except as
required by law.




PART
I




ITEM 1.   BUSINESS




Overview





We
are an Internet media company that owns, operates and grows branded websites in
categories marked by highly focused consumer involvement and strong advertising
spending. We believe that consumers seek knowledge from experts and fellow
visitors online to save time and money in their daily lives.  Our
vertical websites provide knowledge that is accessible and valuable to our
audiences and the advertisers that want to market to them.





Consumer
Internet.  In our Consumer Internet segment, we have continued
to expand and diversify our vertical website categories to serve a wide range of
audiences and advertisers. Our network of websites is grouped into seven
vertical categories: automotive, careers, health, home, money and business,
shopping and travel and leisure. We own and operate over 230 websites, 94 of
which received in excess of 100,000 monthly unique visitors as of
December 31, 2009, which we refer to as our “principal websites.” This
represents an increase from 45 principal websites in December 2007, and from 80
principal websites in December 2008. More than 97% of our websites’ traffic is
from non-paid sources. Our international audiences accounted for approximately
25% of total monthly visitors in December 2009. In 2009 we served a total of
more than 48,000 advertisers on our websites, an increase of 20% over
2008.





Licensing.  In our
Licensing segment, we license certain of our Internet technology products and
services to major companies and individual website owners around the
world.  Our subsidiaries Autodata Solutions, Inc. and Autodata
Solutions Company (together, the “Autodata Solutions division”), are suppliers
of licensed technology and content services to the automotive industry, serving
most of the U.S., Japanese and European automotive manufacturers.  We
also own and operate vBulletin software through our subsidiary, vBulletin
Solutions, Inc. Our vBulletin products are tailored to the growing market of
specialized online communities and include robust discussion forums and a
fully-integrated content management system. We directly market our vBulletin
products on the Internet and have sold more than 140,000 licenses to
date.





Our Operating
Platform.  Our goal is to grow the audiences, revenues and
profitability of our Consumer Internet and Licensing businesses through the
deployment of our common operating platform, by acquiring additional websites in
our existing vertical categories and by continuing to expand into new
categories. Our proprietary technologies and shared operating, sales and content
creation resources are highly scalable and allow us to rapidly and cost
effectively create and deploy valuable knowledge and technology improvements on
our websites that organically gain audiences and advertisers over time. Our
targeted content includes a diverse range of articles, guides, product
comparisons, expert and user reviews, discussion forums, photographs,
directories, deals, discounts and coupons. We optimize revenue yields through
our selective deployment of various advertising models, including cost per click
(CPC), cost per lead (CPL), cost per action (CPA), cost per thousand impressions
(CPM) and flat fees.




We were
incorporated in Delaware in October 1998, and our Class A common stock is
listed on the NASDAQ Global Select Market under the ticker symbol
“INET.”


-4-


Subsequent
Event





From January
1, 2010 through March 2, 2010, we acquired websites in our Consumer Internet
segment for an aggregate purchase price of approximately $7 million in cash,
stock and earnouts.
 Our
Operating Platform




To manage
and grow our websites, we have developed a set of operating processes and
proprietary technologies that form our scalable Consumer Internet operating
platform. We utilize this platform to rapidly and cost efficiently create and
deploy content on our websites, add features and enhancements for our users, and
serve our advertisers.  We also utilize our platform to quickly and
efficiently integrate and improve acquired websites. Applying common processes
and technologies across our websites allows us to continually innovate and
adjust content and product offerings, maximize revenues and reduce personnel,
technology licensing, and other costs. As we add more websites and content that
is valued by our audiences and advertisers to our operating platform and
leverage our resources, we expect our profitability to increase over
time.




Key
Attributes and Benefits




Key
attributes and benefits of our platform include:




Shared Technologies Permit Rapid
Deployment of Content and Website Enhancements.  The core of
our Consumer Internet operating platform is a set of proprietary technologies,
content creation and related capabilities that coordinate many aspects of our
websites, revenue streams, marketing activities and customer relations. We
deploy common technologies wherever feasible.  For example, most of
our community websites have been migrated to our vBulletin
software.  Common technologies include content management systems,
lead generation and distribution systems, database management systems,
website-user features, financial systems, customer service systems, marketing
intelligence systems, network operations, and website hosting. Our technologies
are modular in design, meaning that they are comprised of components and
functions that are generally interchangeable among our websites. This modularity
enables us to combine selected functions to bring new websites to market rapidly
and selectively apply functionalities developed for one of our websites to our
network of websites with a minimal investment of time and capital.  By
utilizing common technologies, we are also able to accommodate much higher
levels of website traffic in a cost-effective manner.




Shared Personnel Creates Additional
Operating Leverage.  We leverage personnel with
highly-specialized technical expertise across our websites. These areas of
expertise include website design, search engine optimization, online community
governance, online marketing, database development, website acquisition and
integration, and website tool development.




Sophisticated Yield Management
Optimizes Advertising Revenues and Profitability.  We have deep
expertise in website audience and content yield management and have developed
sophisticated, algorithmically-driven technology systems that optimize content
creation and revenue generation on our websites on a real-time
basis.  Our highly-diversified website offerings allow us to receive
revenues from a broad set of advertisers based on a variety of different
advertising models.  As we add new websites, content and advertisers
to our platform, we expect to continue to optimize our revenue
yields.




Our
Websites




We
are committed to providing valuable, relevant knowledge to consumers who seek to
save time and money by accessing content and advice and interacting with other
consumers and experts online. Our branded websites occupy leadership positions
in significant vertical categories and provide a diverse array of articles,
guides, reviews, how-to instructions, discussion forums, directories, deals,
discounts and coupons that are valuable to our targeted audiences and the
advertisers seeking to market to those audiences. Many of these websites are
built on a common technology platform centered on vBulletin and open-source
technologies including Linux, Apache, MySQL and php.









Automotive





Our
automotive websites capture a variety of focused audiences, from those
researching and purchasing new and used vehicles to active communities of auto
enthusiasts. For consumers who are researching new and used vehicle purchases,
we offer websites with articles, pricing information, payment calculators, and
other resources and tools to price, configure, order, purchase and finance
vehicles online. CarsDirect.com offers a multi-brand, national-scale, online
vehicle purchase channel for new cars. Autos.com is one of the only websites
that reviews and ranks nearly every new and late-model used vehicle.
NewCarTestDrive.com syndicates new car reviews written by professional
automotive journalists who personally test-drive vehicles.





-5-


We have
more than 90 automotive enthusiast websites which provide visitors an
interactive platform on which to discuss and share information over the lifespan
of automobile ownership -- from researching a purchase to maintaining and
enhancing vehicle performance. Our automotive websites offer vehicle
reviews, how-to guides, and community forum discussions of most vehicle makes
and models. We also connect many of the leading automotive aftermarket
companies with our users through targeted and integrated advertising options.
Many of our principal websites are leaders in their respective niches, such as
CorvetteForum.com, Ford-Trucks.com, and Honda-Tech.com.




Careers




Our careers websites provide visitors
with helpful tools and information to assist them in finding full-time or
part-time employment, and managing and developing their careers. Some of our
careers websites are leaders in their respective niches. For example,
HospitalJobsOnline.com is a leading job board in healthcare employment, having
more than 60,000 active job listings. ModelMayhem.com is the leading online
community of models and fashion photographers, with over 380,000 active members.
CVTips.com is the leading website for knowledge about applying for jobs and
succeeding in the workplace. Other principal careers websites include
GrooveJob.com for part-time employment, AviationEmployment.com and PPRuNe.org
for aviation and pilot employment, ClassADrivers.com for trucking employment
opportunity listings, and WAHM.com for work at home and home-based business
opportunities.




Health





Our
health vertical websites focus on three general categories:  specific
medical procedures, fitness and nutrition, and health-related support
communities. Our medical procedure-focused websites are within our health
directory platform, HealthNews.org, and include leading, niche health
directories such as Vasectomy.com, DermaNetwork.org, ScanDirectory.com,
VeinDirectory.org and DentalFind.com. Our network of fertility-related websites
is the largest of its kind on the Internet. These websites educate consumers
with comprehensive information about conception, pregnancy, birthing and caring
for newborn babies. ProFertilityRegistry.com and InfertilitySpecialist.com help
consumers connect with physicians and fertility clinics. I-am-Pregnant.com is
one of the largest online communities focused on pregnancy and baby topics. Our
fitness and nutrition websites include FitDay.com, which offers a free online
fitness journal and calorie counter, with more than 4 million registered users,
helping dieters and fitness enthusiasts achieve and maintain their fitness
goals.




Home-Related




Our
home-related websites provide visitors content and services spanning the
lifecycle of home-related activities – from housing selection and home
improvement, to home-related activities like gardening and crafting. Our
home-related websites offer articles, newsletters and other tools, as well as
community forums through which users can interact and provide tips and advice on
a variety of home-related topics. DoItYourself.com has thousands of
professionally-written articles, weekly practical tips, a bi-weekly newsletter,
and the largest forum of home improvement and repair do-it-yourselfers on the
Internet. ApartmentRatings.com, a popular community of U.S. apartment renters,
features more than 900,000 reviews and ratings by users of apartments
nationwide, and provides renters with valuable resources such as rent trend
graphs, neighborhood information, and maps for more than 60,000 apartments.
Splitcoaststampers.com and Craftster.org are vibrant communities with over
400,000 crafts experts providing inspiration, advice, and detailed how-to advice
for thousands of hobbyist projects. DavesGarden.com is a comprehensive
educational resource for all things gardening, with easy-to-use plant, bird and
insect databases, thousands of how-to articles, an expansive garden center
directory, and community forums with nearly 500,000 members.




Money and Business




Our money
and business websites offer visitors content, community forums and resources to
manage their personal finances and run their small or medium-sized business.
Mortgage101.com provides educational resources for personal loans and mortgages,
including an innovative rate directory that informs consumers of lending
processes and helps them find lenders with the lowest current lending rates and
consumer-friendly lending practices.  BusinessMart.com is a
marketplace of thousands of small businesses for sale by owners and brokers
across the U.S.; it also serves as a resource marketplace of new business
franchising opportunities. BusinessFinance.com connects small business owners to
sources of small business loans and other financing opportunities. FinWeb.com
educates users, providing thousands of professionally-written articles on
personal finance topics such as insurance, taxes, investing and
loans.




Shopping




Our
shopping websites provide consumers with information regarding online coupons
and deals to help obtain the best prices on a wide range of products, with a
particular focus on high-value products such as consumer
electronics.  For example, UltimateCoupons.com highlights coupons and
discounts from more than 1,000 of the leading e-commerce
merchants.  Websites in this category also provide visitors with
information to help guide their purchase decisions. For instance,
Steves-Digicams.com provides some of the most in-depth and well-respected camera
reviews available on the Internet. Our shopping websites combine content from
our editorial team with knowledge contributed by our user communities.
HighDefDigest.com features a mix of editorial reviews of Blu-ray discs with
community discussions of feature films. Other principal shopping websites
include Bargainist.com and BensBargains.net.




Travel and Leisure




Our
travel and leisure websites include a variety of highly-focused online user
communities and a breadth of travel lodging sites.  Our principal
travel community websites include Wikitravel.org and FlyerTalk.com.
Wikitravel.org is built and managed by a robust user community that has created
English-language guide articles for over 23,000 destinations worldwide, plus
tens of thousands of articles on the 20 other language versions of the website.
Our principal leisure community websites include BikeForums.net, PuppyDogWeb.com
and TrekEarth.com. Our principal travel lodging websites include BBOnline.com
and KidsCamps.com and MySummerCamps which are the leading online
directories of summer camps.




-6-


We
operated 94 principal websites across our seven vertical categories as of
December 2009, including:





Automotive6SpeedOnline.com
              AcuraZine.com
              ATVConnection.com
              AudiForums.com
              AudiWorld.com
              Autos.com
              CarsDirect.com
              CivicForums.com
              ClubLexus.com
              CorvetteForum.com
              DodgeForum.com
            evolutionM.net
              F150Online.com
              Ford-Trucks.com
              g35Driver.com
              HDForums.com
              HondaMarketPlace.com
              Honda-Tech.com
              LS1Tech.com
              Maxima.org
              MBWorld.org
              MustangForums.com
            My350Z.com
              PassionFord.com
              Rennlist.com
              RX7club.com
              RX8club.com
              ScoobyNet.com
              SellMyCar.com
              ThirdGen.org
              WikiCars.org
              Yota-Tech.comCareersAirlinePilotForums.com
              CVTips.com
              GrooveJob.com
              HospitalJobsOnline.com
              iFreelance.com
            ModelMayhem.com
              NursingJobs.org
              PPRuNe.org
              WAHM.comHealth3FatChicks.com
              FitDay.com
              I-Am-Pregnant.comHome-RelatedApartmentRatings.com
              Craftster.org
              DavesGarden.com
              DoItYourself.com
              Epodunk.com
            Gardens.com
              OhMyApartment.com
              RealEstateABC.com
              Splitcoaststampers.com
              ThatRentalSite.comMoney
      and BusinessBusinessMart.com
              FinWeb.com
              Mortgage101.com
              SmallBusinessNotes.comShoppingAVRev.com
              Bargainist.com
              BensBargains.net
              Boddit.com
              Deallocker.com
            HighDefDigest.com
              HighDefForum.com
              OutBlush.com
              Steves-digicams.com
              UltimateCoupons.com
              WirelessForums.orgTravel
      and LeisureBBOnline.com
              BikeForums.net
              BritishExpats.com
              CruiseMates.com
              CruiseReviews.com
              DVDTalk.com
            EquineHits.com
              FamilyCorner.com
              FlyerTalk.com
              Horsetopia.com
              HuntingNet.com
              KidsCamps.com
            MySummerCamps.com
              PuppyDogWeb.com
              RCTech.net
              SlowTrav.com
              TheHullTruth.com
              TheNewPartentsGuide.com
              TrekEarth.com
            TrekLens.com
              TrekNature.com
              VacationTimeShareRentals.com
              VetInfo.com
              WikiTravel.org
              World66.com


-7-








Licensed
Products




Our
Licensing segment is comprised of the following two divisions:




Autodata
Solutions Division




Our
Autodata Solutions division supplies licensed content and technology services to
automotive manufacturers, Internet portals, leasing companies, and other
automotive enterprise accounts. Autodata Solutions serves most major U.S.,
Japanese and European automotive manufacturers, including General Motors, Ford,
Chrysler, Toyota, BMW, and Volkswagen, providing products and services that help
these manufacturers throughout all stages of the selling chain.




Most of
our Autodata Solutions’ revenues are derived from five proprietary technology
platforms: eCommerce, Market Planning, Retail Management, Vehicle Content
Syndication, and Vehicle Ordering. Autodata Solutions benefits from shared costs
and increased capabilities with each client that joins a platform. As of
December 31, 2009, 56 clients utilized our Autodata Solutions division’s
Market Planning platform and 76 clients utilized our Vehicle Content Syndication
platform. Our Autodata Solutions division’s customers typically sign one- to
five-year licensing and services contracts.




vBulletin
Solutions, Inc.





vBulletin
Solutions, Inc. is the largest international developer and distributor of
community bulletin board software. In December 2009, we released vBulletin 4.0
Publishing Suite which features a new content management system, or CMS, an
upgraded search function, blogging add-on tools, and enhancements to vBulletin’s
discussion forum functionality. The vBulletin product is designed to be easily
downloaded and installed by the user, and provides a variety of features that
are both secure and scalable. The licensee pays an upfront fee, typically by
credit card, for a perpetual license. Given the attractiveness of the vBulletin
product, which offers features such as easy scalability, user-friendly system
administration and efficient operating speeds, we typically migrate our acquired
community websites onto the vBulletin platform.





-8-


Technology





Our
technology systems are designed so that they can be scaled by adding additional
hardware and network capacity. We generally host our applications on clustered
hardware designed to minimize system downtime. Our applications and data
connections are monitored 24/7 for performance, responsiveness and stability.
While our platform utilizes many shared underlying technologies, we typically
customize the user-facing elements of our websites extensively to meet the
specific needs of their users.




We
maintain a backup system for website operations at our Los Angeles, California
co-location centers. We replicate critical website data at various times
throughout the day and retain backup data at a certified third-party facility.
We have robust firewalls and switchgear to help ensure network security and have
sought expert third-party assistance in their configuration and testing. We also
run a security audit against each newly-acquired website to help us identify and
address any security issues.




Sales,
Marketing, and Customer Service




Sales




We sell
our products and services primarily through our direct sales force, which is
generally organized vertically, focusing on specific categories and product
lines. We supplement our in-house sales force by utilizing a number of
third-party advertising networks and affiliate websites. We directly served a
total of more than 48,000 advertisers, as of December 31, 2009.




Marketing




More than
97% of our Internet audience in 2009 was generated through non-paid
sources, such as repeat visitation, word-of-mouth, natural search, and public
relations. We selectively utilize paid-marketing sources, such as search engine
marketing, affiliate relationships and co-branded partner deployments for less
than 3% of our traffic.




Our
Competition




As an
Internet media company, we compete with other providers of online products,
services and information. With respect to our Consumer Internet segment in
particular, we contend with a variety of Internet and traditional offline
competitors. We believe our principal competitors include:




•
            companies
      that provide specialized consumer information websites, particularly in
      the automotive, careers, health,  home-related, money and
      business, shopping, and travel and leisure
  categories;




•
            enthusiast
      websites in specific categories, including message boards, blogs, and
      other enthusiast websites maintained by
  individuals;




•
            horizontal
      websites, portals and search properties such as AOL, Ask.com, Google, Bing
      and Yahoo!;




•      automotive
manufacturer and referral websites;




•
            traditional
      advertising channels, including television, radio, newspapers and
      magazines; and




•
            brick-and-mortar
      vendors who compete against our e-commerce services, including automobile
      dealers, retail stores, travel agents, and
  hotels.




Many of
our current and potential online and traditional store-based or print
publication-based competitors have longer operating histories, more industry
experience, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. These
current and potential competitors may be able to devote substantially greater
resources to Internet websites and systems development than we can, including
through acquisitions, investments and joint ventures. Our competitors may also
be able to secure products from vendors on more favorable terms, fulfill
customer orders more efficiently, adopt more aggressive pricing or devote more
resources to marketing and promotional campaigns. In addition, traditional
store-based and print publication-based retailers are able to offer customers
the experience to see and feel products in a manner that is not possible over
the Internet.




-9-


The
principal competitive factor that advantages us in the Consumer Internet segment
is the consistent quality of our products and services. We attract consumer
audiences through our ability to provide high-quality and timely user generated
and editorial content on our websites across a range of categories, and we offer
convenience and ease of use. We attract advertisers through the breadth and
depth of our user audiences, and their affinity and loyalty to our
websites.




In our
Licensing segment, we contend with competitors that supply licensed content and
technology services to the automotive industry, and software and website content
and community tools to those seeking to develop new Internet website
communities. vBulletin Solutions primarily competes with commercial and open
source community forum software, while principal competitors of our Autodata
Solutions division include internal technology departments,
advertising  agencies, and systems integrators such as IBM, Oracle,
and Capgemini, and certain other commercial software developers.




Intellectual
Property




We have
registered and/or have applied to register, service marks and/or trademarks in
the United States for “Internet Brands,” “CarsDirect,” “CarsDirect.com,”
“vBulletin,” “3 Fat Chicks on a Diet,” “Apartment Ratings,” “Autodata,” “CAD
Class A Drivers,” “Craftster,” “Dave’s Garden,” “DoItYourself.com,”
“FamilyCorner.com,” “FitDay,” “GreenLight.com,” “HealthNews.org,”
“KidsCamps.com,” “Model Mayhem,” “SkinCareGuide,” “Slow Travel,” and
“Vasectomy.com.” We also have the right to use a number of unregistered service
marks in connection with our businesses, including “FlyerTalk.com,” “Loan.com,”
and “BBOnline.com,” among others. So long as these marks remain in continuous
use in connection with similar goods and services, their terms can be perpetual,
subject, with respect to registered trademarks, to the timely renewal of such
registrations in the United States Patent and Trademark Office.




Some of
our content and databases are copyrighted, as are certain of our software and
user manuals. We have copyright registrations for our Autodata Solutions
division software and customer databases from the Canadian Intellectual Property
Office. The absence of a registration does not waive copyright protection. We
also have a policy of requiring that our employees and consultants enter into
confidentiality agreements that forbid disclosure of our proprietary
information, inventions and trade secrets.




Government
Regulation




Although
we do not believe that significant existing laws or government regulations
adversely impact us, our business could be affected by different interpretations
or applications of existing laws or regulations, future laws or regulations, or
actions by domestic or foreign regulatory agencies.




In
addition, laws and regulations that apply to communications over the Internet
are evolving rapidly in the United States and elsewhere. In particular, the
growth and development of the market for e-commerce has prompted calls for more
stringent tax, consumer protection, data security and privacy laws in the United
States and abroad that may impose additional burdens on companies conducting
business online. For example, users of our websites are located in the United
States and around the world. As a result, we collect and process the personal
data of individuals who reside in many different countries. Concerns about
privacy and data security could lead to legislative, judicial and regulatory
limitations and conditions on our ability to collect, maintain and use
information about Internet users. The European Union, for example, has adopted a
directive that will require “providers of publicly available communication
services” to store and retain communications data for law enforcement purposes
for up to 24 months. Numerous other laws have been adopted that could have
an impact on our business. Within the United States, federal and state
legislation, such as the federal CAN-SPAM Act of 2003, restrict or prohibit
unsolicited email, commonly known as “spam”; the Communications Decency Act,
gives statutory protection to online service providers who distribute
third-party content; the Digital Millennium Copyright Act is intended to reduce
the liability of online service providers for listing or linking to third-party
websites that include materials that infringe copyrights or other rights of
others; the Gramm-Leach-Bliley Act governs the collection and use of consumer
credit card and financial information; and  statutes adopted in
California require online services to report certain breaches of the security of
personal data to California consumers when their personal data might be
disclosed to direct marketers. Any existing or new laws and regulations
applicable to us may adversely affect our ability to market our products and
services to consumers in a cost-effective manner.




The costs
of compliance with, and the other burdens imposed by, these and other laws or
regulatory actions may prevent us from selling our products and services, or
increase the costs associated with selling our products and services, which
might make them less attractive to users and advertisers. For additional,
important information related to government regulation of our business, please
review the information in Item 1A, “Risk Factors” of this
report.




Failure
to comply with these and other applicable laws and regulations may result in,
among other things, administrative enforcement actions and fines, class action
lawsuits and civil and criminal liability. Furthermore, any such regulatory or
civil action that is brought against us, even if unsuccessful, may distract our
management’s attention, divert our resources, damage our reputation among
Internet users and our customers, and otherwise harm our business.


-10-




Employees




As of
December 31, 2009, we had 649 employees, of whom 303 were full-time and 96
were part-time Internet Brands’ employees, and 250 were employed at our Autodata
Solutions division in Canada. Our employees are not represented by any
collective bargaining agreements, and we have never experienced a work stoppage.
We believe our employee relationships are good.




Available
Information




For
further discussion concerning our business, see the information included in
Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operation,”
and Item 8, “Financial
Statements and Supplementary Data”of this report.




We make available, free of charge
through our website at www.internetbrands.com, our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments to those reports, if applicable, filed or
furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange
Act of 1934, as amended, or Exchange Act, as soon as reasonably practicable
after the material is electronically filed or furnished to the Securities and
Exchange Commission, or SEC. The information posted on our website is not
incorporated into this Form 10-K.





-11-


ITEM
1A.  RISK FACTORS




Cautionary
Note Regarding Forward-Looking Statements




Forward-looking
statements provide current expectations of future events based on certain
assumptions and include any statement that does not directly relate to any
historical or current fact. Forward-looking statements speak only as of the date
they are made. Forward-looking statements can also be identified by words such
as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,”
“predicts,” and similar terms. Forward-looking statements are not guarantees of
future performance and the Company’s actual results may differ significantly
from the results discussed in the forward-looking statements. The Company
assumes no obligation to revise or update any forward-looking statements for any
reason, except as required by law.




Factors
that might cause such differences include, but are not limited to, those
discussed in this “Risk Factors” section. Generally, forward-looking statements
include:




•
            Projections
      of our revenues, income, earnings per share, capital structure or other
      financial items




•
            Descriptions
      of our plans or objectives for future operations, products or
      services




•
            Forecasts
      of our future economic performance, interest rates, profit margins and our
      share of future markets




•
            Descriptions
      of assumptions underlying or relating to any of the
    foregoing.




We
may make forward-looking statements in this report and in other reports we file
with the SEC and in our press releases. Our management may make forward-looking
statements orally in a public forum to analysts, investors, the media and
others. Given such risks and uncertainties, readers of this report are cautioned
not to place undue reliance on forward-looking statements.




Risks
Related to Our Business, Technologies and Industry




Changes
in economic conditions could materially adversely affect us.




Our
business is affected by U.S. and worldwide economic conditions. Uncertainty
about current global economic conditions poses a risk as consumers and
businesses may continue to postpone spending in response to tighter credit,
unemployment, negative financial news and/or declines in income or asset values,
which could negatively affect demand for our products and services. For example,
as our Consumer Internet segment generates revenues through sales of online
advertising in various monetization formats such as CPL, CPM, CPC, CPA and flat
fees, reduced consumer and advertiser demand may negatively affect our revenues
or negatively impact our ability to grow our revenues. In the event of renewed
financial turmoil affecting the banking system and financial markets, there
could be a new or incremental tightening in the credit markets, low
liquidity, and volatility in fixed income, credit, currency, and equity
markets. Consequently, demand could be different from our current expectations
due to factors including negative changes in general business and economic
conditions and/or further tightening or deterioration in credit markets, either
of which could affect consumer confidence, customer acceptance of our and our
competitors’ products and changes in customer order patterns including order
cancellations which in turn could have a material adverse effect on our
financial condition and operating results.




Our
growth strategy includes acquisitions that entail significant execution,
integration and operational risks.




We have
made numerous acquisitions in the past and our future growth may depend, in
part, on acquisitions. In 2009, we completed 18 website-related acquisitions
across our seven primary verticals for a total aggregate purchase price of $19.9
million. We intend to continue making additional acquisitions in the future to
increase the scope of our business domestically and
internationally.




We may
experience operational and financial risks in connection with acquisitions. If
we are unable to identify suitable future acquisition opportunities, reach
agreement with such parties or obtain the financing necessary to make such
acquisitions, we could lose market share to competitors who are able to make
such acquisitions. This loss of market share could negatively impact our
business, revenues and future growth. Even if we are able to complete
acquisitions that we believe will be successful, we may be unable to achieve the
anticipated benefits of a particular acquisition, the anticipated benefits may
take longer to realize than expected, or we may incur greater costs than
expected in attempting to achieve anticipated benefits.




-12-


Although
we review the records of companies or businesses we are interested in acquiring,
even an in-depth review may not reveal existing or potential problems or permit
us to become familiar enough with a business to assess fully its capabilities
and deficiencies. Integration of acquired companies may disrupt or slow the
momentum of the activities of our business. As a result, if we fail to properly
evaluate, execute and integrate future acquisitions, our business and prospects
may be seriously harmed.




Significant
acquisition risks which could have an adverse effect on our business, prospects,
financial condition, operating results or cash flow, include:




•
            use
      of substantial portions of our available cash to pay all or a portion of
      the purchase prices of future
acquisitions;




•
            diversion
      of management time and potential business
  disruption;




•
            entry
      into new markets in which we have limited or no prior experience and in
      which competitors may have stronger market positions, which may result in
      errors or failures by us in the conception, structure or implementation of
      our strategies to take advantage of available opportunities in these new
      markets;




•
            failure
      to understand the needs and behaviors of the audience for a newly-acquired
      website or other product;




•
            unwillingness
      by consumers and advertisers to accept our current or future pricing
      models or our inability to implement pricing models that maximize our
      revenues;




•
            redundancy
      or overlap between existing products and services, on the one hand, and
      acquired products and services, on the other
  hand;




•
            failure
      of the market to accept the products and services of an acquired
      business;




•
            inability
      to maintain or enhance the key business relationships and the reputations
      of acquired businesses;




•
            dependence
      on unfamiliar affiliates and
partners;




•
            difficulty
      integrating various operations, technologies, products, policies and
      systems of acquired businesses;




•
            failure
      to improve our operation, infrastructure, financial and management
      controls, procedures and policies in step with our
  growth;




•
            potential
      loss of key employees from an acquired
business;




•
            failure
      to integrate, train, supervise and manage our expanding work force
      effectively;




•
            assuming
      liabilities, including unknown and contingent liabilities, of acquired
      businesses;




•
            becoming
      involved in acquisitions-related litigation;
and




•
            potential
      impairment of acquired assets.




In
addition, the issuance of equity or convertible debt securities to finance or
otherwise complete acquisitions may dilute the ownership of our stockholders.
Failure of our acquisition-based growth strategy to yield anticipated benefits
would likely harm our operating results. Foreign acquisitions would involve
risks other than those listed above, and we may not be able to address those
risks successfully, or at all, without incurring additional costs, delay and
operations difficulties.




Our
acquisitions may make it difficult to evaluate our financial
performance.




Our
strategy includes the continued addition of new websites to our Consumer
Internet segment platform. Upon launch or acquisition of a newly-acquired
website, we generally attempt to integrate it into our platform as quickly as
possible and begin to generate associated revenues. As a result of this
strategy, it may be difficult to evaluate our financial performance from period
to period.




-13-


Our
success depends upon the continued commercial use of the Internet, and
acceptance of online advertising as an alternative to offline
advertising.





Many
advertisers still have limited experience with online advertising and may
continue to devote significant portions of their advertising budgets to
traditional, offline advertising media. Accordingly, we continue to compete for
advertising dollars with traditional media, including print publications, in
addition to websites with higher levels of traffic. We believe that the
continued growth and acceptance of online advertising generally will depend on
its perceived effectiveness and the acceptance of related advertising models,
and the continued growth in commercial use of the Internet, among other factors.
Any lack of growth in the market for various online advertising models could
have an adverse effect on our business, financial condition and results of
operations.





If
any of our relationships with Internet search websites terminate, or if such
websites’ methodologies are modified, traffic to our websites and corresponding
consumer origination volumes could decline.




We depend
in part on various Internet search websites, such as Google, Bing and Yahoo!,
and other websites to direct a significant amount of traffic to our websites and
to generate customer referrals for our customer referral activities. Search
websites typically provide two types of search results, algorithmic and
purchased listings. Algorithmic listings cannot be purchased and, instead, are
determined and displayed solely by a set of formulas designed by search engine
companies. Other listings can be purchased and are displayed if particular word
searches are performed on a search engine. We rely primarily on algorithmic
search results to direct a substantial share of the visitors to our websites and
the advertiser customers we serve.




Our
ability to maintain the number of visitors directed to our websites by search
websites and other Internet websites is not entirely within our control. For
example, search websites frequently revise their algorithms in an attempt to
optimize their search result listings. Changes in the methodologies used by
search websites to display results could cause our websites to receive less
favorable placements, which could reduce the number of users who link to our
websites from these search websites. Some of our websites have experienced
fluctuations in search result rankings and we anticipate similar fluctuations in
the future. Internet search websites could decide content on our websites is
unacceptable or violates their corporate policies. Any reduction in the number
of users directed to our websites would negatively affect our ability to earn
revenue. If traffic on our websites declines, we may need to resort to more
costly sources to replace lost traffic, and such increased expense could
adversely affect our business and financial condition.




If
we are unable to continue to drive and increase visitors to our websites and
convert these visitors into users and customers cost-effectively, our business,
financial condition and results of operations could be adversely
affected.





We engage
in a variety of measures designed to attract traffic to our websites and convert
these visitors into repeat users and customers. How successful we are in these
efforts depends, in part, upon our continued ability to develop and introduce
new services and products that resonate with users and customers generally. We
may not be able to adapt quickly and/or cost effectively to frequent changes in
user and customer requirements, which can be difficult to predict. Any such
failure to do so could adversely affect user and customer experiences and reduce
traffic driven to our various websites, which would adversely affect our
business, financial condition and results of operations.





One of
the most cost-effective efforts we employ to attract and acquire new, and retain
existing, members and customers is commonly referred to as search engine
optimization, or SEO. SEO involves developing websites to rank well in search
engine results. Search engines frequently update and change the logic that
determines the placement and display of results of user searches. The failure to
successfully manage SEO efforts across our websites, including the timely
modification of SEO efforts from time to time in response to periodic changes in
search engine algorithms, search query trends and related efforts by providers
of search services designed to ensure the display of unique offerings in search
results, could result in a substantial decrease in traffic to our various
websites, which would result in substantial decreases in conversion rates and
repeat business, as well as increased costs if we were to replace free traffic
with paid traffic, any or all of which would adversely affect our business,
financial condition and results of operations.





Even if
we succeed in driving traffic to our websites, we may not be able to convert
this traffic or otherwise retain users, which requires us to continue to improve
the experience for users through the improvement of the development of content,
products and services responsive to user needs and preferences. Our failure to
do so could result in decreases in our user base and related advertising
revenue, which would have an adverse effect on our business, financial condition
and results of operations.








-14-


If
we fail to manage future growth effectively, we may not be able to create,
market and sell our products and services successfully.


We have
expanded our operations significantly since our inception and anticipate that
further significant expansion will be necessary. Our future operating results
depend to a large extent on our management’s ability to manage expansion and
growth successfully, including, but not limited to, hiring, training and
developing our technology and sales personnel to create and implement technology
enhancements, and generate revenue, controlling expenses, implementing and
enhancing infrastructure, systems and processes and addressing new markets. This
future growth, if it occurs, would place significant demands on our management,
infrastructure and other resources. A failure to manage our growth effectively
could materially and adversely affect our ability to market and sell our
products and services.




Modification
or termination of our relationships with Internet search websites and other
Internet websites could negatively affect our traffic and revenues.
  Our advertising contracts with online search engines and other Internet websites
are typically short-term. If one or more Internet search websites or other
Internet websites on which we rely for marketing modifies or terminates its
relationship with us, the amount of our website's traffic could decrease, and
our related revenues or margins could decline.


Due
to seasonal market fluctuations, investors may not be able to predict our annual
operating results based on a quarter-to-quarter comparison of our operating
results.




Our
quarterly financial results fluctuate because of seasonal trends in the usage of
the Internet and in the demand for the products and services offered by our
websites and our customers. Historically, Internet usage typically declines
during the summer and particular holiday periods. In contrast, with respect to
the automobile industry, vehicle purchasing in the United States is typically
stronger in the spring and summer months. Our automotive customer referral
volume usually declines later in the year as some consumers defer purchases in
anticipation of the model year change-over. Automotive sales and advertising
also fluctuate based in part on varying seasonal levels of vehicle inventory and
new model introductions. The travel industry experiences high usage during the
first two quarters of the year and lower usage during the remainder of the year,
and traffic to our travel websites fluctuates in response to such seasonal
trends. Consumer spending is typically highest in the last quarter of the year
and lower in the remainder of the year, and the traffic to our shopping websites
corresponds to these seasonal fluctuations. For our career job board websites,
the fourth quarter of the year typically demonstrates some weakness due to a
downturn in hiring during this period. Our health category websites do not
demonstrate significant seasonality; however, the fourth quarter lags slightly
due to the holiday season and physician schedules. Our money and business
websites typically demonstrate strength in the first two quarters as business
investment is strong but lags somewhat in the fourth quarter as a result of the
holiday season. Consequently, our operating results fluctuate and investors may
not be able to predict our annual operating results based on a
quarter-to-quarter comparison of our operating results due to the impact of
these seasonal trends.




Problems
in the functioning of our websites or cyber crime may harm our
operations.




Our
websites’ traffic has continued to increase substantially over time, and we seek
to increase further our user base. As a result, our Internet servers must
accommodate more traffic and spikes in demand from our websites in order to
support significant additional growth in traffic. Cyber crime is a large scale
threat that poses high risk to Internet businesses. The complexity and severity
of attacks is increasing over time. We have deployed cyber security systems and
procedures which we believe will reduce the risk from cyber security threats.
However, delays and service interruptions as a result of cyber attacks could
frustrate users and reduce website traffic, which could have an adverse effect
on our business and operations.




We
have a limited operating history in an emerging market sector and may not be
able to achieve financial or operational success.




Our
company was founded in October 1998, and we initiated our consumer websites by
launching CarsDirect.com in 1999. We became a public reporting company in
November 2007. We have a limited operating history in an emerging market sector
on which investors can base an evaluation of our business and future prospects.
We may not be able to achieve sustained financial or operational success, given
the risks, uncertainties, expenses, delays and difficulties in a
rapidly-evolving and highly-competitive market, some of which may be beyond our
control, including our ability to manage successfully any growth we may achieve
in the future and to integrate acquired website businesses, technologies or
services.




-15-


We
have incurred operating losses in the past and may be unable to sustain positive
cash flow or profitability in the future.




We
experienced significant operating losses in each quarter early in our operating
history although we have been profitable in recent years. We had stockholders’
equity of $353.3 million as of December 31, 2008 and $371.3 million as of
December 31, 2009, which included an accumulated net loss of $241.8 million
as of December 31, 2009. While we have experienced positive operating cash
flows since the fourth quarter of 2003 and achieved positive annual net income
since 2004, we may be unable, in the future, to sustain or increase cash flow
and profitability on a quarterly or annual basis. If revenues grow more slowly
than anticipated or if operating expenses exceed our expectations or cannot be
adjusted accordingly, our business, operating results and financial condition
will be adversely affected.




We
may not be able to adapt quickly enough to changing industry
standards.





Our
industry is highly competitive and subject to rapidly-evolving standards, and
frequent new service and product introductions and enhancements. The development
of new products and services in response to evolving industry standards requires
significant time and resource allocation and we may not be able to adapt rapidly
and/or cost-effectively enough to these changes. As a result, our inability to
do so could adversely affect our business, financial condition and results of
operations.





The
active adoption of new Internet or telecommunications technologies and devices
or other technological changes could require us to modify or adapt our services
or infrastructures. If our existing websites, services and proprietary
technologies are outdated, this could adversely affect our business, financial
condition and results of operations. For example, the number of people who
access the Internet through devices other than personal computers, including
mobile telephones, personal digital assistants, or PDAs, smart phones and
handheld computer devices, has increased dramatically in recent years. The lower
resolution, functionality and memory associated with alternative devices make
the use of our products and services through such devices more difficult and the
versions of our products and services developed for these devices may not be
compelling to users. If users of these devices do not widely adopt versions
developed for these devices of our products and services, our business could be
adversely affected.





We
generate most of our revenue from advertising, and the reduction in spending by
or loss of advertisers could seriously harm our business.





We
generated 69% of our revenues in 2008 and 66% of our revenues in 2009 from our
more than 48,000 advertisers. Our advertisers can generally terminate their
contracts with us at any time. Advertisers will not continue to do business with
us if their investment in advertising with us does not generate sales leads, and
ultimately customers, or if we do not deliver their advertisements in an
appropriate and effective manner. In addition, expenditures by advertisers tend
to be cyclical, reflecting overall economic conditions and budgeting and buying
patterns. If we are unable to remain competitive and provide value to our
advertisers, they may stop placing advertisements with us, which would
negatively harm our revenues and business.





If
we are unable to compete effectively, our business, revenues and future growth
may suffer.




The
market for online marketing and media services is highly competitive and we
expect competition to intensify in the future. This competition could make it
more difficult for us to sell our advertising products and services, and result
in increased pricing pressure, reduced profit margins, increased sales and
marketing expenses, decreased website traffic, and failure to increase, or the
loss of, market share, any of which would likely seriously harm our business,
revenues, financial condition and future growth. There can be no assurance that
we will be able to compete successfully against current or future
competitors.




We face
intense competition from a wide range of Internet and offline companies. Our
current principal competitors include:




•
            companies
      that provide specialized consumer information websites, particularly in
      the automotive, careers, health,  home-related, money and
      business, shopping, and travel and leisure
  categories;




•
            enthusiast
      websites in specific categories, including message boards, blogs and other
      enthusiast websites maintained by individuals and other Internet
      companies;




•
            horizontal
      websites, portals and search properties such as AOL, Ask.com, Google, Bing
      and Yahoo!;




-16-


•
            automotive
      manufacturer websites;




•
            traditional
      advertising channels, including television, radio, and print publications;
      and




•
            brick-and-mortar
      vendors who compete against our e-commerce services, including automobile
      dealers, travel agents and classified
  advertisements.




Our
Licensing segment competes with other software and system sources. vBulletin
Solutions, the developer of our vBulletin software, primarily competes with
commercial and open source community forum software, while principal competitors
of our Autodata Solutions division include internal technology departments,
advertising agencies and systems integrators such as IBM, Oracle and Capgemini,
and certain other commercial software developers.




Many of
our current and potential online and traditional store-based or print
publication-based competitors have longer operating histories, more industry
experience, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. These
current and potential competitors may be able to devote substantially greater
resources to Internet websites and systems development than we can, including
through acquisitions, investments and joint ventures. Our competitors may also
be able to secure products from vendors on more favorable terms, fulfill
customer orders more efficiently, adopt more aggressive pricing or devote more
resources to marketing and promotional campaigns. In addition, traditional
store-based and print publication-based retailers are able to offer customers
the experience to see and feel products in a manner that is not possible on the
Internet.




We
may not succeed in establishing our businesses internationally, which may limit
our future growth.




One
potential area of growth for us is in the international markets. Operating
internationally, where we have limited experience, exposes us to additional
risks and operating costs. We cannot be certain that we will be successful in
introducing or marketing our services abroad or that our services will gain
market acceptance or that growth in commercial use of the Internet
internationally will continue. There are risks inherent in conducting business
in international markets, including the need to localize our products and
services to foreign customers’ preferences and customs, difficulties in managing
operations due to language barriers, distance, staffing and cultural
differences, application of foreign laws and regulations to us, tariffs and
other trade barriers, fluctuations in currency exchange rates, establishing
management systems and infrastructures, reduced protection for intellectual
property rights in some countries, changes in foreign political and economic
conditions, and potentially adverse tax consequences. Our inability to expand
and market our products and services abroad may have a negative effect on our
business and future growth.




Certain
U.S. and foreign laws could subject us to claims or otherwise harm our
business.





We are
subject to a variety of laws in the U.S. and abroad that may subject us to
claims or other remedies. Our failure to comply with applicable laws may subject
us to additional liabilities, which could adversely affect our business,
financial condition and results of operations. Laws and regulations which are
particularly relevant to our business address:





•
            user
      privacy;




•
            freedom
      of expression;




•
            information
      security;




•
            pricing,
      fees and taxes;




•
            content
      and the distribution of content;




•
            intellectual
      property rights;




•
            characteristics
      and quality of products and
services;




•
            taxation;
      and




•
            online
      advertising and marketing, including email marketing and unsolicited
      commercial email.




-17-
 Many
applicable laws were adopted prior to the advent of the Internet and do not
contemplate or address the unique issues of the Internet. The laws that do
reference the Internet are being interpreted by the courts, but their
applicability and





Federal
and state legislation regulating email communications and Internet advertising,
such as privacy-related laws that restrict or prohibit unsolicited email
(commonly known as “spam”) may adversely affect our ability to market our
services to consumers in a cost-effective manner. Violation of such laws may
result in monetary fines or penalties or damage to our reputation. The CAN-SPAM
Act of 2003, or CAN-SPAM, imposes complex and often burdensome requirements in
connection with sending commercial email. Depending on how the law is
interpreted and applied, CAN-SPAM may impose significant costs and burdens on
our email marketing practices.




The Gramm-Leach-Bliley Act, places
limitations on the sharing of consumer financial information by financial
institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all
financial institutions offering financial products or services to retail
customers to provide such customers with the financial institution’s privacy
policy and provide such customers the opportunity to “opt out” of the sharing of
certain personal financial information with unaffiliated third
parties.




We receive, process and store large amounts of personal data of users of our
websites. Our privacy and data security policies govern the collection, use,
sharing, disclosure and protection of this data. The storing, sharing, use,
disclosure and protection of personal information and user data is subject to
federal, state and international privacy laws, the purpose of which is to
protect the privacy of personal information that is collected, processed and
transmitted in or from the governing jurisdiction. If requirements regarding the
manner in which certain personal information and other user data will need to be
processed and stored change significantly, our business may be may adversely
affected, impacting financial condition and results of operations. In addition,
we may be exposed to potential liabilities as a result of differing views on the
privacy of consumer and other user data we collect. Our failure or the failure
of various third party vendors and service providers, to comply with applicable
privacy policies or applicable laws and regulations, or any compromise of
security that results in the unauthorized release of personal information or
other user data could adversely affect our business, financial condition and
results of operations.




As nearly
all of our products and services are Internet based, the amount of data we store
for our users on our servers (including personal information) has increased. Any
systems failure or compromise of our security that results in the release of our
users’ data could seriously limit the adoption of our products and services as
well as harm our reputation and brands and, therefore, our business. We may also
need to expend significant resources to protect against security breaches. The
risk that these types of events could seriously harm our business is likely to
increase as we expand the number of Internet-based products and services we
offer as well as increase the number of countries where we operate.




Federal,
state and local tax authorities may alter tax treatment of companies engaged in
Internet commerce. New or revised tax regulations, whether domestic or
internationally, may subject us or our affiliates 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, particularly sales taxes, could negatively affect the
attractiveness of advertising and selling goods and services over the Internet
and increase our costs. These events, if they occur, could have an adverse
effect on our business and results of operations.





If
we are unable to protect our intellectual property and proprietary rights, our
competitive position could be harmed.




Our
ability to compete depends upon our proprietary systems and technology. Our
intellectual property rights, including patents, service marks, trademarks and
domain names, copyrights, trade secrets and similar intellectual property, are
critical to our success. We rely on a combination of laws and contractual
restrictions with employees, contractors, customers, suppliers, affiliates and
others to establish and protect these proprietary rights. Software codes,
informational databases and other components are integral to our products and
services. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our services or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
proprietary rights is difficult. There can be no assurance that the steps taken
by us will prevent misappropriation of our intellectual property, or that the
agreements we have entered into for that purpose will be enforceable. Effective
trademark, service mark, patent, copyright and trade secret protection may not
be available in every jurisdiction in which our products and services are made
available through our websites. In addition, our use of open source software in
our distributed software products could result in an obligation to disclose our
proprietary source code to third parties. Though we use commercially available
software tools to help avoid triggering the distribution obligations commonly
found in open source software products, these tools are not always reliable and
therefore, we cannot be certain that our software complies with the terms of all
relevant open source licenses. Misappropriation of our intellectual property may
deprive us of competitive advantages in the form of brand awareness or
user-friendly technological innovations.


-18-


Our
business may be harmed by third-party claims, including claims of intellectual
property infringement.





Our products and services may increasingly be subject to third-party claims of
intellectual property infringement as the number of our products, services and
competitors increases, as the functionalities of products and services in our
markets overlap, and as the patenting of software functionality becomes more
widespread. There can be no assurance that our internally-developed or acquired
products and services do not infringe or otherwise violate the intellectual
property rights of third parties.




From time to time, we have received letters from customers demanding indemnity
or otherwise reserving their right to indemnity with respect to patent
infringement lawsuits brought by third party patent holders. See, Part II, Item
8, Note 13, Commitments and Contingencies – Legal Contingencies, of this report.
Such claims for indemnity could cause us to invest considerable resources
defending these suits. In addition, we may be required to pay damages and
attorneys’ fees which could adversely affect our business. Furthermore, we
license some of our content and software from third parties and may therefore be
exposed to infringement actions if such parties do not possess the necessary
intellectual property rights. In addition, certain of our domain names for our
automotive enthusiast websites include trademarks or trade names of automotive
manufacturers, with which we currently have no formal licensing arrangements.
For example, we received letters from certain automotive manufacturers informing
us of their need to police the use of their trademarks and their willingness to
enter into licenses which would cover our ongoing use of the marks in certain of
our automotive enthusiast website domain names. We are currently in discussions
with those auto manufacturers regarding the terms of the licenses, although we
do not believe we are engaging in activities that infringe the manufacturers’
trademarks. We cannot guarantee that we will be able to continue to use such
manufacturers’ names in our domain names on favorable terms. The receipt of a
notice alleging infringement may require in some situations that a costly
opinion of counsel be obtained to prevent a successful claim of intentional
infringement


The fact
that we make products, services and content available to our customers through
the Internet as part of our business also creates the potential for third
parties to make other types of claims against us. We could face liability for
products or services sold over the Internet. In addition, we could be exposed to
liability relating to third-party information that may be accessible directly
through our websites, through links on our websites to other websites, or other
content or materials that members may post in chat rooms or bulletin boards.
Potential claims could, for example, be made for defamation, negligence,
personal injury, breach of contract, unfair competition, false advertising,
invasion of privacy or other legal theories based on the nature, content or
copying of these materials. In the past, plaintiffs have brought these types of
claims and sometimes successfully litigated them against online services, as
well as traditional print publications.




Regardless
of the merits, responding to any third-party claim can result in the expenditure
of significant time, costs and other resources in investigating and defending
against such a claim, costly litigation, diversion of the efforts and attention
of management and other employees, delays in releasing new or upgrading existing
services, or implementation of measures to reduce our exposure to liability,
which may limit the attractiveness of our products or services to consumers and
others. In the event of a successful claim against us for intellectual property
infringement, we may be required to pay significant monetary damages. If a
successful claim for intellectual property infringement were made against us and
we failed to develop or license a commercially-viable substitute technology, our
ability to provide then-existing products and services, or future products or
services, could be harmed. In addition, our insurance may not cover, or may not
adequately cover, all potential third-party claims to which we are exposed. Any
imposition of liability on us that is not covered by insurance, or is in excess
of our insurance coverage, could require use of our available cash, which could
adversely impact our business, operating results and financial
condition.




If
we are unable to acquire or maintain key domain names for our websites, our
ability to operate and grow our business may be impaired.




Our
website addresses, or domain names, are critical to our business. However, the
regulation of domain names is subject to change, and it may be difficult for us
to prevent third parties from registering or retaining domain names that are
similar to ours, that infringe our trademarks or that otherwise decrease the
value of our brands and other proprietary rights. Additionally, regulatory
bodies may establish additional generic or county-code top-level domains or
modify the requirements for holding domains. If we are unable to obtain or
maintain key domain names for the various areas of our business, our ability to
operate and grow our business may be impaired.




If
we fail to detect click-through or other fraud on advertisements, we could lose
our advertisers’ confidence, causing our business to suffer.




We are
exposed to the risk of fraudulent clicks on our advertisements by persons
seeking to increase the advertising fees paid to us. Click-through fraud occurs
when a person clicks on an advertisement displayed on our websites in order to
generate revenue to us and to increase the cost for the advertiser. Action fraud
occurs when forms on our websites are completed with false or fictitious
information with the intention of increasing the actions through which companies
are compensated. If we are unable to monitor and prevent these types of
fraudulent activity, we may have to issue retroactive refunds of amounts
previously paid to us if any such fraud is later detected. Such fraud could
cause advertisers to become dissatisfied with our advertising programs, which,
in turn, could lead to a loss of advertisers and revenue, and diminish our
reputation.





-19-




We
depend on key management, technical and marketing personnel for continued
success.




Our
success and future growth depend, to a significant degree, on the skills and
continued services of our management team, including Robert N. Brisco, our
President and Chief Executive Officer. Our ongoing success also depends on our
ability to identify, hire and retain skilled and qualified technical and
Internet marketing personnel in a highly competitive employment market. As we
develop and acquire new products and services, we will need to hire additional
employees. Our inability to attract and retain well-qualified managerial,
technical and Internet sales and marketing personnel may have a negative effect
on our business, operating results and financial condition.




The
terms of our Credit Facility may restrict our current and future operations,
which would adversely affect our ability to respond to changes in our business
and to manage our operations.





Our
Credit Facility with Silicon Valley Bank, further described in Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operation” of this
report,contains,
and any future indebtedness of ours would likely contain, a number of
restrictive covenants that impose significant operating and financial
restrictions on us. The restrictions primarily relate to our ability to incur
additional debt, pay dividends, create liens, make investments and acquisitions,
engage in sales of assets, enter into transactions with affiliates, make capital
expenditures, and transfer all or substantially all of our assets or enter into
merger or consolidation transactions.  The Credit Facility also
requires us to maintain certain financial ratios.





To date,
we have not drawn on the Credit Facility.  However, were we to draw on
the Credit Facility, a failure by us to comply with the covenants or financial
ratios contained in our Credit Facility could result in an event of default
under the facility, which could adversely affect our ability to respond to
changes in our business and manage our operations. In the event of any default
under our Credit Facility, the lenders under our Credit Facility would not be
required to lend any additional amounts to us. Our lenders also could elect to
declare all amounts outstanding to be due and payable and require us to apply
all of our available cash to repay these amounts.





Our
operations could be significantly hindered by the occurrence of a natural
disaster or other catastrophic event, including future terrorist attacks or acts
of war.




Our
corporate headquarters and operations, and secure hosting co-location facilities
are located in Southern California and are susceptible to “rolling blackouts,”
fire, floods, earthquake, telecommunications failures, break-ins, and other
natural disasters. The proximity of our offices in El Segundo, California, to
high-value terrorist targets, such as the Los Angeles International Airport,
could, in the event of war or a terrorist attack, result in damage to, or the
destruction of, such offices, as well as the permanent or temporary loss of key
personnel. Our disaster recovery plans are not designed to handle such
catastrophic events, and our insurance coverage may not adequately reimburse us
for any damages suffered as a result of a terrorist attack or act of
war.




Our
servers are susceptible to interruption from a number of factors, including
capacity constraints, power outages and damage from fire, earthquake, flood,
break-ins, sabotage, telecommunications breakdown and other uncontrollable
events. Our information technology platform is an integration of complex
technologies, consisting of proprietary technologies, commercially licensed
technologies and other sources. Although our systems are designed to minimize
downtime, we cannot expect that service levels will be maintainable during
periods of unpredictably high website traffic or all possible disaster
situations. Users of the Internet must also rely on online service providers. A
significant outage or interruption in a third-party system could severely
disrupt traffic to our websites, harming our business, operating results and
financial condition. Some of our systems are not fully redundant, and our
disaster recovery planning cannot account for all eventualities.




We
rely on a network of automotive manufacturers and dealerships to provide
essential data, the loss of which would negatively impact our business,
operating results and financial condition.




To
enhance our products and services in the automotive sector, we rely on our
Autodata Solutions division to provide content for our CarsDirect.com and
Autos.com websites, including prices, configuration data, competitive comparison
data and editorials. Our Autodata Solutions division compiles information
concerning the automotive industry in a timely fashion based on data that it
receives from an extensive network of automotive manufacturers and dealerships.
If our Autodata Solutions division were to lose some or all of those
relationships, it might be unable to obtain and compile this information as
effectively or at all. The resulting loss of relevant content for our automotive
websites would adversely affect the operation of those websites, negatively
impacting our business, operating results and financial condition.





-20-




Failure
to establish and maintain effective internal controls over financial reporting
could have a material adverse effect on our business, operating results and
stock price.





Maintaining
effective internal controls over financial reporting is necessary for us to
produce reliable financial reports and is important in helping to prevent
financial fraud. If we are unable to maintain adequate internal controls, our
business and operating results could be harmed. We are required to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the
related rules of the SEC, which require, among other things, our management to
assess annually the effectiveness of our internal control over financial
reporting and our independent registered public accounting firm to issue a
report on that assessment.  If we are unable to maintain proper and
effective internal controls, we may not be able to produce accurate financial
statements on a timely basis, which could adversely affect our ability to
operate our business and could result in regulatory action. If our management or
our independent registered public accounting firm were to conclude in their
reports that our internal control over financial reporting was not effective,
investors could lose confidence in our reported financial information, and the
trading price of our stock could be affected.





Risks
Related to Our Class A Common Stock




Our
ownership is heavily concentrated with executive officers, directors and
affiliates and may limit stockholders ability to influence corporate
matters.




We have a
dual-class capitalization structure, which substantially reduces the effect of
the votes of holders our Class A common stock and poses a significant risk
of dilution to such holders. Idealab Holdings, L.L.C., or Idealab, through its
ownership of our Class A common stock and exclusive ownership of our
Class B common stock, controls approximately 64.4% of the votes represented
by our Class A common stock and Class B common stock outstanding as of
December 31, 2009. Thus, Idealab is able to influence or control matters
requiring approval of our stockholders, including the election of directors and
the approval of mergers, acquisitions and other significant corporate
transactions. In addition, each share of our Class B common stock is
convertible at any time at the option of Idealab into one share of Class A
common stock, and each share of our Class B common stock transferred to a
holder unaffiliated with Idealab would be automatically converted into
Class A common stock upon transfer. All shares of Class B common stock
would be automatically converted into Class A common stock if Idealab,
together with certain affiliates, ceases to hold at least 15% of our outstanding
capital stock. Conversion of our Class B common stock into Class A
common stock would dilute stockholders of our Class A common stock in terms
of percentage ownership and voting power within the class of Class A common
stock, although the overall percentage ownership of each share of Class A
common stock in our company as a whole would remain unchanged and the overall
percentage voting power of each share of Class A common stock in our
company as a whole would increase. Our Chief Executive Officer controls
approximately 3.4% of the votes represented by our Class A and Class B common
stock and our executive officers and directors, as a group, control
approximately 70% of such votes. This concentration of ownership may have the
effect of delaying, preventing or deterring a change of control of our company,
could deprive stockholders of an opportunity to receive a premium for their
common stock as part of a sale of our company and might ultimately affect the
market price of our common stock.




Future
sales of shares of Class A common stock by existing stockholders could
cause our stock price to decline.




As of
December 31, 2009, we had 42,148,080 shares of Class A common stock and
3,025,000 shares of Class B common stock outstanding. Of these shares of our
common stock, only 27,255,907 shares of Class A common stock were freely
tradable without restriction in the public market.  At various times,
the following additional shares will be available for sale in the public
market:


·
              Up
      to 14,892,173 shares of Class A common stock, which are held by directors,
      executive officers and other affiliates, subject in some cases to various
      vesting arrangements and to volume and  other restrictions of
      Rule 144 and Rule 701 under the Securities Act of 1933, as
      amended;
  ·
              3,025,000
      shares of Class B common stock (which upon sale will automatically convert
      to shares of Class A common stock on a one-on-one basis), subject to
      volume and other restrictions under Rule 144 under the Securities Act;
      and
  ·
              2,380,242
      shares currently subject to outstanding options under our 1998
      Stock  Plan, 2000 Stock Plan and 2007 Equity Plan to the extent
      permitted by the provisions of various vesting agreements and subject in
      some cases to volume and other restrictions of Rule 144 and Rule 701 under
      the Securities Act.




-21-





Pursuant
to a lock-up agreement with the Company, Idealab agreed not sell, transfer, or
pledge its shares, subject to certain exceptions, through November 15, 2009. As
the lock up agreement has expired, up to an additional 5,716,677 shares of Class
A common stock are eligible for sale in the public market, subject to certain
volume and other restrictions pursuant to Rule 144 under the Securities Act.
With respect to these 5,716,677 shares and as additional 3,025,000 shares
of Class A common stock issuable upon conversion of shares of Class B common
stock, Idealab has certain demand and piggyback rights that expire in November
2011 to require us to register their shares with the SEC. If we register any of
these registrable shares of Class A common stock, stockholders would be able to
sell those shares freely in the public market.


Our
stock price has been volatile and may continue to fluctuate
significantly.
 
 The
trading price of our Class A common stock historically has been, and we expect
will continue to be, subject to fluctuations. These fluctuations may be due to
factors specific to us including those discussed in the risk factors in this
section as well as others not currently known to us or that we currently do not
believe are material, to changes in securities analysts' earnings estimates or
ratings, to our results or future financial guidance falling below our
expectations and analysts' and investors' expectations, to factors affecting the
Internet, publishing, media or automotive industries, or to national or
international economic conditions.  Stock markets, in general, have
experienced over the years, and continue to experience significant price and
volume fluctuations that have affected trading prices for companies such as ours
and that may be unrelated or disproportionate to the operating performance of
the affected companies. These broad market and industry fluctuations may
adversely affect the price of our stock, regardless of our operating
performance.


Provisions
in our certificate of incorporation and bylaws, and Delaware law may discourage,
delay or prevent a change of control of the Company or changes in our management
and, therefore, may adversely affect the trading price of our Class A
common stock.




Provisions
in our certificate of incorporation and bylaws may discourage, delay or prevent
a merger or acquisition involving us or changes in our management that our
stockholders may consider favorable. For example, these provisions:




•
            provide
      that our Board of Directors may elect a director to fill a vacancy,
      including vacancies created by the expansion of our Board of
      Directors;




•
            authorize
      our Board of Directors to issue “blank check” preferred stock, allowing
      our Board of Directors, without further stockholder approval, to attach
      special rights, including voting and dividend rights, to this preferred
      stock and thereby making it more difficult for a third party to acquire
      us;




•
            prohibit
      stockholder action by written consent following the date on which Idealab
      and certain of its affiliates collectively cease to hold and have the
      right to direct the vote of at least 15% of the shares of our outstanding
      capital stock, which means that, after such date, all stockholder actions
      must be taken at a meeting of our
stockholders;




•
            prohibit
      stockholders from calling a special meeting of our
      stockholders;




•
            restrict
      transfers of our stock to any person who would then own more than 5% of
      our stock or would increase the ownership of anyone owning more than 5% of
      our stock such that an ownership change would be deemed to have occurred
      under Section 382 of the Internal Revenue Code, unless such restriction is
      waived in advance by our Board of Directors;
and




•
            establish
      advance notice requirements for nominations of candidates for our Board of
      Directors or for proposing matters that can be acted upon by stockholders
      at a meeting of our stockholders.




Additionally,
we are subject to Section 203 of the Delaware General Corporation Law
which, subject to some exceptions, prohibits “business combinations” between a
publicly-held Delaware corporation and an “interested stockholder.” An
“interested stockholder” is generally defined as a stockholder who owns 15% or
more of a corporation’s outstanding voting stock, any stockholder associated or
affiliated with the corporation, who owns or within three years prior to the
determination of interested stockholder status did own 15% or more of the
corporation’s voting stock, or the affiliates or associates of any such
stockholder. Section 203 could have the effect of delaying, deferring or
preventing a change of control of our company that our Class A common
stockholders might consider to be in their best interests.




We
do not intend to pay dividends on our common stock.









-22-




ITEM
1B.    UNRESOLVED STAFF COMMENTS





Not applicable.




ITEM
2.    PROPERTIES





Our
corporate headquarters are located in El Segundo, California, where we occupy
approximately 54,000 square feet of office space under a lease that expires in
June 2014. These facilities comprise our headquarters, including our
administration, operations, technology, and sales and marketing departments.




We
lease facilities in London, Ontario, Canada, which include approximately 25,000
square feet, pursuant to four separate lease agreements with options to extend
the lease terms to 2017. These facilities are used by our Autodata Solutions
division for all operating functions. We also lease small amounts of space
(under 1,000 square feet) in several states in the U.S. for various operating
and regulatory purposes.




ITEM 3.    LEGAL
PROCEEDINGS




From time
to time, we may be subject to legal proceedings and claims arising in the
ordinary course of business.




On
August 8, 2008, Versata Software, Inc. (Versata Software) and Versata
Development Group, Inc. (Versata Development) filed suit against us and our
subsidiaries,  Autodata Solutions Company (Autodata) and Autodata
Solutions, Inc. (Autodata Solutions) in the United States District Court
for the Eastern District of Texas, Marshall Division, claiming that certain
software and related services we and our Autodata subsidiaries offer violate
Versata Development’s  U.S. Patent No. 7,130,821 entitled “Method and
Apparatus for Product Comparison” and its U.S. Patent No. 7,206,756
entitled “System and Method for Facilitating Commercial Transactions over a Data
Network,” breach of a settlement agreement entered into in 2001 related to a
previous lawsuit brought by the Versata entities, and tortious interference with
an existing contract and prospective contractual relations.  On
August 25, 2008, Versata Software and Versata Development filed an amended
complaint against us, Autodata and Autodata Solutions, asserting additional
claims that certain software and related services offered by the Company and its
Autodata subsidiaries violate Versata Development’s U.S. Patent
No. 5,825,651 entitled “Method and Apparatus for Maintaining and
Configuring Systems,” Versata Development’s  U.S. Patent No. 6,675,294
entitled “Method and Apparatus for Maintaining and Configuring Systems,” and
Versata Software’s  U.S. Patent No. 6,405,308 entitled “Method and
Apparatus for Maintaining and Configuring Systems” and seeking declaratory
judgment regarding the validity of the Versata entities’  revocation and
termination of licenses included in the 2001 settlement agreement.  Versata
Software and Versata Development seek unspecified damages, attorneys’ fees and
costs and permanent injunctions against the Company, Autodata and Autodata
Solutions.  In December 2008, we filed a Motion to Dismiss for lack of
personal jurisdiction, which was denied in August 2009. Discovery is
pending.





On August 12, 2009, the Company, Autodata and Autodata Solutions filed suit in
the District Court of Travis County, Texas, in which we assert unauthorized
disclosure, misappropriation and conversion of proprietary, trade secret and
confidential information imparted by us to Versata Software and Versata
Development in 1997 and 1998. We allege that Versata Software and Versata
Development disclosed such confidential information to the U.S. Patent &
Trademark Office in their applications for U.S. Patent No. 7,130,821 and U.S.
Patent No. 7,206,756, and claimed it as their own. Our petition seeks
declaratory relief to quiet title resulting from Versata Software and Versata
Development’s claimed ownership of the technology and confidential information
underlying the patents as well as unspecified damages, attorneys’ fees and
costs. In January 2010, Versata filed its Answer, which included among other
things, a plea for dismissal for lack of jurisdiction, which is
pending.





On August 12, 2009, Versata Software and Versata Development filed suit for
declaratory judgment against the Company, Autodata and Autodata Solutions, in
the United States District Court for the Western District of Texas, Austin
Division, alleging apprehension of a potential lawsuit by us against them for
their breach of a confidentiality agreement between the parties. Versata
voluntarily dismissed the suit without prejudice in January 2010.





We believe the remaining claims against us are without merit and intend to
vigorously defend the lawsuits, but we cannot predict the outcome of these
matters, and an adverse outcome could have a material impact on our financial
condition, results of operations or cash flows.  Even if we are successful
in defending the lawsuits, we may incur substantial costs and diversion of
management time and resources to defend the litigation. We are not able to
estimate a probable loss, if any.




-23-


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




None.


-24-


PART
II




ITEM
5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES






Our
Class A common stock has been quoted on the NASDAQ Global Select Market
under the symbol "INET" since November 16, 2007. Prior to that time, there
was no public market for our Class A common stock. As of February 26, 2010,
there were 526, and one stockholder of record of our Class A common
stock, and Class B common stock, respectively. This does not include the
number of persons whose stock is in nominee or "street name" accounts through
brokers.




The
closing price of our Class A common stock was $8.51 per share as reported
by NASDAQ on March 1, 2010.




The high
and low sales prices for our Class A common stock for each full quarterly period
within the two most recent fiscal years, and a partial fourth quarter of 2007
given our initial public offering on November 16, 2007, are indicated below, as
reported on NASDAQ:





First
              Quarter
            
            
            Second
              Quarter
            
            
            Third
              Quarter
            
            
            Fourth
              QuarterYear Ended
            December 31,
      2009High
            
            $
            6.00
            
            
            $
            7.24
            
            
            $
            8.00
            
            
            $
            8.91Low
            
            $
            4.50
            
            
            $
            5.50
            
            
            $
            6.84
            
            
            $
            6.75Year Ended
            December 31,
      2008High
            
            $
            9.44
            
            
            $
            7.92
            
            
            $
            7.13
            
            
            $
            6.98Low
            
            $
            5.84
            
            
            $
            5.72
            
            
            $
            5.37
            
            
            $
            4.43Year Ended
            December 31,
      2007High
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/A
            
            
            $
            8.87Low
            
            
            N/A
            
            
            
            N/A.
            
            
            
            N/A
            
            
            $
            6.44





Our
Class B common stock is neither listed nor publicly traded.




Dividend
Policy




We
have never paid or declared any cash dividends on our common stock. We currently
intend to retain earnings to finance the growth and development of our business
and therefore, do not expect to pay any cash dividends on our common stock in
the foreseeable future. Payment of future dividends will be at the discretion of
our Board of Directors and will depend on our financial condition, results of
operations, capital requirements, restrictions contained in current or future
financing instruments and other factors our Board of Directors deems relevant.




Unregistered
Sales of Equity Securities




The
following sets forth information regarding unregistered securities sold by us in
2009:  In June 2009, August 2009 and December 2009, we issued to
accredited investors a total of 217,642 shares of Class A common stock with
an aggregate fair market value ranging from $178,500 to $1.17 million, as
consideration in connection with three website-related
acquisitions.




The sale
of the above securities was deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2). The recipients of securities in
each such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with us, to information about us.





-25-


Issuer
Purchases of Equity Securities




On
February 28, 2009, 5,375 shares of Class A common stock valued at $4.79 per
share were withheld in connection with the payment of taxes on behalf of Lisa
Morita, our Chief Operating Officer, to meet tax withholding obligations arising
pursuant to the vesting of a portion of a restricted stock award granted on
February 29, 2008.




On August
29, 2009, 2,619 shares of Class A common stock valued at $7.41 per share were
withheld in connection with the payment of taxes on behalf of Scott A. Friedman,
our Chief Financial Officer, to meet tax withholding obligations arising
pursuant to the vesting of a portion of a restricted stock award granted on
August 29, 2008.





-26-


Performance
Graph





The
following graph shows the total stockholder return on an investment of $100 in
cash on January 1, 2009 of (i) our Class A common stock, (ii) the
NASDAQ Composite Index, and (iii) the AMEX Interactive Week Internet Index,
at the closing price on December 31, 2009. All values assume reinvestment of the
full amount of all dividends, if any. The stockholder return shown below is not
necessarily indicative of future performance, and we do not make or endorse any
predictions as to future stockholder returns.




This
performance graph shall not be deemed "filed" for purposes of Section 18 of
the Securities Exchange, or incorporated by reference into any filing of the
Company under the Securities Act, or the Exchange Act, except as shall be
expressly set forth by specific reference in such filing.









Cumulative
      Total ReturnJanuary
      1, 2009
            
            December
      31, 2009Internet
      Brands, Inc.
            
            $100
            
            $134.54Nasdaq
      Composite Index
            
            $100
            
            $143.89AMEX
      Interactive Week Internet Index
            
            $100
            
            $174.82







ITEM
6.    SELECTED FINANCIAL DATA




You should read the selected consolidated financial data set forth below in
conjunction with our consolidated financial statements, the notes to our
consolidated financial statements found in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operation," and
Item 8, “Financial
Statements and Supplementary Data” of this report.




The
consolidated statement of operations data and the consolidated statement of cash
flows data for each of the three years ended December 31, 2007, 2008 and
2009, as well as the consolidated balance sheet data as of December 31,
2008 and 2009, are derived from our audited consolidated financial statements
included elsewhere in this report. The consolidated balance sheet data as of
December 31, 2005 are derived from our audited financial statements not
included elsewhere in this report. Our historical results are not necessarily
indicative of results to be expected for future periods.




Year
      Ended December 31,2009
            
            2008
            
            2007
            
            2006 (1)
            
            2005(In
      thousands, except per share data)Consolidated
      Statement of Operations Data:Revenues
            $
            99,756
            
            $
            104,036
            
            $
            89,889
            
            $
            84,804
            
            $
            78,073Costs
      and operating expenses:Cost
      of revenues
            
            18,781
            
            
            23,952
            
            
            24,626
            
            
            20,310
            
            
            15,715Sales
      and marketing(2)
            
            19,109
            
            
            21,473
            
            
            21,026
            
            
            19,025
            
            
            21,081Technology
      (2)
            
            9,631
            
            
            8,683
            
            
            7,607
            
            
            6,516
            
            
            5,131General
      and administrative(2)
            
            15,411
            
            
            17,154
            
            
            23,745
            
            
            18,303
            
            
            22,394Depreciation
      and amortization
            
            16,590
            
            
            13,554
            
            
            8,030
            
            
            3,952
            
            
            2,417Total
      costs and operating expenses
            
            79,522
            
            
            84,816
            
            
            85,034
            
            
            68,106
            
            
            66,738Income
      from operations
            
            20,234
            
            
            19,220
            
            
            4,855
            
            
            16,698
            
            
            11,335Investment
      and other income
            
            (312
            )
            
            497
            
            
            6,033
            
            
            6,287
            
            
            3,648Income
      before income taxes
            
            19,922
            
            
            19,717
            
            
            10,888
            
            
            22,985
            
            
            14,983Provision
      (benefit) for income taxes
            
            7,534
            
            
            8,158
            
            
            10,577
            
            
            (66,306
            )
            
            1,569Net
      income
            
            12,388
            
            
            11,559
            
            
            311
            
            
            89,291
            
            
            13,414Less
      undistributed income attributable to preferredstockholders
            
            -
            
            
            -
            
            
            -
            
            
            (54,279
            )
            
            (8,298
            )Net
      income attributable to commonstockholders
            $
            12,388
            
            $
            11,559
            
            $
            311
            
            $
            35,012
            
            $
            5,116Net
      income attributable to common stockholders per common share - Class A and
      B:Basic
            $
            0.28
            
            $
            0.27
            
            $
            0.01
            
            $
            2.19
            
            $
            0.36Diluted
            $
            0.27
            
            $
            0.26
            
            $
            0.01
            
            $
            1.81
            
            $
            0.29Pro
      forma net income attributable to common stockholders per common
      share:Basic
            
            
            
            
            
            
            
            
            
            $
            2.19Diluted
            
            
            
            
            
            
            
            
            
            $
            2.03


(1)
            2006
      includes the effect of a prior period adjustment of $3.8 million to
      deferred tax assets and the benefit from income
    taxes.


(2)
Stock-based compensation expense is included in the line items above as follows:




Year
      Ended December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005(in
      thousands)Sales
      and marketing
            
            $
            410
            
            
            $
            292
            
            
            $
            1,208
            
            
            $
            667
            
            
            $
            659Technology
            
            
            207
            
            
            
            130
            
            
            
            302
            
            
            
            97
            
            
            
            94General
      and administrative
            
            
            2,660
            
            
            
            2,069
            
            
            
            13,685
            
            
            
            8,363
            
            
            
            11,817Total
            
            $
            3,277
            
            
            $
            2,491
            
            
            $
            15,195
            
            
            $
            9,127
            
            
            $
            12,570


-27-





Year
      Ended December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005(in
      thousands)Consolidated
      Balance Sheet Data:Cash
      and cash equivalents
            
            $
            38,408
            
            
            $
            43,648
            
            
            $
            31,780
            
            
            $
            43,661
            
            
            $
            52,416Investments,
      available for sale
            
            
            21,736
            
            
            
            13,723
            
            
            
            64,864
            
            
            
            107,423
            
            
            
            85,365Working
      capital
            
            
            72,327
            
            
            
            60,487
            
            
            
            100,468
            
            
            
            161,321
            
            
            
            134,477Total
      assets (3)
            
            
            391,943
            
            
            
            377,689
            
            
            
            359,652
            
            
            
            327,608
            
            
            
            228,786Total
      current liabilities
            
            
            20,629
            
            
            
            24,368
            
            
            
            22,884
            
            
            
            19,175
            
            
            
            19,636Total
      stockholders' equity (3)
            
            
            371,314
            
            
            
            353,321
            
            
            
            336,768
            
            
            
            308,433
            
            
            
            209,150





(3) For
the fiscal years 2008, 2007 and 2006, amounts have been revised corrected for a
$3.8 million prior period adjustment to reduce deferred tax asset and
retained earnings.




Year
      Ended December 31,2009
            
            2008
            
            2007
            
            2006
            
            2005(in
      thousands)Consolidated
      Statement of Cash Flows Data:Net
      cash provided by operating activities
            
            $36,090
            
            $33,773
            
            $36,048
            
            $31,341
            
            $29,236Depreciation
      and amortization
            
            16,590
            
            13,554
            
            8,030
            
            3,952
            
            2,417Acquisitions,
      net of cash acquired
            
            (24,221)
            
            (68,131)
            
            (102,790)
            
            (16,832)
            
            (21,765)





Year
      Ended December 31,2009
            
            2008
            
            2007
            
            2006
            
            2005Other
      Financial Data:
            
            (in
      thousands)Adjusted
      EBITDA(4)
            
            $40,101
            
            $35,265
            
            $28,080
            
            $29,777
            
            $26,322





(4) We
define Adjusted EBITDA as net income (loss) plus the provision (benefit) for
income taxes, depreciation, amortization of purchased intangible assets,
stock-based compensation, interest expense (income) and other income. Adjusted
EBITDA is not a measure of liquidity calculated in accordance with accounting
principles generally accepted in the U.S., or GAAP, and should be viewed as a
supplement to, not a substitute for, our results of operations presented on the
basis of GAAP. Adjusted EBITDA does not purport to represent cash flow provided
by, or used in, operating activities as defined by GAAP. Our statement of cash
flows presents our cash flow activity in accordance with GAAP. In addition,
Adjusted EBITDA is not necessarily comparable to similarly titled measures
reported by other companies.





We
believe Adjusted EBITDA is useful to an investor in evaluating our operating
performance for the following reasons:





•
Adjusted EBITDA is widely used by investors to measure a company's operating
performance without regard to items such as interest income, taxes, depreciation
and amortization, and stock-based compensation, which can vary substantially
from company to company depending upon accounting methods and book value of
assets, capital structure and the method by which assets were acquired; and





•
analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate
the overall operating performance of companies in our industry.





Our
management uses Adjusted EBITDA:





• as a
measure of operating performance, because it provides
information  related to the Company’s ability to provide cash flows
for acquisitions, capital expenditures and working capital requirements;





• for
planning purposes, including in the preparation of our internal annual operating
budget;





• to
allocate resources to enhance the financial performance of our business;





-28-


• to
evaluate the effectiveness of our operational strategies;





• in
communications with the Board of Directors, stockholders, analysts and investors
concerning our financial performance; and





• as a
factor in the evaluation of the performance of our management in determining
compensation.





A
reconciliation of Adjusted EBITDA to net income, the most directly comparable
GAAP measure, for each of the fiscal periods indicated, is as follows:




Year
      Ended December 31,2009
            
            
            2008
            
            
            2007
            
            
            2006
            
            
            
            2005(in
      thousands)Net
      income
            
            $
            12,388
            
            
            $
            11,559
            
            
            $
            311
            
            
            $
            89,291
            
            
            
            $
            13,414Provision
      (benefit) for income taxes
            
            
            7,534
            
            
            
            8,158
            
            
            
            10,577
            
            
            
            (66,306
            )
            (5
            )
            
            1,569Depreciation
      and amortization
            
            
            16,590
            
            
            
            13,554
            
            
            
            8,030
            
            
            
            3,952
            
            
            
            
            2,417Stock
      based compensation
            
            
            3,277
            
            
            
            2,491
            
            
            
            15,195
            
            
            
            9,127
            
            
            
            
            12,570Investment
      and other (income) expense
            
            
            312
            
            
            
            (497
            )
            
            
            (6,033
            )
            
            
            (6,287
            )
            
            
            
            (3,648
            )Adjusted
      EBITDA
            
            $
            40,101
            
            
            $
            35,265
            
            
            $
            28,080
            
            
            $
            29,777
            
            
            
            $
            26,322







(5)  As
of December 31, 2006, we concluded it was more likely than not that we will
realize certain deferred tax assets through expected future taxable profits. As
a result, we released a valuation allowance of approximately $82.7 million,
the majority of which was recognized as an income tax benefit. 2006 also
includes the effect of a prior period adjustment of $3.8 million to reduce
deferred tax assets and reduce the benefit for income
taxes.


-29-
 ITEM
7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION




As
used in this report, references to "we," "our," "the Company" or "Internet
Brands" refer to Internet Brands, Inc. and its consolidated subsidiaries
unless otherwise indicated. This discussion includes forward-looking statements
which are subject to certain risks and uncertainties as discussed in the
preceding Item 1A, “Risk
Factors”of this report.




The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes to those statements as included elsewhere in
this report. In addition to the historical financial information, the following
discussion and analysis contain forward-looking statements that involve risks,
uncertainties and assumptions. Our actual results and timing of selected events
may differ materially from those anticipated in these forward-looking statements
as a result of many factors, including those discussed under "Risk Factors,”
under Part I, Item 1A of this report (see "Cautionary Note Regarding
Forward-Looking Statements”) and elsewhere in this report. The Company assumes no
obligation to revise or update any forward-looking statements for any reason,
except as required by law.




Overview




We
are an Internet media company that owns, operates and grows branded websites in
categories marked by highly focused consumer involvement and strong advertising
spending. We believe that consumers seek knowledge from experts and fellow
visitors online to save time and money in their daily lives.  Our
vertical websites provide knowledge that is accessible and valuable to our
audiences and the advertisers that want to market to them.





Consumer Internet
Segment.  In our Consumer Internet segment, we have continued
to expand and diversify our vertical website categories to serve a wide range of
audiences and advertisers. Our network of websites is grouped into seven
vertical categories: automotive, careers, health, home, money and business,
shopping and travel and leisure. We operate 94 websites that received in excess
of 100,000 monthly unique visitors as of December 31, 2009, which we refer
to as our “principal websites.” Our number of principal websites has grown from
45 in December 2007, to over 80 in December 2008, to more than 90 in December
2009. More than 97% of our websites’ traffic is from non-paid sources. Our
international audiences accounted for approximately 25% of total monthly
visitors in December 2009. In 2009 we served a total of more than 48,000
advertisers on our websites, an increase of 20% over 2008.





Despite a
challenging online advertising market, in 2009 our Consumer Internet segment
revenues (excluding automotive CPL and CPA revenues) grew 21% from 2008, with
12% growth in websites we have owned for more than one year. In the same period,
the U.S. online advertising industry experienced a 3% decline (according to
MAGNA’s U.S. Advertising Revenue Forecast). Our online advertising revenues
growth was offset by a 39% year-over-year decline in automotive CPL and CPA
revenues resulting from the continued weakness in consumer demand for
automobiles in a challenging economic environment. We expect that our Consumer
Internet revenues (excluding automotive CPL and CPA revenues from automotive
dealers) will continue to increase in 2010 as we further grow and diversify our
organic traffic and revenue sources on existing websites and acquire additional
websites. We also expect to benefit from a return to overall growth in the U.S.
online advertising industry, which is projected to increase by 9% in 2010 over
2009 (according to MAGNA’s U.S. Advertising Revenue Forecast). While we believe
that our CPL and CPA revenues from automotive dealers stabilized in the fourth
quarter of 2009, we cannot predict whether the overall downward trend in
consumer automotive demand that started in the second half of 2006 will continue
to result in declines in these revenue sources in 2010.





Licensing
Segment.  In our Licensing segment, we license certain of our
Internet technology products and services to major companies and individual
website owners around the world.  Our Autodata Solutions division
supplies licensed technology and content services to the automotive industry,
serving most of the U.S., Japanese and European automotive
manufacturers.  We also own and operate vBulletin software supplies
products that are tailored to the growing market of specialized online
communities and include robust discussion forums and a fully-integrated content
management system.  We directly market our vBulletin products on the
Internet and have sold more than 140,000 licenses to date. Our Licensing Segment
revenues also continued to grow in 2009 as our Autodata Solutions division
entered into new multi-year contracts in the second half of 2009 and we launched
our vBulletin 4.0 Publishing Suite in the fourth quarter.





Our
goal is to grow the audiences, revenues and profitability of our Consumer
Internet and Licensing businesses through the deployment of our common operating
platform, by acquiring additional websites in our existing vertical categories
and by continuing to expand into new categories. Our proprietary technologies
and shared operating, sales and content creation resources are highly scalable
and allow us to rapidly and cost effectively create and deploy valuable
knowledge and technology improvements on our websites that gain audiences and
advertisers over time. Our targeted content includes a diverse range of
articles, guides, product comparisons, expert and user reviews, discussion
forums, photographs, directories, deals, discounts and coupons. We monetize
through various advertising models, including cost per click (CPC), cost per
lead (CPL), cost per action (CPA), cost per thousand impressions (CPM) and flat
fees.


-30-




We use
certain performance indicators that are key elements of our growth strategy in
order to manage our business and assess our operational
performance:





•     Online Traffic.  A
principal strategic element in expanding our Consumer Internet business is
increasing the size of audiences visiting our websites. We use measures of
online traffic to our portfolio of websites, such as page views and monthly
unique visitors, as key performance indicators.




·
            Unique
      visitors grew to an average of 50 million per month in the fourth quarter
      of 2009, a 22% increase from 41 million unique visitors per month in the
      fourth quarter of 2008.  Visitor calculations include websites
      acquired in the fourth quarter of 2009 on a pro forma basis.·
            Page
      views averaged 651 million per month in the fourth quarter of 2009, a 0.3
      % decrease from an average of 653 million monthly page views in the fourth
      quarter of 2008.  Page views and the ratio of page views to
      unique visitors modestly decreased year over year primarily as a result of
      new website features that combine elements from multiple pages to single
      pages.





•    
Acquisitions.  Acquisitions of vertically-focused websites have
been and will continue to be a material component of the expansion of our
Consumer Internet business. In 2009 we reduced our total capital investment in
acquisitions to $19.9 million, from $62.6 million in 2008.  We have
refined our acquisition strategy as we have accelerated the organic growth rates
of existing websites and rapidly integrated acquired websites onto our operating
platform.  We anticipate that we will continue to acquire websites and
related technologies in 2010 on a similar pace as 2009, subject to our
ability to identify assets that meet our growth objectives on favorable
terms.





•     Adjusted EBITDA.  As discussed in Item 6, "Selected Financial Data" of
this report, we employ Adjusted EBITDA for several purposes, including as a
measure of our operating performance. We use Adjusted EBITDA because it removes
the impact of items not directly resulting from our core operations, which
allows us to better assess whether the elements of our growth strategy --
increasing audience sizes, selling additional licenses and related
products, and adding and developing new websites -- are yielding positive
results.





·
            Adjusted
      EBITDA grew from $28.1 in 2007 to $35.3 million in 2008, a 26% increase,
      and to $40.1 million in 2009, a 14% increase from
  2008.





·
            Adjusted
      EBITDA as a percentage of revenue increased from 31.2% in 2007 to 33.9% in
      2008, an increase of 270 basis points, and to 40.2% in 2009, an increase
      of 630 basis points from 2008.





As
we have continued to grow and diversify our organic website traffic, revenues
and products, our overall EBITDA margins have also continued to grow, from 31.2%
in 2007, to 33.9% in 2008, to 40.2% in 2009. We expect this trend to continue in
2010 as we leverage our technology and operating platform to optimize revenue
yields.




Our
Revenues




We
derive our revenues from two segments: Consumer Internet and Licensing. In our
Consumer Internet segment, revenues are primarily derived from advertisers. In
our Licensing segment, revenues are derived from the licensing of data and
technology tools and services to automotive manufacturers, and proprietary
software for website communities.




Our total
revenues were $99.8 million in 2009 compared to $104.0 million in 2008. The key
factors influencing the year-over-year change were:




• the
addition of websites that we owned, operated and grew, which offered new
advertising opportunities to our existing advertisers and facilitated new
advertising relationships;




•
increased advertising sales on our websites as our Consumer Internet audiences
grew;




•
increased licensing revenues from our vBulletin Solutions division, which was
primarily a result of the launch of the new vBulletin 4.0 publishing software
during the fourth quarter of 2009; and offset by




in
2009.


-31-





Our
Consumer Internet revenues were $66.2 million for the year ended December 31,
2009 compared to $71.6 million for the year ended December 31,
2008.  Website advertising increased $7.9 million, or 21%, during the
year ended December 31, 2009 compared to the prior year. The increase was primarily
driven by growth from ourauto enthusiast, home-related, and careers
vertical websites. Organic
growth from websites owned more than one year contributed significantly to that
growth. Offsetting this growth, our CPA and CPL revenues from automotive dealers
declined $13.3 million, or 39%, during fiscal 2009 compared to 2008. Such
reduced dealer advertising spending is consistent with the industry-wide
downturn in the automotive sector. This industry has generally been in a
downward cycle that began in the second half of 2006 and significantly deepened
in the second half of 2008 and into 2009. We cannot predict how long this
negative trend will continue, or when it will end or reverse; consequently, our
prospects in this area cannot be predicted.




Our
Licensing revenues were $33.6 million for the year ended December 31, 2009
compared to $32.5 million for the year ended December 31, 2008.  The
increase in revenues was primarily a result of the launch of the new vBulletin
4.0 Publishing Suite during the fourth quarter of 2009.




Historically,
our revenues have come from clients located in the United States. Sales
denominated in non-U.S. currencies accounted for 15.4% of our revenues in 2009,
and 17.9% of our revenues in 2008. The sales revenues we currently receive in
non-U.S. currencies are generally denominated in Canadian dollars. We receive a
small portion of our revenues, which we believe to be an immaterial amount
compared to our total revenues, from additional sources outside the United
States through credit card and merchant account transactions. In these
transactions, payments in non-U.S. currencies are automatically converted to
U.S. dollars by credit card companies and other payment intermediaries.




Consumer Internet
Revenues




Our
Consumer Internet segment generates revenues through sales of online advertising
in various monetization formats such as cost per thousand impressions (CPM),
cost per click (CPC), cost per lead (CPL), cost per action (CPA) and flat fees.
Under the CPM format, advertisers pay a fee for displays of their graphical
advertisements, typically at an incremental rate per thousand displays or
"impressions." Under the CPC model, we earn revenues based on "click-throughs"
on text-based links displayed on our websites, which occur when a user clicks on
an advertiser's listing. We derive revenues on a CPC model through direct sales
to advertisers, as well as through various third-party advertising networks,
such as Google, Vibrant and Federated Media, for which we receive a negotiated
percentage of their advertising revenues. Under the CPL model, our advertiser
customers pay for leads generated through our websites and accepted by the
customer. Under the CPA format, we earn revenues based on a percentage
or negotiated amount ofa consumer transaction undertaken or
initiated through our websites. Revenues from flat-fee,
listings-based services are based on a customer's subscription to a
service.




We
vary our advertising formats based on consumer and advertiser preferences in a
particular category and our ability to optimize revenue yields. For example, we
sell display advertising directly to automotive manufacturers and home
improvement advertisers on a CPC or CPM basis, and consumer automotive and
automotive finance leads to automotive dealers on a CPL basis. We typically
invoice our advertisers for display advertisements and CPL products on a monthly
basis after we have run the advertisements or delivered the leads. Our contracts
with these advertisers are typically on a multiple-month basis and are
cancelable on 60 days or less notice. Revenue from our shopping sites is
typically generated on a CPA basis where we earn commissions as website users
buy products online. We also sell classified listings for annual flat fees to
thousands of summer camps, vacation rental property owners and managers, and bed
and breakfast owners. Advertisers typically pay flat fees by credit card, PayPal
or similar online payment service, utilizing online "self serve" tools provided
on our websites. Some of these flat fees are automatically renewed utilizing
payment information on file with us. Our policy is not to offer refunds for
mid-term cancellation of advertisements sold on a flat-fee basis. As consumer
and advertiser preferences continue to evolve, we expect that we will adjust our
revenue sources and mix on our websites to address those changing needs and
optimize our revenue yields.




Our
advertiser base is highly diversified across our Consumer Internet categories.
As of December 31, 2009, we had nearly 48,000 advertising customers in our
Consumer Internet segment. We also utilize a variety of advertising networks and
affiliate relationships to monetize our websites. As our website audiences
continue to grow and diversify among our consumer categories, we expect that our
sources of advertising revenues will likewise continue to grow and diversify.




Our
Consumer Internet segment revenues represented approximately 66% and 69% of our
total revenues in 2009 and 2008, respectively.




-32-
 Licensing
Revenues




We
license customized products and services and automotive vehicle and marketing
data to most major U.S., Japanese and European automotive manufacturers and
other online automotive service providers. Customers typically enter into
multi-year licensing and technology development agreements for these products
and services, which include market analytics, product planning, vehicle
configuration, management and order placement, in-dealership retail systems and
consumer-facing websites.




Through
vBulletin Solutions we also sell and license vBulletin Internet software to U.S.
and international website owners. vBulletin revenues are primarily derived from
software license purchases and leasing for a flat fee, as well as annual
maintenance fees for customer support and software updates. With the release of
vBulletin 4.0 Publishing Suite in the fourth quarter of 2009, leasing for a flat
fee and annual maintenance fees were eliminated.




During
the fourth of quarter of 2009, we launched the vBulletin 4.0 Publishing Suite.
The new product suite includes a new forum product, content management system,
blogging tools and more powerful administration features to help customers
manage their websites and grow vibrant
communities.




Our
Licensing segment revenues represented approximately 34% and 31% of our total
revenues in 2009 and 2008, respectively.




Expenses




The
largest component of our expenses is personnel. Personnel costs include salaries
and benefits for our employees, commissions for our sales staff and stock-based
compensation, which are categorized in our statements of operations based on
each employee's principal function (i.e., Sales and
Marketing, Technology or General and Administrative). Cost of revenues
represent expenses
that vary proportionately with revenues andincludes development costs,
including personnel cost, related to the licensing business, marketing costs
directly related to the fulfillment of specific customer advertising orders and
costs of hosting our websites. Sales and marketing expenses include both
personnel and online marketing costs.General and
administrative expenses include personnel, audit, tax and legal fees, insurance
and facilities costs.




Critical
Accounting Policies




Our
discussion and analysis of our financial condition and results of operations are
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the U.S., or GAAP.
The preparation of these financial statements requires us to make estimates,
assumptions and judgments that affect the amounts reported in our financial
statements and the accompanying notes. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ from these estimates. We
believe the following accounting policies to be the most critical to the
judgments and estimates used in the preparation of our consolidated financial
statements.




Revenue
Recognition




We
recognize revenue in accordance with Accounting Standards Codification (ASC)
605-10 (previously SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition). Revenue
is recognized only when the price is fixed or determinable, persuasive evidence
of an arrangement exists, the service is performed and collectibility of the
resulting receivable is reasonably assured. Our revenues are derived from our
Consumer Internet and Licensing segments.




Consumer
Internet




Consumer
Internet segment revenue is earned from online advertising sales on a cost per
impression (CPM), cost per click (CPC), cost per lead (CPL), cost per action
(CPA) or flat-fee basis.




·
            We
      earn CPM revenue from the display of graphical
      advertisements.  An impression is delivered when an
      advertisement appears on website pages viewed by
      users.  Revenue from graphical advertisement impressions is
      recognized based on the actual impressions delivered in the
      period.




-33-


·
            Revenue
      from the display of text-based links to the websites of our advertisers is
      recognized on a CPC basis, and search advertising is recognized as
      "click-throughs" occur.  A "click-through" occurs when a user
      clicks on an advertiser's link.




·
            Revenue
      from advertisers on a CPL basis is recognized in the period the leads are
      accepted by the dealer or mortgage lender, following the execution of a
      service agreement and commencement of services. Service agreements
      generally have a term of twelve months or
less.




·
            Under
      the CPA format, we earn revenues based on a percentage or negotiated
      amount of a consumer transaction undertaken or initiated through our
      websites. Revenue is recognized at the time of the
      transaction.




·
            Revenue
      from flat-fee, listings-based services is based on a customer's
      subscription to the service for up to twelve months and are recognized on
      a straight-line basis over the term of the
  subscription.





Licensing




We
enter into contractual arrangements with customers to develop customized
software and content products; revenue is earned from software licenses, content
syndication, maintenance fees and consulting services. Agreements with these
customers are typically for multi-year periods. For each arrangement, revenue is
recognized when both parties have signed an agreement, the fees to be paid by
the customer are fixed or determinable, collection of the fees is probable,
delivery of the product has occurred, and no other significant obligations on
our part remain. We do not offer a right of return on these products.




Software-related
revenue is accounted for in accordance with ASC 985-605
(previously Statement of Position (SOP) No. 97-2, Software Revenue
Recognition), and interpretations thereof.  Post-implementation
development and enhancement services are not sold separately; the revenue and
all related costs of these arrangements are deferred until the commencement of
the applicable license period. Revenue is recognized ratably over the term of
the license; deferred costs are amortized over the same period as the revenue is
recognized.




Fees for
stand-alone projects are fixed-bid and determined based on estimated effort and
client billing rates since we can reasonably estimate the required effort to
complete each project or each milestone within the project. Recognition of the revenue
and all related costs of these arrangements is deferred until delivery and
acceptance of the projects in accordance with the terms of the
contract.




During
the fourth quarter of 2009, we began selling and electronically delivering the
vBulletin 4.0 Publishing Suite. We recognize revenue from the sale of this
product when legal title transfers, which occurs when customers download the
product from the Internet.  In connection with the sale of
vBulletin 4.0, we provide customers with free email technical
support.  We do not defer the recognition of any vBulletin 4.0 revenue
as (i) historically, the majority of customers utilize their free email support
within the first month of owning the product, and (ii) the cost of providing
this free email support is insignificant.  We accrue the estimated
cost of providing this free email support upon delivery of the
product.




Business
Combinations




We
use the purchase method of accounting for business combinations and the results
of the acquired businesses are included in the income statement from the date of
acquisition. Historically, the purchase price included the direct costs of the
acquisition.  However, beginning in fiscal year 2009,
acquisition-related costs were expensed as incurred, in accordance with ASC 805 (previously
Financial Accounting Standards Board (FASB) issued revision to Statement of
Financial Accounting Standards (SFAS) No. 141,Business
Combinations). Under the purchase method
of accounting, we allocate the purchase price of acquired websites to the
identifiable tangible and intangible assets.Goodwill
represents the excess of consideration paid over the net identifiable business
assets acquired. Amounts allocated to intangible assets are amortized over their
estimated useful lives; no amounts are allocated to in-progress research and
development.  We have entered into earnout agreements which are
contingent on the acquired website business achieving agreed upon performance
milestones. Earnout payments are not based on the seller's on-going service to
the Company; when the seller provides services following the acquisitions, the
cost of the seller's services is recorded as compensation expense in the period
the services were performed. Historically, we have accounted for earnout
consideration as an addition to goodwill in the period
earned.  Beginning with fiscal year 2009 acquisitions, in accordance
with ASC 805, we estimated the net present value of expected earnout payments
and recorded such amount as an addition to goodwill and liability or equity, at
the time of closing of the acquisition. Subsequent changes are recorded on the
statement of operations as other income or expense in the period of
re-measurement. If earnout projections are recorded as equity, then no
subsequent re-measurement is required.




-34-




Goodwill,
Intangible Assets and the Impairment of Long-Lived Assets




We assess
the recoverability of the carrying value of long-lived assets. If circumstances
suggest that long-lived assets may be impaired, and a review indicates that the
carrying value will not be recoverable, the carrying value is reduced to its
estimated fair value. ASC 350 -20 (previously SFAS No. 142, Goodwill and Other Intangible
Assets), requires goodwill to be tested for impairment on an annual basis
and between annual tests in certain circumstances, and written down when
impaired. Our impairment review process compares the fair value of the reporting
unit in which the goodwill resides to its carrying value. We determined that our
reporting units are equivalent to our Consumer Internet and Licensing operating
segments for the purposes of completing our ASC 350-20 analysis. Goodwill is
assigned to the reporting unit that is expected to benefit from the anticipated
revenue and cash flows of the business combination.





We
utilize a two-step approach to test goodwill for impairment. The first step
determines the fair value of our reporting units using an Income Approach and a
Market Approach. Under the Income Approach, the fair value of a business unit is
based on the cash flows it can be expected to generate over its remaining life.
The estimated cash flows are converted to their present value equivalent using
an appropriate rate of return. The Market Approach utilizes a market comparable
method whereby similar publicly-traded companies are valued using Market Values
of Invested Capital, or MVIC, multiples (i.e., MVIC to Enterprise Value/EBITDA
ratio and MVIC to Price/Earnings ratio) and then, these MVIC multiples are
applied to a company’s operating results to arrive at an estimate of value. If
the fair values exceed the carrying values, goodwill is not impaired. The second
step, if necessary, measures the amount of any impairment by applying fair
value-based tests to individual assets and liabilities. If the reporting unit's
carrying value exceeds its fair value, the company compares the fair value of
the goodwill with the carrying value of the goodwill. If the carrying value of
goodwill for the company exceeds the fair value of that goodwill, an impairment
loss is recognized in the amount equal to that excess.


We perform this analysis during December of each fiscal year. Our
December 31, 2009 consolidated balance sheet includes $223.9 million of
goodwill, $20.1 million of intangible assets, net, and $15.1 million of
fixed assets, net. Our management updated its analysis of goodwill, intangible
assets and long-lived assets as of December 31, 2009, and determined that no
impairment had occurred.




Intangible
assets are carried at cost less accumulated amortization. Intangible assets are
amortized on a straight-line basis over the expected useful lives of the assets,
between three and nine years, with the exception of customer relationships,
which are amortized using a double-declining balance method, to more accurately
reflect the pattern in which the economic benefit is consumed. Other intangible
assets are reviewed for impairment in accordance with ASC 360-10-35 (previously
SFAS 144, Accounting for
Impairment or Disposal of Long-Lived Assets), whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be
recoverable. Measurement of any impairment loss for long-lived assets and
identifiable intangible assets that management expects to hold and use is based
on the amount of the carrying value that exceeds the fair value of the
asset.




We have
acquired many website businesses in each of the last few years and our current
business strategy includes continuing to make additional acquisitions in the
future. These acquisitions will continue to give rise to goodwill and other
intangible assets which will need to be assessed for impairment from time to
time.




Provision
for Income Taxes and Deferred Income Tax Assets




Deferred
income tax assets and liabilities are periodically computed for temporary
differences between the financial statement and income tax bases of assets and
liabilities. Such deferred income tax asset and liability computations are based
on enacted tax laws and rates applicable to years in which the differences are
expected to reverse. A valuation allowance is established, when necessary, to
reduce deferred income tax assets to the amount expected to be realized.
Significant judgment is necessary in determining valuation allowances necessary
for our deferred tax assets. Accounting standards require us to establish a
valuation allowance for that portion of our deferred tax assets for which it is
more likely than not that we will not receive a future benefit. In making this
judgment, all available evidence is considered, some of which, particularly
estimates of future profitability and income tax rates, are subjective in
nature. Estimates of deferred income taxes are based on management's assessment
of actual future taxes to be paid on items reflected in the consolidated
financial statements, giving consideration to both timing and the probability of
realization. Actual income taxes could vary from these estimates due to future
changes in income tax law, state income tax apportionment or the outcome of any
review of our tax returns by the Internal Revenue Service, as well as actual
operating results that vary significantly from anticipated
results.  Our effective income tax provision (benefit) rates for the
years ended December 31, 2009, 2008 and 2007 were 37.8%, 41.4% and 97.1%,
respectively.


-35-


During
2009, we discovered an incorrect recording of our deferred tax assets in 2006
relating to the inclusion of certain stock-based compensation charges that were
built up over the previous five years. As a result, we overstated an adjustment
to our deferred tax assets in 2006 by approximately $3.8 million.
 In accordance
with ASC 250(previously SFAS No.154, Accounting Changes and Error
Correction), SAB No. 99,Materiality,and SAB
No. 108,Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements,weevaluated the materiality
of the error from a qualitative and quantitative perspective and concluded that
the error was not material to any prior periods.For financial reporting
purposes, this error has been accounted for as a prior period adjustment in
accordance with ASC 250.  The Company has charged the Accumulated Deficit
account in Shareholders’ Equity in the amount of $3.8 million and reduced the
deferred tax asset balance in the amount of $3.8 million as of December 31, 2006
to appropriately reflect the prior period
adjustment.





Seasonality




The
automotive industry in which we provide Consumer Internet products and services
has historically experienced seasonality with relativelystronger sales
in the second and third quarters and weaker sales in the fourth quarter. In
2008, we entered the online shopping category which has historically experienced
relatively stronger sales in the fourth quarter.




Results
of Operations




The
following table sets forth our consolidated statements of operation data as a
percentage of total revenues for each of the periods indicated:




Year
      Ended December 31,2009
            
            
            2008
            
            
            2007Revenues
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %Costs
      and operating expenses:Cost
      of revenues
            
            
            18.8
            
            
            
            23.0
            
            
            
            27.4Sales
      and marketing
            
            
            19.2
            
            
            
            20.6
            
            
            
            23.4Technology
      and product development
            
            
            9.7
            
            
            
            8.3
            
            
            
            8.5General
      and administrative
            
            
            15.4
            
            
            
            16.5
            
            
            
            26.4Depreciation
      and amortization of intangibles
            
            
            16.6
            
            
            
            13.0
            
            
            
            8.9Total
      operating expenses
            
            
            79.7
            
            
            
            81.5
            
            
            
            94.6Operating
      income
            
            
            20.3
            
            
            
            18.5
            
            
            
            5.4Investment
      and other (expense) income
            
            
            (0.3
            )
            
            
            0.5
            
            
            
            6.7Income
      from operations before income taxes
            
            
            20.0
            
            
            
            19.0
            
            
            
            12.1Provision
      for income taxes
            
            
            7.6
            
            
            
            7.9
            
            
            
            11.8Net
      income
            
            
            12.4
            
            
            
            11.1
            
            
            
            0.3




Years
Ended December 31, 2009, 2008 and 2007





Total Revenues (in thousands, except for percentages)




Increase
      (decrease)
            
            Increase
      (decrease)Year
      Ended December 31,
            
            2009
      vs. 2008
            
            2008
      vs. 20072009
            
            2008
            
            2007
            
            $
            
            %
            
            $
            
            %Revenues:Consumer
      Internet
            
            
            $66,154
            
            $71,564
            
            $63,738
            
            $(5,410)
            
            (7.6)%
            
            $7,826
            
            12.3%Licensing
            
            
            
            33,602
            
            32,472
            
            26,151
            
            1,130
            
            3.5%
            
            6,321
            
            24.2%Total
      revenues
            
            
            $99,756
            
            $104,036
            
            $89,889
            
            $(4,280)
            
            (4.1)%
            
            $14,147
            
            15.7%




-36-


2009 vs.
2008




Our
revenues for the year ended December 31, 2009, decreased $4.3 million, or 4%,
from our revenues for the year ended December 31, 2008.




Consumer Internet
advertising revenues from our websites increased $7.9 million, or 21%, on a
year-over-year basis, with organic growth from websites owned more than one year
contributing significantly to this growth.The increase was
primarily driven by growth from our auto enthusiast,
home-related, and careerswebsites. However, this increase was
offset by a $13.3 million, or 39%, decrease in our CPA and CPL revenues from
automotive dealers (referred to as automotive e-commerce revenues), due to
continued weakness in consumer demand for automobiles resulting from the
distressed economy and credit crisis. Such reduced dealer
advertising spending is consistent with the industry-wide downturn in the
automotive sector that began in the second half of
2006.Consequently, our overall Consumer Internet revenues
decreased $5.4 million, or 8%, during 2009 compared to 2008.




For the
year ended December 31, 2009, Licensing revenues increased $1.1 million, or 4%,
over 2008 which was primarily attributable to the fourth quarter launch
of our vBulletin 4.0 Publishing Suite.





2008 vs.
2007




Our revenues in the
Consumer Internet segment increased $7.8 million, or 12%, during the year
ended December 31, 2008 compared to the prior year. This increase was
primarily a result of a $14.4 million increase in advertising revenues
from our auto
enthusiast, careers, home-related, shopping, and travel and leisurewebsites.  Partially offsetting this growth and primarily reflecting
the continuing weakness in the automotive industry, our automotive e-commerce
revenues declined $6.6 million during fiscal 2008 compared to the same period in
the prior year.




During
the year ended December 31, 2008 our licensing revenues increased
$6.3 million, or 24%, over 2007.Autodata Solutions division
revenues increased $4.1 million, the majority of which was derived from
additional product sales to existing Autodata Solutions division’s
clients. Revenues also increased $2.2 million as a result of the
acquisition of Jelsoft in June 2007.




Cost of Revenues


Increase
      (decrease)
            
            Increase
      (decrease)Year
      Ended December 31,
            
            2009
      vs. 2008
            
            2008
      vs. 20072009
            
            2008
            
            2007
            
            $
            
            %
            
            $
            
            %Cost
      of revenues
            
            
            $18,781
            
            $23,952
            
            $24,626
            
            $(5,171)
            
            (21.6)%
            
            $(674)
            
            (2.7)%Percentage
      of revenues
            
            18.8%
            
            23.0%
            
            27.4%






2009 vs.
2008




Our cost of revenues decreased $5.2 million, or 22%, for the year ended December
31, 2009, compared to the year ended December 31, 2008. The lower cost of
revenues was driven by reduced variable marketing
costs associated with our automotive CPL business in our Consumer Internet
segment, consistent with the decline in revenues from our automotive
e-commerce business.




2008 vs.
2007




Our total
cost of revenues decreased $0.7 million, or 3%, for the year ended
December 31, 2008 compared to the year ended December 31, 2007. The
decrease was primarily due to a $0.8 million reduction in variable marketing
costs associated with our automotive CPL business in our Consumer Internet
segment, partially offset by a $0.1 million increase in website management,
hosting and maintenance costs from our growing number of websites.




-37-


Sales
and Marketing Expenses


Increase
      (decrease)
            
            Increase
      (decrease)Year
      Ended December 31,
            
            2009
      vs. 2008
            
            2008
      vs. 20072009
            
            2008
            
            2007
            
            $
            
            %
            
            $
            
            %Sales
      and marketing
            
            
            19,109
            
            $21,473
            
            $21,026
            
            $(2,364)
            
            (11.0)%
            
            $447
            
            2.1%Percentage
      of revenues
            
            19.2%
            
            20.6%
            
            23.4%




2009 vs.
2008




Sales and
marketing expenses declined $2.4 million, or 11%, for the year ended December
31, 2009, compared to the year ended December 31, 2008.  The decline
is the result of reductions in headcount and headcount-related costs in our
automotive e-commerce business.




2008 vs.
2007




Sales and
marketing expenses increased $0.4 million, or 2%, for the year ended
December 31, 2008 over the prior year period; excluding the effect of the
decline in the stock-based compensation expense, sales and marketing expenses
increased $1.4 million, or 7%, for the year ended December 31, 2008 over
the prior year. The increase was primarily due to additional
headcount costs to maintain our growing number of
websites.




Technology




Increase
      (decrease)
            
            Increase
      (decrease)Year
      Ended December 31,
            
            2009
      vs. 2008
            
            2008
      vs. 20072009
            
            2008
            
            2007
            
            $
            
            %
            
            $
            
            %Technology
      and product development
            
            9,631
            
            $8,683
            
            $7,607
            
            $948
            
            10.9%
            
            $1,076
            
            14.1%Percentage
      of revenues
            
            9.7%
            
            8.3%
            
            8.5%




2009 vs.
2008




Technology
expenses increased $0.9 million, or 11%, for the year ended December 31, 2009,
compared to the year ended December 31, 2008.  The increase was due to
additional headcount and support costs to further develop, grow and maintain our
websites and from the acquisition of additional websites in 2009.




2008 vs.
2007




Technology
expenses increased $1.1 million, or 14%, for the year ended December 31,
2008 over the prior year period.   The increase was primarily
due to additional
support costs to maintain our growing number of
websites.




General
and Administrative Expenses


Increase
      (decrease)
            
            Increase
      (decrease)Year
      Ended December 31,
            
            2009
      vs. 2008
            
            2008
      vs. 20072009
            
            2008
            
            2007
            
            $
            
            %
            
            $
            
            %General
      and administrative
            
            15,411
            
            $17,154
            
            $23,745
            
            $(1,743)
            
            (10.2)%
            
            $(6,591)
            
            (27.8)%Percentage
      of revenues
            
            15.4%
            
            16.5%
            
            26.4%




2009 vs.
2008




General
and administrative expenses decreased $1.7 million, or 10%, for the year ended
December 31, 2009, compared to the year ended December 31, 2008. The decline is
due to a $1.5 million reduction in bad debt expense resulting from strong
collection efforts and reduced days sales outstanding, as well as a $0.2 million
decrease in headcount related expenses.




-38-


2008 vs.
2007




General
and administrative expenses declined $6.6 million, or 28%, for the year ended
December 31, 2008 over the prior year period; excluding the effect of the
decline in the stock-based compensation expense, general and administrative
expenses increased $5.0 million, or 50% for the year ended December 31,
2008 over the prior year.  Key factors causing this increase included a
$1.3 million increase in bad debt expense, primarily a result of the
recessionary macro-economic environment, $1.6 million of increased legal, audit
and professional fees and insurance related to our becoming a public company,
and $2.2 million of additional headcount and other administrative costs
resulting from our growing number of websites.




Depreciation
and Amortization Expenses of Intangibles




Increase
      (decrease)
            
            Increase
      (decrease)Year
      Ended December 31,
            
            2009
      vs. 2008
            
            2008
      vs. 20072009
            
            2008
            
            2007
            
            $
            
            %
            
            $
            
            %Depreciation
      and amortization of intangibles
            
            16,590
            
            $13,554
            
            $8,030
            
            $3,036
            
            22.4%
            
            $5,524
            
            68.8%Percentage
      of revenues
            
            16.6%
            
            13.0%
            
            8.9%




Depreciation
and amortization expenses increased $3.0 million, or 22%, for the year
ended December 31, 2009 compared to the year ended December 31, 2008,
and $5.5 million, or 69%, for the year ended December 31, 2008 compared to
the year ended December 31, 2007. These changes were a result of increased
value of long-lived intangible assets acquired over the course of the two years,
as well as additional capitalized software costs.




Investment
and Other Income




Increase
      (decrease)
            
            Increase
      (decrease)Year
      Ended December 31,
            
            2009
      vs. 2008
            
            2008
      vs. 20072009
            
            2008
            
            2007
            
            $
            
            %
            
            $
            
            %Investment
      and other income
            
            (312)
            
            $497
            
            $6,033
            
            $(809)
            
            (162.8)%
            
            $(5,536)
            
            (91.8)%Percentage
      of revenues
            
            -0.3%
            
            0.5%
            
            6.7%




2009 vs.
2008




Investment
and other income declined $0.8 million for the year ended December 31, 2009,
over the year ended December 31, 2008, primarily reflecting a $0.4 million
impairment charge related to one of our investments and decreased interest
income. Lower interest rates on our investment portfolio are due to the current
economic environment and our short-term investment horizon.




2008 vs.
2007




Investment
and other income declined $5.5 million, for the year ended December 31,
2008 over the prior year, primarily reflecting decreased investment income of
$3.9 million as we maintained lower average cash and investment balances due to
our acquisitions during the past 12 months. Additionally, we incurred losses
from foreign currency transactions of $1.2 million and impairment charges of
$0.4 million related to one of our investments.




Provision for Income
Taxes




Increase
      (decrease)
            
            Increase
      (decrease)Year
      Ended December 31,
            
            2009
      vs. 2008
            
            2008
      vs. 20072009
            
            2008
            
            2007
            
            $
            
            %
            
            $
            
            %Provision
      for income taxes
            
            7,534
            
            $8,158
            
            $10,577
            
            $(624)
            
            (7.6)%
            
            $(2,419)
            
            (22.9)%Percentage
      of revenues
            
            7.6%
            
            7.8%
            
            11.8%




The 2009
income tax provision reflects the application of our standard federal and state
income tax rates to our pre-tax income, net of stock-based compensation expense,
which represents the primary permanent book-to-tax difference, for the year
ended December 31, 2009.  The reduction in the effective tax rate
in 2009, as compared to 2008, was primarily attributable to the result of a
Research and Development, or R&D, credit study that was completed in the
fourth quarter of 2009. Based on the study, we determined that the Company had
additional federal and state R&D credits of $0.9 million available for the
tax years 2000 through 2008.


-39-




The 2008
and 2007 income tax provision reflects the application of our standard federal
and state income tax rates to our pre-tax income, net of stock-based
compensation expense, which represents the primary permanent book-to-tax
difference, for the year ended December 31, 2008 and December 31, 2007,
respectively.




Segment
Reporting




The
following table presents summarized information by segment (in thousands):




Year
      Ended December 31,2009
            
            2008
            
            2007Consumer
      InternetRevenues
            
            $66,154
            
            $71,564
            
            $63,738Investment
      and other income
            
            971
            
            805
            
            6,441Depreciation
      and amortization
            
            13,564
            
            10,729
            
            6,743Segment
      pre-tax income
            
            12,500
            
            13,012
            
            5,508Provision
      for income tax
            
            5,993
            
            6,640
            
            9,643Stock-based
      compensation
            
            3,277
            
            2,491
            
            15,195Segment
      assets
            
            350,985
            
            340,294
            
            324,451LicensingRevenues
            
            33,602
            
            32,472
            
            26,151Investment
      and other income (loss)
            
            (1,283)
            
            (308)
            
            (408)Depreciation
      and amortization
            
            3,026
            
            2,825
            
            1,287Segment
      pre-tax income
            
            7,422
            
            6,705
            
            5,380Provision
      for income tax
            
            1,541
            
            1,518
            
            934Stock-based
      compensation
            
            -
            
            -
            
            -Segment
      assets
            
            40,958
            
            37,395
            
            35,201TotalRevenues
            
            99,756
            
            104,036
            
            89,889Investment
      and other income (loss)
            
            (312)
            
            497
            
            6,033Depreciation
      and amortization
            
            16,590
            
            13,554
            
            8,030Pre-tax
      income
            
            19,922
            
            19,717
            
            10,888Provision
      for income tax
            
            7,534
            
            8,158
            
            10,577Stock-based
      compensation
            
            3,277
            
            2,491
            
            15,195Total assets
            
            391,943
            
            377,689
            
            359,652




2008 and
2007 asset totals include the effect of a $3.8 million prior period adjustment
to correct deferred tax assets.




Liquidity
and Capital Resources




We
have financed our operations primarily through cash provided by our operating
activities, through the private sales of our Series A, B, C, and D
convertible preferred stock and our Class A and Class B common stock,
and net proceeds from our initial public offering of our Class A common
stock. At December 31, 2009, we had $60.1 million in cash, cash
equivalents and available-for-sale investments; these investments are comprised
of government and debt securities.




-40-


Our
principal sources of liquidity are cash, cash equivalents and available-for-sale
investments, as well as the cash flow that we generate from our operations. We
believe that our existing cash, cash equivalents, available-for-sale investments
and cash generated from operations will be sufficient to satisfy our currently
anticipated cash requirements through at least the next twelve months. Our
liquidity could be negatively affected by a decrease in demand for our products
and services. In addition, we intend to make acquisitions, which may require us
to raise additional capital through future debt financings or equity offerings
to the extent necessary to fund such acquisitions.




On
October 7, 2008, we entered into an agreement with Silicon Valley Bank that
entitles us to borrow up to a $35 million revolving line of credit under a four
year term.  The interest to be paid on the used portion of the credit
facility will be based upon LIBOR or the prime rate plus a spread based on the
ratio of debt to adjusted earnings before interest, taxes, depreciation and
amortization. In addition, the obligations under the agreement are secured by a
lien on substantially all of the assets of the Company.  At December
31, 2009, we have no outstanding debt under this revolving line of
credit.




Operating
Activities





We generated $36.1 million of net cash from operating activities for the
year ended December 31, 2009 compared to $33.8 million and
$36.0 million for the years ended December 31, 2007 and 2006,
respectively. The significant components of cash flows from operating activities
during the year ended December 31, 2009 were a net income of $12.4 million
which is net of $3.3 million of non-cash stock-based compensation expense,
$16.6 million in non-cash depreciation and amortization expense, and a
reduction of $6.5 million in our deferred income tax assets reflecting tax on
our pre-tax income.  During this same period, we experienced a $2.3
million decrease in the amounts collected from customers in advance of when we
recognized revenue.




The
significant components of cash flows from operating activities during the year
ended December 31, 2008 were a net income of $11.6 million which is net of
$2.5 million of non-cash stock-based compensation expense,
$13.6 million in non-cash depreciation and amortization expense, and a
reduction of $5.6 million in our deferred income tax assets reflecting tax
on our pre-tax income.  During this same period, we experienced a
$463,000 decrease in the amounts collected from customers in advance of when we
recognize revenue.




The
significant components of cash flows from operating activities during the year
ended December 31, 2007 were a net income of $311,000 which is net of
$15.2 million of non-cash stock-based compensation expense,
$8.0 million in non-cash depreciation and amortization expense and a
reduction of $11.3 million in our deferred income tax assets reflecting tax
on our pre-tax income. We increased by $707,000 the amounts we collected from
customers in advance of when we recognize revenues.




Investing
Activities




Cash used
in investing activities during the year ended December 31,
2009  totaled $42.1 million and was primarily attributable to
acquisitions, net of cash acquired and liabilities assumed of
$24.2 million, $9.9 million invested in property and equipment and
capitalized website development costs, and $8.0 million of net purchases
of  available-for-sale investments. Cash used in investing activities
during the year ended December 31, 2008 totaled $24.9 million and was
primarily attributable to acquisitions, net of cash acquired and liabilities
assumed, of $68.1 million and $8.1 million invested in property and
equipment and capitalized website development costs, offset by net proceeds of
available-for-sale investments. Cash used in investing activities during the
year ended December 31, 2007 totaled $63.9 million and was primarily
attributable to acquisitions, net of cash acquired and liabilities assumed, of
$102.8 million and $4.4 million invested in property and equipment and
capitalized website development costs, offset by net proceeds of
available-for-sale investments.




Investments
available for sale include government and corporate debt securities.




Financing
Activities




Cash
provided by financing activities during the year ended December 31, 2009
totaled $202,000. Cash provided by financing activities during the year ended
December 31, 2008 totaled $1.3 million and was primarily due to
issuance of Class A common stock, as well as proceeds from stock options
exercised. Cash provided by financing activities during the years ended
December 31, 2007 totaled $14.1 million and was primarily due to the
proceeds of the initial public offering of our Class A common stock, net of
expenses, and stock options exercised, including cash received from the
repayment of stockholder notes.






-41-
 
 
 Aquisitions Activities


During 2009, we acquired 18 website businesses in our Consumer Internet segment
for an aggregate purchase price of $19.9 million net of cash acquired and
liabilities assumed, including subsequent purchase price adjustments and
earn-out adjustments. During 2008, we acquired 29 website businesses for an
aggregate purchase price of $62.6 million net of cash acquired and liabilities
assumed, including subsequent purchase price adjustments and earn-out
adjustments.





We have
entered into earnout agreements as part of the consideration for certain
acquisitions.  We account for earnout consideration in accordance with
ASC 805 (previously SFAS No.141R, Business Combinations), as an
addition to goodwill and accrued expenses at the present value of all
anticipated future earnouts at the acquisition date for acquisitions occurring
in fiscal years beginning after December 15, 2008.  Earnouts occurring
from acquisitions prior to December 31, 2008 are accounted for under
EITF 95-8, Accounting for
Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a
Purchase Combination, as an addition to compensation expense or goodwill
in the period earned. For 2009, we paid earnouts totaling $3.7 million and
anticipate that the most probable earnout amounts to be paid in 2010 to be $2.6
million.





We cannot
reasonably estimate maximum earnout payments as a significant number of
agreements do not contain maximum payout clauses. Earnouts related to each
website business are contingent upon achievement of agreed upon performance
milestones such as future website traffic, page views, revenue growth and
operating income.  A significant portion of earnout payments is
triggered upon achieving significant revenue and operating income milestones and
is specifically designed such that the additional cash flow outweighs the
liquidity impact of the earnout payments. As a result, we do not believe that
future earnout payments will have a significant impact on our liquidity and cash
position.




Contractual
Obligations




Contractual
obligations represent future cash commitments and liabilities under agreements
with third parties, and exclude contingent liabilities for which we cannot
reasonably predict future payment. The following table represents our
contractual obligations as of December 31, 2009 (in
thousands):




Less
      than
              
              
              
              More
      thanTotal
              1
      year
              1-3
      years
              3-5
      years
              5
      yearsOperating
      Leases
              $  6,296
              1,429
              4,151
              
              716
              
              -Capital
      Leases
              438
              173
              265
              
              -
              
              -less:
      interest expense
              (18)
              (18)$  6,716
              1,584
              4,416
              
              716
              
              -





In our
normal course of business, we have agreed to certain indemnities, commitments
and guarantees under which we may be required to make payments in relation to
certain transactions. Those indemnities include intellectual property
indemnities to our customers in connection with the sale of products and the
licensing of technology, indemnities for liabilities associated with the
infringement of third parties' technology by our products and technology, and
indemnities to our directors and officers to the maximum extent permitted under
the laws of the State of Delaware, where we incorporated. The duration of these
indemnities, commitments and guarantees varies and, in certain cases, is
indefinite. The majority of these indemnities, commitments and guarantees do not
provide for any limitation of the maximum potential future payments that we
could be obligated to make. As a result, we have not recorded any liability for
these indemnities, commitments and guarantees in the accompanying balance
sheets. We do, however, accrue for losses for any known contingent liability,
including those that may arise from indemnification provisions, when future
payment is probable.





On October 15, 2009, we entered into a Second Amendment to Office Lease, or
Lease Amendment, with Kilroy Realty, L.P., to amend our June 2004 Office Lease.
The Lease Amendment extends for a period of four years, from July 1, 2010 to
June 30, 2014, our lease of approximately 54,000 square feet of office space in
El Segundo, California. Under the terms of the Lease Amendment, the total
aggregate base rent for the facilities for the period from July 1, 2010 through
June 30, 2014, is approximately $5.4 million. The Lease Amendment also
provides an option to further renew the lease for two additional years on
substantially the same terms, a tenant improvement allowance, and certain
expansion rights, among other provisions.




Off-Balance
Sheet Arrangements




As
of December 31, 2009, we did not have off-balance sheet
arrangements.




-42-


Recent
Accounting Pronouncements




Effective
July 1, 2009, we adopted the Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC or Codification) and the Hierarchy of
Generally Accepted Accounting Principles under ASC Topic 105. This standard
establishes only two levels of U.S. generally accepted accounting principles, or
GAAP: authoritative and nonauthoritative. This FASB Codification became the
source of authoritative, non-governmental GAAP, except for rules and
interpretive releases of the SEC, which are sources of authoritative GAAP for
SEC registrants. All other non-grandfathered, non-SEC accounting literature not
included in the Codification became non-authoritative. We began using the new
guidelines and numbering system prescribed by the Codification when referring to
GAAP, and references to specific accounting authority within the ASC are
referred to by their respective Topic number. As the Codification was not
intended to change or alter existing GAAP, it did not have a material impact on
our financial statements.




In June
2009, the FASB issued ASC 855 (previously SFAS No. 165, Subsequent Events), which
establishes general standards of accounting for and disclosures of events that
occur after the balance sheet date, but before the financial statements are
issued or available to be issued. It is effective for interim and annual periods
ending after June 15, 2009. There was no material impact upon the adoption of
this standard on our consolidated financial statements. We have considered
subsequent events up to March 2, 2010 in preparing the consolidated financial
statements appearing elsewhere in this Form 10-K.





In
October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, which
amends ASC Topic 605,Revenue
Recognition, to require companies to allocate revenue in multiple-element
arrangements based on an element’s estimated selling price if vendor-specific or
other third-party evidence of value is not available. ASU 2009-13 is effective
beginning January 1, 2011, and earlier application is permitted. We are
currently evaluating both the timing and the impact of the pending adoption of
the ASU on our consolidated financial statements.





In
October 2009, the FASB issued ASU 2009-14, which amends ASC Topic 985-605, Software-Revenue Recognition,
to exclude from its requirements (a) non-software components of tangible
products and (b) software components of tangible products that are sold,
licensed, or leased with tangible products when the software components and
non-software components of the tangible product function together to deliver the
tangible product's essential functionality. ASU 2009-14 will be effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, and early adoption will be
permitted. We are currently in the process of determining the effect, if any,
the adoption of ASU 2009-14 will have on our consolidated financial
statements.


-43-


ITEM
7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




Foreign Exchange Risk




We
provide our licensing products and services to customers in the United States,
Canada and the United Kingdom. Sales are denominated in the respective local
currency, primarily in U.S. dollars, and to a lesser extent, Canadian dollars
and British pounds sterling. With regard to our foreign currency transactions,
we do not use derivative instruments to minimize risks associated with
fluctuations in foreign currency exchange rates.




Our
exposure to fluctuations in foreign currency exchange rates also arises from the
net working capital denominated in the functional currency of our foreign
subsidiaries. When re-measured and translated into U.S. dollars, these net
assets may have an impact on our operating results depending upon fluctuations
in foreign currency exchange rates. The financial statements
of our non-U.S. subsidiaries are translated into U.S. dollars using current
exchange rates, with gains or losses included in the cumulative translation
adjustment account, which is a component of stockholders’ equity.For the
year ended December 31, 2009, the net working capital denominated in the
functional currency of our foreign subsidiaries was less than 3% of our
consolidated net working capital. For the year ended December 31, 2009, our
total realized and unrealized gains due to fluctuations in foreign currencies,
primarily Canadian dollars and British pounds sterling, was less than 1% of our
revenue. As exchange rates fluctuate, these foreign exchange results may vary
and adversely or favorably impact our operating results. However, in light of
the above, we believe that an unfavorable fluctuation of 10% in foreign currency
rates would not have a material impact on our financial statements.




For the nine months ended
September 30, 2008, we recognized foreign exchange gains and losses on
the statement of operations for intercompany balances that were denominated in
currencies other than the reporting currency.  In the fourth quarter of
2008, we determined that intercompany balances between the Company and its
subsidiaries would not be settled in the foreseeable future; as a result, the
foreign exchange gains and losses were recorded as part of the cumulative
translation adjustment on the balance sheet.




Interest Rate Risk




As of
December 31, 2009, we had cash and cash equivalents of $38.4 million, which
consisted primarily of cash and U.S. government debt securities with original
maturities of 90 days or less from the date of purchase. We also had marketable
securities of $21.7 million, which consisted primarily of highly-liquid
government securities with original maturities of more than 90 days but less
than two years from the date of purchase and are available for use in current
operations. Marketable securities that are available for use in current
operations are classified as current assets in the accompanying consolidated
balance sheets, regardless of the remaining time to maturity.





The primary objective of our investment activities is to preserve principal
while maximizing income without significantly increasing risk. Fixed rate securities may
be adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected when interest rates fall.To minimize this risk, we intend to maintain our portfolio of
highly-liquid cash equivalents and marketable securities in a variety of
instruments, including U.S. government securities, money market funds and
high-quality debt securities. We do not use financial instruments for trading or
other speculative purposes, nor do we use leveraged financial instruments. Our
investment policy limits investments to certain types of securities issued by
institutions with investment-grade credit ratings and places restrictions on
maturities and concentration by type and issue.





-44-


ITEM
8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




Index
      to Audited Consolidated Financial Statements
            PageReport of Independent Registered
      Public Accounting Firm
            
            46Consolidated
      Financial StatementsConsolidated Balance
      Sheets
            
            47Consolidated Statements of
      Operations
            
            48Consolidated Statements of
      Stockholders' Equity
            
            49Consolidated Statements of Cash
      Flows
            
            51Consolidated Statements of
      Comprehensive Income (Loss)
            
            52Notes to Consolidated Financial
      Statements
            
            53












-45-







Report of Independent Registered
Public Accounting Firm




Board of
Directors and Stockholders


Internet
Brands, Inc.


El
Segundo, California





We have
audited the accompanying consolidated balance sheets of Internet Brands, Inc. as
of December 31, 2009 and 2008 and the related consolidated statements of
operations and comprehensive income (loss), stockholders’ equity, and cash flows
for each of the three years in the period ended December 31,
2009.  These financial statements are the responsibility of the
Company’s management.  Our responsibility is to express an opinion on
these financial statements based on our audits.
  We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States).  Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Internet Brands, Inc. at
December 31, 2009 and 2008, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2009, in conformity with
accounting principles generally accepted in the United States of
America.
  We also have
audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Internet Brands, Inc.’s internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control – Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 2, 2010 expressed an
unqualified opinion thereon.


/s/ BDO
SEIDMAN, LLP






Los
Angeles, California











-46-


INTERNET
      BRANDS, INC.CONSOLIDATED
      BALANCE SHEETS(in
      thousands, except share and per share amounts)December 31,2009
            
            
            2008ASSETSCurrent
      assetsCash
      and cash equivalents
            
            $
            38,408
            
            
            $
            43,648Investments,
      available for sale
            
            
            21,736
            
            
            
            13,723Accounts
      receivable, less allowances for doubtful accounts of $618 and $1,513 at
      December 31, 2009 and 2008, respectively
            
            
            15,416
            
            
            
            16,353Deferred
      income taxes
            
            
            16,184
            
            
            
            9,832Prepaid
      expenses and other current assets
            
            
            1,212
            
            
            
            1,299Total
      current assets
            
            
            92,956
            
            
            
            84,855Property
      and equipment, net
            
            
            15,125
            
            
            
            11,460Goodwill
            
            
            223,925
            
            
            
            203,806Intangible
      assets, net
            
            
            20,080
            
            
            
            24,556Deferred
      income taxes
            
            
            39,255
            
            
            
            52,245Other
      assets
            
            
            602
            
            
            
            767Total
      assets
            
            $
            391,943
            
            
            $
            377,689LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable and accrued expenses
            
            $
            13,957
            
            
            $
            17,043Deferred
      revenue
            
            
            6,414
            
            
            
            7,325Other
      liabilities
            
            
            258
            
            
            
            -Total
      current liabilities
            
            
            20,629
            
            
            
            24,368Commitments
      and Contingencies (Note 13)Stockholders’
      equityCommon
      stock, Class A, $.001 par value; 125,000,000 sharesauthorized
      and 42,148,080 and 40,946,826 issued and outstandingat
      December 31, 2009 and 2008, respectively
            
            
            42
            
            
            
            41Common
      stock, Class B, $.001 par value; 6,050,000 authorizedand
      3,025,000 shares issued and outstanding at December 31,2009
      and 2008, respectively
            
            
            3
            
            
            
            3Additional
      paid-in capital
            
            
            612,528
            
            
            
            607,434Accumulated
      deficit
            
            
            (241,806
            )
            
            
            (254,194
            )Accumulated
      other comprehensive income
            
            
            547
            
            
            
            37Total
      stockholders’ equity
            
            
            371,314
            
            
            
            353,321Total
      liabilities and stockholders’ equity
            
            $
            391,943
            
            
            $
            377,689




See
accompanying notes to consolidated financial statements.







-47-




INTERNET
      BRANDS, INC.CONSOLIDATED
      STATEMENTS OF OPERATIONS(in
      thousands, except share and per share amounts)Year
      Ended December 31,2009
            
            2008
            
            2007RevenuesConsumer
      Internet
            
            $66,154
            
            $71,564
            
            $63,738Licensing
            
            33,602
            
            32,472
            
            26,151Total
      revenues
            
            99,756
            
            104,036
            
            89,889Costs
      and operating expensesCost
      of revenues (exclusive of
      depreciation and amortization)
            
            18,781
            
            23,952
            
            24,626Sales
      and marketing (1)
            
            19,109
            
            21,473
            
            21,026Technology
      (1)
            
            9,631
            
            8,683
            
            7,607General
      and administrative(1)
            
            15,411
            
            17,154
            
            23,745Depreciation
      and amortization of intangibles
            
            16,590
            
            13,554
            
            8,030Total
      costs and operating expenses
            
            79,522
            
            84,816
            
            85,034Income
      from operations
            
            $20,234
            
            $19,220
            
            $4,855Investment
      and other (expense) income
            
            (312)
            
            497
            
            6,033Income
      before income taxes
            
            19,922
            
            19,717
            
            10,888Provision
      for income taxes
            
            7,534
            
            8,158
            
            10,577Net
      income
            
            12,388
            
            11,559
            
            311Basic
      net income per share - Class A
            
            $0.28
            
            $0.27
            
            $0.01Diluted
      net income per share - Class A
            
            $0.27
            
            $0.26
            
            $0.01Basic
      net income per share - Class B
            
            $0.28
            
            $0.27
            
            $0.01Diluted
      net income per share - Class B
            
            $0.27
            
            $0.26
            
            $0.01Class
      A weighted average number of shares - Basic
            
            40,488,476
            
            40,003,230
            
            36,697,233Class
      A weighted average number of shares - Diluted
            
            46,069,649
            
            45,011,503
            
            41,691,104Class
      B weighted average number of shares - Basic and Diluted
            
            3,025,000
            
            3,025,000
            
            3,025,000Stock-based
      compensation expense by function (1)Sales
      and marketing
            
            $410
            
            $292
            
            $1,208Technology
            
            207
            
            130
            
            302General
      and administrative
            
            2,660
            
            2,069
            
            13,685




See
accompanying notes to consolidated financial statements.







-48-





INTERNET
BRANDS, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


YEARS
ENDED DECEMBER 31, 2009, 2008 and 2007


(in
thousands, except share amounts)




Series A-F
            
            Class A
            
            Class B
            
            Class CPreferred
      Stock
            Common
      Stock
            Common
      Stock
            Common
      StockShares
            
            Amount
            
            Shares
            
            Amount
            
            Shares
            
            Amount
            
            Shares
            
            AmountBalance
      at December 31, 2006  - as previously
    reported
            
            22,420,232
            
            $271,757
            
            10,330,692
            
            $10
            
            3,025,000
            
            3
            
            $98,252
            
            $-Prior
      period adjustment- correction of deferred tax asset
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Balance
      at December 31, 2006  - as adjusted
            
            22,420,232
            
            271,757
            
            10,330,692
            
            10
            
            3,025,000
            
            3
            
            98,252
            
            -Exercise
      of stock options
            
            -
            
            -
            
            339,003
            
            1
            
            -
            
            -
            
            5,840
            
            -Rescissions
      of options exercised with notes receivable
            
            -
            
            -
            
            (302,741)
            
            (1)
            
            -
            
            -
            
            -
            
            -Repurchase
      of stock from former employee
            
            -
            
            -
            
            (58,835)
            
            -
            
            -
            
            -
            
            -
            
            -Collections
      on notes receivable
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Exercise
      of warrant
            
            -
            
            -
            
            1,042,985
            
            1
            
            -
            
            -
            
            -
            
            -Stock-based
      compensation under ASC 718
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Option
      liability
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Conversion
      upon IPO
            
            (22,420,232)
            
            (271,757)
            
            26,089,913
            
            27
            
            -
            
            -
            
            (104,092)
            
            -Company
      shares sold through IPO
            
            -
            
            -
            
            2,350,115
            
            2
            
            -
            
            -
            
            -
            
            -IPO
      related costs
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Adoption
      of FIN 48
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Restricted
      stock grant
            
            -
            
            -
            
            386,702
            
            -
            
            -
            
            -
            
            -
            
            -Comprehensive
      loss:Net
      income
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Other
      comprehensive loss
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Balance
      at December 31, 2007 - as adjusted
            -
            $
            -
            
            40,177,834
            $
            40
            
            3,025,000
            $
            3
            
            -
            $
            -Exercise
      of stock options
            
            -
            
            -
            
            337,615
            
            -
            
            -
            
            -
            
            -
            
            -Rescissions
      of options exercised with notes receivable
            
            -
            
            -
            
            (2,371)
            
            
            
            -
            
            -
            
            -
            
            -Repurchase
      of stock from former employee
            
            -
            
            -
            
            (12,500)
            
            -
            
            -
            
            -
            
            -
            
            -Stock
      surrendered to pay taxes
            
            -
            
            -
            
            (30,626)
            
            -
            
            -
            
            -
            
            -
            
            -Stock
      issued for acquisition
            
            -
            
            -
            
            125,000
            
            -
            
            -
            
            -
            
            -
            
            -Retirement
      of stocks returned
            
            -
            
            -
            
            (11,702)
            
            -
            
            -
            
            -
            
            -
            
            -Stock-based
      compensation under ASC 718
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Option
      liability
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -IPO
      related costs
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Restricted
      stock grants
            
            -
            
            -
            
            432,253
            
            1
            
            -
            
            -
            
            -
            
            -Restricted
      stock cancellations
            
            -
            
            -
            
            (68,677)
            
            -
            
            -
            
            -
            
            -
            
            -Tax
      benefit from shortfall on restricted stocks
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Comprehensive
      income:Net
      income
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Other
      comprehensive income
            
            -
            
            -
            
            -
            
            -
            -
            -
            
            -
            
            -
            
            -Balance
      at December 31, 2008 - as adjusted
            -
            $
            -
            
            40,946,826
            $
            41
            
            3,025,000
            
            3
            
            -
            $
            -Exercise
      of stock options
            
            -
            
            -
            
            260,008
            
            -
            
            -
            
            -
            
            -
            
            -Restricted
      stocks to pay taxes
            
            -
            
            -
            
            (7,994)
            
            -
            
            -
            
            -
            
            -
            
            -Stock
      issued for acquisition
            
            -
            
            -
            
            217,642
            
            -
            
            -
            
            -
            
            -
            
            -Stock-based
      compensation under ASC 718
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Option
      liability
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Restricted
      stock grant
            
            -
            
            -
            
            748,133
            
            1
            
            -
            
            -
            
            -
            
            -Stock
      options exercised
            
            -
            
            -
            
            (16,535)
            
            -
            
            -
            
            -
            
            -
            
            -Tax
      benefit from restricted stocks
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Comprehensive
      income:Net
      income
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Other
      comprehensive income
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Balance
      at December 31, 2009
            -
            $
            -
            
            42,148,080
            $
            42
            
            3,025,000
            
            3
            
            -
            $
            -


See
accompanying notes to consolidated financial statements.




-49-


INTERNET
BRANDS, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


YEARS
ENDED DECEMBER 31, 2009, 2008 and 2007


(in
thousands, except share amounts)




Class D
            
            
            
            
            
            Stockholders'
            
            Accumulated
      Other Comprehensive Income (loss)
            
            TotalCommon
      Stock
            Additional
            Accumulated
      Deficit
            
            Notes
            
            
            Stockholders'Shares
            
            Amount
            
            Paid-In
      Capital
            
            
            Receivable
            
            
            EquityBalance
      at December 31, 2006  - as previously
    reported
            
            3,565,589
            $
            4
            $
            306,039
            $
            (262,161)
            $
            (2,767)
            $
            (676)
            $
            312,209Prior
      period adjustment- correction of deferred tax asset
            
            -
            
            -
            
            -
            
            (3,776)
            
            -
            
            -
            
            (3,776)Balance
      at December 31, 2006  - as adjusted
            
            3,565,589
            
            4
            
            306,039
            
            (265,937)
            
            (2,767)
            
            (676)
            
            308,433Exercise
      of stock options
            
            -
            
            -
            
            544
            
            -
            
            -
            
            -
            
            545Rescissions
      of options exercised with notes receivable
            
            -
            
            -
            
            (2,412)
            
            -
            
            2,412
            
            -
            
            -Repurchase
      of stock from former employee
            
            -
            
            -
            
            (138)
            
            -
            
            -
            
            -
            
            (138)Collections
      on notes receivable
            
            -
            
            -
            
            -
            
            -
            
            339
            
            -
            
            339Exercise
      of warrant
            
            -
            
            -
            
            20
            
            -
            
            -
            
            -
            
            21Stock-based
      compensation under ASC 718
            
            -
            
            -
            
            15,195
            
            -
            
            -
            
            -
            
            15,195Option
      liability
            
            -
            
            -
            
            (275)
            
            -
            
            -
            
            -
            
            (275)Conversion
      upon IPO
            
            (3,565,589)
            
            (4)
            
            271,734
            
            -
            
            -
            
            -
            
            -Company
      shares sold through IPO
            
            -
            
            -
            
            18,799
            
            -
            
            -
            
            -
            
            18,801IPO
      related costs
            
            -
            
            -
            
            (5,504)
            
            -
            
            -
            
            -
            
            (5,504)Adoption
      of FIN 48
            
            -
            
            -
            
            -
            
            (127)
            
            -
            
            -
            
            (127)Restricted
      stock grant
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Comprehensive
      loss:Net
      income
            
            -
            
            -
            
            -
            
            311
            
            -
            
            -
            
            311Other
      comprehensive loss
            -
            
            -
            
            -
            
            -
            
            -
            
            (833)
            
            (833)Balance
      at December 31, 2007 - as adjusted
            -
            $
            -
            $
            604,002
            $
            (265,753)
            $
            (16)
            $
            (1,509)
            $
            336,768Exercise
      of stock options
            
            -
            
            -
            
            506
            
            -
            
            -
            
            -
            
            506Rescissions
      of options exercised with notes receivable
            
            -
            
            -
            
            (16)
            
            -
            
            16
            
            -
            
            -Repurchase
      of stock from former employee
            
            -
            
            -
            
            (19)
            
            -
            
            -
            
            -
            
            (19)Stock
      surrendered to pay taxes
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Stock
      issued for acquisition
            
            -
            
            -
            
            1,250
            
            -
            
            -
            
            -
            
            1,250Retirement
      of stocks returned
            
            -
            
            -
            
            (47)
            
            -
            
            -
            
            -
            
            (47)Stock-based
      compensation under ASC 718
            
            -
            
            -
            
            2,491
            
            -
            
            -
            
            -
            
            2,491Option
      liability
            
            -
            
            -
            
            (299)
            
            -
            
            -
            
            -
            
            (299)IPO
      related costs
            
            -
            
            -
            
            (175)
            
            -
            
            -
            
            -
            
            (175)Restricted
      stock grants
            
            -
            
            -
            
            1
            
            -
            
            -
            
            -
            
            1Restricted
      stock cancellations
            
            -
            
            -
            
            (199)
            
            -
            
            -
            
            -
            
            (199)Tax
      benefit from shortfall on restricted stocks
            
            -
            
            -
            
            (61)
            
            -
            
            -
            
            -
            
            (61)Comprehensive
      income:Net
      income
            
            -
            
            -
            
            -
            
            11,559
            
            -
            
            -
            
            11,559Other
      comprehensive income
            
            -
            
            -
            
            -
            
            -
            
            -
            
            1,546
            
            1,546Balance
      at December 31, 2008 - as adjusted
            -
            $
            -
            $
            607,434
            $
            (254,194)
            $
            -
            $
            37
            $
            353,321Exercise
      of stock options
            
            -
            
            -
            
            276
            
            -
            
            -
            
            -
            
            276Restricted
      stocks to pay taxes
            
            -
            
            -
            
            (46)
            
            -
            
            -
            
            -
            
            (46)Stock
      issued for acquisition
            
            -
            
            -
            
            1,825
            
            -
            
            -
            
            -
            
            1,825Stock-based
      compensation under ASC 718
            
            -
            
            -
            
            3,277
            
            -
            
            -
            
            -
            
            3,277Option
      liability
            
            -
            
            -
            
            (299)
            
            -
            
            -
            
            -
            
            (299)Restricted
      stock grant
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Stock
      options exercised
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -
            
            -Tax
      benefit from restricted stocks
            
            -
            
            -
            
            60
            
            -
            
            -
            
            -
            
            60Comprehensive
      income:
            
            
            
            
            
            
            
            
            
            
            
            
            
            -Net
      income
            
            -
            
            -
            
            -
            
            12,388
            
            -
            
            -
            
            12,388Other
      comprehensive income
            
            -
            
            -
            
            -
            
            -
            
            -
            
            510
            
            510Balance
      at December 31, 2009
            -
            $
            -
            $
            612,528
            $
            (241,806)
            $
            -
            $
            547
            $
            371,314


See
accompanying notes to consolidated financial statements.




-50-




INTERNET
      BRANDS, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(in
      thousands)Year
      ended December 31,2009
            
            
            2008
            
            
            2007Cash
      flows from operating activitiesNet
      income
            
            $
            12,388
            
            
            $
            11,559
            
            
            $
            311Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            16,590
            
            
            
            13,554
            
            
            
            8,030Provision
      for bad debt
            
            
            68
            
            
            
            1,581
            
            
            
            320Stock
      based compensation
            
            
            3,277
            
            
            
            2,491
            
            
            
            15,195Benefit
      from deferred income taxes
            
            
            6,528
            
            
            
            5,578
            
            
            
            11,250Loss
      on sale of property, plant and equipment
            
            
            32
            
            
            
            59
            
            
            
            8Unrealized
      gain on investments
            
            
            -
            
            
            
            (385
            )
            
            
            (234
            )Realized
      loss on sale of investments
            
            
            220
            
            
            
            408
            
            
            
            874Amortization
      of premium on investments
            
            
            (171
            )
            
            
            (714
            )
            
            
            (912
            )Changes
      in operating assets and liabilities, net of the effect of
      acquisitions:Accounts
      receivable
            
            
            1,155
            
            
            
            (3,154
            )
            
            
            674Prepaid
      expenses and other current assets
            
            
            80
            
            
            
            214
            
            
            
            686Liabilities
      associated with stock guarantees
            
            
            (211
            )
            
            
            -
            
            
            
            -Other
      assets
            
            
            165
            
            
            
            (621
            )
            
            
            698Accounts
      payable and accrued expenses
            
            
            (1,733
            )
            
            
            3,666
            
            
            
            (1,559
            )Deferred
      revenue
            
            
            (2,298
            )
            
            
            (463
            )
            
            
            707Net
      cash provided by operating activities
            
            
            36,090
            
            
            
            33,773
            
            
            
            36,048Cash
      flows from investing activitiesPurchases
      of property and equipment
            
            
            (2,629
            )
            
            
            (2,499
            )
            
            
            (2,192
            )Capitalized
      internal use software costs
            
            
            (7,257
            )
            
            
            (5,560
            )
            
            
            (2,241
            )Purchases
      of investments
            
            
            (38,209
            )
            
            
            (85,747
            )
            
            
            (69,959
            )Proceeds
      from investments
            
            
            30,236
            
            
            
            137,020
            
            
            
            113,249Acquisitions,
      net of cash acquired, and earnouts
            
            
            (24,221
            )
            
            
            (68,131
            )
            
            
            (102,790
            )Net
      cash used in investing activities
            
            
            (42,080
            )
            
            
            (24,917
            )
            
            
            (63,933
            )Cash
      flows from financing activitiesProceeds
      from issuance of common stock and exercise of stock
options
            
            
            277
            
            
            
            1,498
            
            
            
            13,863Deferred
      initial public offering costs
            
            
            -
            
            
            
            (176
            )
            
            
            -Repurchases
      of restricted common stock
            
            
            (45
            )
            
            
            (66
            )
            
            
            (138
            )Payments
      on capital lease obligations
            
            
            (30
            )
            
            
            -
            
            
            
            -Collections
      on stockholder notes receivable
            
            
            -
            
            
            
            -
            
            
            
            339Net
      cash provided by financing activities
            
            
            202
            
            
            
            1,256
            
            
            
            14,064Effect
      of exchange rate changes on cash and cash equivalents
            
            
            548
            
            
            
            1,756
            
            
            
            1,940Net
      (decrease) increase in cash and cash equivalents
            
            
            (5,240
            )
            
            
            11,868
            
            
            
            (11,881
            )Cash
      and cash equivalentsBeginning
      of period
            
            
            43,648
            
            
            
            31,780
            
            
            
            43,661End
      of period
            
            $
            38,408
            
            
            $
            43,648
            
            
            $
            31,780Supplemental
      schedule of cash and non-cash consolidated cash flow
      information:Adjustment
      to retained earnings related to the liability for uncertain tax
      positions
            
            $
            -
            
            
            $
            -
            
            
            $
            126Notes
      receivable paid with exchange of common stock
            
            $
            -
            
            
            $
            -
            
            
            $
            2,412Cash
      paid for income taxes
            
            $
            4,291
            
            
            $
            463
            
            
            $
            -




See
accompanying notes to consolidated financial statements.







-51-








INTERNET
BRANDS, INC.


CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


(in
thousands)


Years
      ended December 31,2009
              
              
              2008
              
              
              2007Net
      income
              
              $
              12,388
              
              
              $
              11,559
              
              
              $
              311Foreign
      currency translation
              
              
              630
              
              
              
              1,399
              
              
              
              (729
              )Investments,
      fair value adjustment
              
              
              (120
              )
              
              
              147
              
              
              
              (104
              )Comprehensive
      income (loss)
              
              $
              12,898
              
              
              $
              13,105
              
              
              $
              (522
              )Accumuated
      comprehensive income (loss)
              
              $
              547
              
              
              $
              37
              
              
              $
              (1,509
              )







See
accompanying notes to consolidated financial statements.







-52-





INTERNET
BRANDS, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
1. ORGANIZATION AND BASIS OF PRESENTATION





The Company—Internet Brands, Inc. (the "Company") is an Internet
media company that owns, operates and grows branded websites in categories
marked by highly-focused consumer involvement and strong advertising spending.
The Company's websites provide knowledge that is accessible and valuable to
their audiences and the advertisers that want to market to
them.


In addition, the Company licenses its content and
Internet technology products and services to major companies and individual
website owners around the world.


Initial Public
Offering (IPO)—On November 16, 2007, a registration statement
(Registration No. 333-144750) relating to the initial public offering of
6,000,000 shares of the Company's Class A common stock was declared
effective by the Securities and Exchange Commission. The shares of Class A
common stock registered under the registration statement were sold at a price to
the public of $8.00 per share. 2,350,115 shares were sold by the Company, and
3,649,885 shares were sold by the selling stockholders identified in the
registration statement. The offering closed on November 21, 2007.




The aggregate net proceeds to the Company
from the offering were approximately $13.3 million, after deducting an
aggregate of approximately $1.3 million in underwriting discounts and
commissions paid to the underwriters and an estimated $4.2 million in other
expenses incurred in connection with the offering. The Company invested the net
proceeds primarily in investment-grade, interest-bearing instruments, pending
their use for general corporate purposes, including funding working capital and
capital expenditures, and supporting the Company's general growth plan, which
includes possible future acquisitions of complementary products, technologies
and businesses.




Principles of
Consolidation—The consolidated financial statements include the accounts
of Internet Brands, Inc. and its wholly-owned subsidiaries, from the dates
of their respective acquisitions. All significant inter-company accounts,
transactions and balances have been eliminated in consolidation.




NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Use of Estimates—The preparation of consolidated financial statements in conformity with
generally accepted accounting principles in the United States, or GAAP, requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results may differ from those
estimates.





Prior Period Adjustment—During 2009, the
Company discovered an incorrect recording of its deferred tax assets in 2006
relating to the inclusion of certain stock-based compensation charges that were
built up over the previous five years.  As a result, the Company
overstated an adjustment to its deferred tax assets in 2006 by approximately
$3.8 million.





In accordance
with ASC 250(previously SFAS No.154, Accounting Changes and Error
Correction), SAB No. 99,Materiality,and SAB
No. 108,Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements,the Company’smanagement
evaluated the materiality of the error from a qualitative and quantitative
perspective and concluded that the error was not material to any prior periods.For financial reporting purposes, this error has been accounted for as a
prior period adjustment in accordance with ASC 250.  The Company has
charged the Accumulated Deficit account in Shareholders’ Equity in the amount of
$3.8 million and reduced the deferred tax asset balance in the amount of $3.8
million as of December 31, 2006 to appropriately reflect the prior period
adjustment.


-53-


Revenue Recognition—The Company recognizes revenue in accordance
with Accounting Standard Codification (ASC) 605-10 (previously Securities and
Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition). Revenue
is recognized only when the price is fixed or determinable, persuasive evidence
of an arrangement exists, the service is performed and collectibility of the
resulting receivable is reasonably assured. The Company's revenues are derived
from:




Consumer Internet—Consumer Internet segment revenue is earned from online advertising
sales and on a cost per thousand impressions (CPM), cost per click (CPC), cost
per lead (CPL), cost per action (CPA) and flat-fee basis.





·The
      Company earns CPM revenue from the display of graphical advertisements. An
      impression is delivered when an advertisement appears in pages viewed
      by users.  Revenue from graphical advertisement impressions is
      recognized based on the actual impressions delivered in the
      period.
              
              ·Revenue
      from the display of text-based links to the websites of the Company's
      advertisers is recognized on a CPC basis, and search advertising is
      recognized as "click-throughs" occur.  A "click-through" occurs
      when a user clicks on an advertiser's link.
              
              ·Revenue
      from advertisers on a CPL basis is recognized in the period the leads are
      accepted by the dealer or mortgage lender, following the execution of a
      service agreement and commencement of the services.
              
              ·Under
      the CPA format, the Company earns revenue based on a percentage or
      negotiated amount of a consumer transaction undertaken or initiated
      through its websites. Revenue is recognized at the time of the
      transaction.
              
              ·Revenue
      from flat-fee, listings-based services is based on a customer’s
      subscription to the service for up to twelve months and are recognized on
      a straight-line basis over the term of the
subscription..


Licensing—The Company enters into
contractual arrangements with customers to develop customized software and
content products; revenue is earned from software licenses, content syndication,
maintenance fees and consulting services. Agreements with these customers are
typically for multi-year periods. For each arrangement, revenue is recognized
when both parties have signed an agreement, the fees to be paid by the customer
are fixed or determinable, collection of the fees is probable, delivery of the
product has occurred, and no other significant obligations on the part of the
Company remain. The Company does not offer a right of return on these products.




Software-related
revenue is accounted for in accordance with ASC 985-605 (previously American
Institute of Certified Public Accountants' (AICPA) Statement of Position (SOP)
No. 97-2, Software
Revenue Recognition) and related interpretations. Post-implementation
development and enhancement services are not sold separately; the revenue and
all related costs of these arrangements are deferred until the commencement of
the applicable license period. Revenue is recognized ratably over the term of
the license; deferred costs are amortized over the same period as the revenue is
recognized.




Fees for
stand-alone projects are fixed-bid and determined based on estimated effort and
client billing rates since the Company can reasonably estimate the required
effort to complete each project or each milestone within the
project.  Recognition of the revenue
and all related costs of these arrangements are deferred until delivery and
acceptance of the projects in accordance with the terms of the
contract.




During
the fourth quarter of 2009, the Company began selling and electronically
delivering the vBulletin 4.0 Publishing Suite. The Company recognizes revenue
from the sale of this product when legal title transfers, which occurs when the
customers download the product from the Internet.   In connection
with the sale of vBulletin 4.0, the Company provides the customer with free
email technical support.  The Company does not defer the recognition
of any vBulletin 4.0 revenue as (i) historically, the majority of customers
utilize their free email support within the first month of owning the product,
and (ii) the cost of providing this free email support is
insignificant.  The Company accrues the estimated cost of providing
this free email support upon delivery of the product.




Financial
Instruments—The Company's financial instruments, including cash and cash
equivalents, accounts receivable, notes receivable from stockholders and
accounts payable, are carried at historical cost. At December 31, 2009 and
2008, the fair values of these instruments approximated their carrying amounts
because of the short-term nature. Investments classified as available for sale
are carried at fair value. Unrealized gains or losses are included in other
comprehensive income or loss as a component of stockholders' equity;
other-than-temporary impairments in the value of these investments are accounted
for as realized losses in the period in which they occur.




Concentration of
Risk—Financial instruments that potentially subject the Company to
significant concentration of risk consist primarily of cash, cash equivalents,
investments and accounts receivable. Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash
deposits in excess of the insured limit of the Federal Deposit Insurance
Corporation, or FDIC, or $250,000. Accounts receivable are typically unsecured
and are derived from revenue earned from customers.




The
Company performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses. Historically, such losses have been
within management's expectations. The Company generally does not require
collateral from its customers. No one customer accounted for greater than 10% of
the Company's net accounts receivable at December 31, 2009, and no customer
accounted for more than 10% of the Company's revenue for the years ended
December 31, 2009, 2008 and 2007.


-54-





Cash and Cash
Equivalents—Cash and cash equivalents consist of cash on hand and
highly-liquid investments with original maturities of three months or less.




Accounts
Receivable and Allowance for Doubtful Accounts—Accounts receivables are recorded at
the invoiced amount and do not bear interest.  The allowance for
doubtful accounts is the Company’s best estimate of the amount of probable
credit losses in its existing accounts receivable.  The Company
determines the allowance based on historical write-off experience and customer
economic data.  The Company reviews its allowance for doubtful
accounts monthly.  Past due balances over 90 days are reviewed
individually, for collectibility. Account balances are charged off against the
allowance when the Company believes it is probable the receivable will not be
recovered.




Investments,
Available for Sale—The Company invests excess cash in marketable
securities, including highly-liquid debt instruments of the United States
Government and its agencies and money market instruments. All highly-liquid
investments with an original maturity of more than three months at original
purchase are considered investments available for sale.




The
Company's investments in securities are classified as available-for-sale as
defined by ASC 320-10 (previously Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments
in Debt and Equity Securities). Accordingly, marketable securities are
recorded at fair value, which is based on quoted market prices with unrealized
gains and losses included in other comprehensive income or loss as a component
of stockholders' equity.




The
Company evaluates its marketable securities periodically for possible
other-than-temporary impairment and reviews factors such as length of time and
extent to which fair value has been below cost basis and the Company's intent
and ability to hold the marketable security for a period of time which may be
sufficient for anticipated recovery in market value. The Company records
impairment charges equal to the amount that the carrying value of its
available-for-sale securities exceeds the estimated fair market value of the
securities as of the evaluation date, if appropriate. The fair value for
securities is determined based on quoted market prices as of the valuation date
as available, with the exception of one impaired asset where valuation is based
on estimated fair market value.  The estimated fair value
of the impaired asset represents approximately 1% of total investments available
for sale.





Effective January 1,
2008, the Company adopted ASC 820-10 (previously SFAS No. 157, Fair Value Measurements). ASC
820-10 defines fair value, establishes a framework for measuring fair value
under generally accepted accounting principles and enhances disclosures about
fair value measurements. Fair value is defined under ASC 820-10 as the exchange
price that would be received for an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the
measurement date. Valuation techniques used to measure fair value under ASC
820-10 must maximize the use of observable inputs and minimize the use of
unobservable inputs. The standard describes a fair value hierarchy based on
three levels of inputs, of which the first two are considered observable and the
last unobservable, that may be used to measure fair value which are the
following:




·
            Level
      1 - Quoted prices in active markets for identical assets or
      liabilities




·
            Level
      2 - Inputs other than Level 1 that are observable, either directly or
      indirectly, such as quoted prices for similar assets or liabilities;
      quoted prices in markets that are not active; or other inputs that are
      observable or can be corroborated by observable market data for
      substantially the full term of the assets or
  liabilities




·
            Level
      3 - Unobservable inputs that are supported by little or no market activity
      and that are significant to the fair value of the assets or
      liabilities








-55-


The adoption of this statement with respect to the Company’s financial assets
and liabilities did not impact our consolidated results of operations and
financial condition, but required additional disclosure for assets and
liabilities measured at fair value.  In accordance with ASC 820-10,
the following table represents the fair value hierarchy for the Company’s
financial assets (cash, cash equivalents and investments) measured at fair value
on a recurring basis as of December 31, 2009 (in thousands):


Level
      2
            
            Level 3
            
            TotalDescription
            Level
      1Cash
      and cash equivalents
            $38,408
            
            -
            
            -
            
            $38,408Short
      term available-for-sale investments
            19,990
            
            1,480
            
            266
            
            $21,736Total
            $58,398
            
            $1,480
            
            $266
            
            $60,144





The
Company has one Level 3 investment with an original cost basis of $2.0
million.  From December 2007 through December 31, 2009, the
Company recorded in aggregate, an other-than temporary impairment loss of $1.3
million of which $0.4 million was recorded during the twelve months
ended December 31, 2009. During the same period, the Company received
approximately $0.1 million in returned principal relating to this
investment.  As of December 31, 2009, the current estimated fair value
for this Level 3 investment was $0.3 million. The Company reviews periodic
reports of an outside valuation firm to monitor its Level 3 investment and
engages in discussions with representatives of this firm, as needed, as inputs
in determining the fair value of this investment.  For the years ended
December 31, 2009 and 2008, unrealized gains and losses on available-for-sale
securities were not material.




Year
      EndedLevel
      3 investment
            
            December
      31, 2009Balance,
      beginning of year
            
            $
            824Returns
      of principal
            
            
            (140
            )Impairments
            
            
            (418
            )Balance,
      end of year
            
            $
            266




Property and
Equipment—Property and equipment are stated at cost, less accumulated
depreciation using the straight-line method over the following estimated useful
lives of the assets:




Computer
      equipment and purchased software
            3 yearsFurniture
      and equipment
            5 years




Leasehold
improvements are amortized over their estimated useful lives, or the term of the
lease, whichever is shorter.




Repairs
and maintenance are expensed as incurred, while renewals or betterments are
capitalized. Gains or losses upon sale or retirement of property and equipment
are included in the consolidated statement of operations and the related cost
and accumulated depreciation are removed from the consolidated balance sheet.




Impairment
of Long-Lived Assets—The Company reviews long-lived assets to be held
and used, other than goodwill, for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If an
evaluation of recoverability is required, the estimated discounted future cash
flows directly associated with the asset are compared to the asset's carrying
amount. If the estimated future cash flows from the use of the asset are less
than the carrying value, an impairment write-down would be recorded to reduce
the asset to its estimated fair value. Long-lived assets to be disposed of other
than by sale are classified as held and used until the date of disposal.




Internal
Use Software Development Costs—The Company has adopted the provisions of
ASC 350-40 (previously SOP No. 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use), which requires the
capitalization of certain external and internal computer software costs incurred
during the application development stage. The application development stage is
characterized by software design and configuration activities, coding, testing
and installation. Training costs and maintenance are expensed as incurred, while
upgrades and enhancements are capitalized if it is probable that such
expenditures will result in additional functionality.




The
Company has adopted the provisions of ASC 350-50 (previously EITF No. 00-2,
Accounting for Web Site
Development Costs) in accounting for internal use website software
development costs. ASC 350-50 provides that certain planning and training costs
incurred in the development of website software be expensed as incurred, while
application development stage costs are to be capitalized pursuant to ASC
350-40.




During
the years ended December 31, 2009 and 2008, the Company capitalized certain
internal use software and website development costs totaling approximately $5.2
million and $4.5 million, respectively. These are expensed using the
straight-line method over their estimated useful life of three years and
included in property and equipment, net of accumulated depreciation. For the
years ended December 31, 2009, 2008 and 2007, amortization expense was
approximately $3.1 million, $1.9 million and $1.4 million, respectively.


-56-




Proprietary
Software Development Costs—In accordance with ASC 985-20 (previously
SFAS No. 86, Accounting
for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed (as
amended)), the Company has capitalized certain computer software
development costs upon the establishment of technological feasibility.
Technological feasibility is considered to have occurred upon completion of a
detailed program design that has been confirmed by documenting the product
specifications, or to the extent that a detailed program design is not pursued,
upon completion of a working model that has been confirmed by testing to be
consistent with the product design.




During
the years ended December 31, 2009 and 2008, the Company capitalized certain
proprietary software development costs totaling $0.9 million and $1.0 million,
respectively. These costs are recognized ratably over the term of the license to
the customer, commencing at the time the specifications or the working model has
been accepted by the client. For the years ended December 31, 2009, 2008
and 2007, the expense was approximately $1.1 million, $0.9 million, and $0.8
million, respectively.




Business
Combinations-The Company accounts for business combinations using the purchase
method of accounting and accordingly, the assets and liabilities of the acquired
businesses are recorded at their estimated fair values at the date of
acquisition. Goodwill represents the excess of the purchase price over the fair
value of net assets, including the amount assigned to identifiable intangible
assets. The Company does not amortize the goodwill balance. The primary drivers
that generate goodwill are the value of synergies between the acquired
businesses and the Company and the acquired intellectual property. Identifiable
intangible assets with finite lives are amortized over their useful lives. See
Note 4. “Acquisitions.” The results of operations of the acquired businesses
were included in the company’s Consolidated Financial Statements from the
respective dates of acquisition.





Goodwill—
Goodwill represents the excess of the purchase price over the fair value of the
identifiable net assets acquired in an acquisition accounted for as a purchase.
Goodwill is carried at cost. In accordance with ASC 350-20 (previously SFAS
No. 142, Goodwill and
Other Intangible Assets,), the Company is required to test goodwill for
impairment on an annual basis and between annual tests in certain circumstances,
and written down when impaired. The Company’s impairment review process compares
the fair value of the reporting unit in which the goodwill resides to its
carrying value. The Company has determined that its reporting units are
equivalent to its Consumer Internet and Licensing operating segments for the
purposes of completing its ASC 350-20 analysis. Goodwill is assigned to the
reporting unit that is expected to benefit from the anticipated revenue and cash
flows of the business combination.





The
Company utilizes a two-step approach to testing goodwill for impairment. The
first step is to determine the fair value of the Company’s reporting units using
both the Income Approach and the Market Approach. Under the Income Approach, the
fair value of a business unit is based on the cash flows it can be expected to
generate over its remaining life. The estimated cash flows are converted to
their present value equivalent using an appropriate rate of return. The Market
Approach utilizes a market comparable method whereby similar publicly traded
companies are valued using Market Values of Invested Capital (“MVIC”) multiples
(i.e., MVIC to Enterprise Value/EBITDA and MVIC to Price/Earnings ratio) and
then these MVIC multiples are applied to the Company’s operating results to
arrive at an estimate of value.  If the fair values exceed the
carrying values, goodwill is not impaired. The second step, if necessary,
measures the amount of any impairment by applying fair value-based tests to
individual assets and liabilities. If the reporting unit's carrying value
exceeds its fair value, the Company compares the fair value of the goodwill with
the carrying value of the goodwill.  If the carrying value of goodwill
for the Company exceeds the fair value of that goodwill, an impairment loss is
recognized in the amount equal to that excess. The Company also compared its
market capitalization to its book value of equity at December 31, 2009 to
determine if this comparison may be an indicator of impairment. With a
reasonable control premium applied to market capitalization, the book value of
equity was less than the Company’s imputed market capitalization.  The
Company performs this analysis during December of each fiscal year. No
impairment loss was recorded for the years ended December 31, 2009, 2008
and 2007.







-57-




ConsumerBalance
      at
              
              Licensing
              
              
              Internet
              
              
              TotalDecember 31,
      2007
              
              $
              18,362
              
              
              $
              132,501
              
              
              $
              150,863Additional
      investment
              
              
              503
              
              
              
              52,440
              
              
              
              52,943December 31,
      2008
              
              
              18,865
              
              
              
              184,941
              
              
              
              203,806Additional
      investment
              
              
              -
              
              
              
              20,119
              
              
              
              20,119December
      31. 2009
              
              $
              18,865
              
              
              $
              205,060
              
              
              $
              223,925


In connection with certain of its business acquisitions, the Company recorded a
valuation allowance as certain acquired deferred tax assets did not meet the
more-likely-than-not criteria to berecognized under ASC 740 (previously
SFAS No. 109, Accounting
for Income Taxes). The impact of recording this valuation allowance in
purchase accounting is an increase to the amount of goodwill initially recorded.
During the year ended December 31, 2007, upon meeting the
more-likely-than-not recognition criteria under ASC 740, the Company reversed a
portion of this valuation allowance and recognized a reduction of
goodwill.





The
Company has acquired businesses in each of the last few years and its current
business strategy includes continuing to make additional acquisitions in the
future. These acquisitions will continue to give rise to goodwill and other
intangible assets which will need to be assessed for impairment from time to
time.




Intangible
Assets—Intangible assets consist primarily of identifiable intangible
assets purchased in connection with the Company's acquisitions. Intangible
assets are carried at cost less accumulated amortization. Intangible assets are
amortized on a straight-line basis over the expected useful lives of the assets,
between three and nine years, with the exception of customer relationships,
which are amortized using a double-declining balance method, to more accurately
reflect the pattern in which the economic benefit is consumed. Other intangible
assets are reviewed for impairment in accordance with ASC 360-10-35 (previously
SFAS No. 144, Accounting
for Impairment or Disposal of Long-Lived Assets), whenever events or
changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. Measurement of any impairment loss for long-lived assets and
identifiable intangible assets that management expects to hold and use is based
on the amount of the carrying value that exceeds the fair value of the asset. No
impairment loss was recorded for the years ended December 31, 2009, 2008
and 2007. The balances consist of the following (in thousands):




As
      of December 31, 2009Average
              
              
              GrossEstimated
              
              
              Carrying
              
              
              Accumulated
              
              
              NetUseful
      Lives
              
              
              Amount
              
              
              Amortization
              
              
              AmountAcquired
      technology
              
              
              3.7
              
              
              $
              5,015
              
              
              $
              (3,168
              )
              
              $
              1,847Customer
      relationships
              
              
              5.0
              
              
              
              11,584
              
              
              
              (6,728
              )
              
              
              4,856Content
              
              
              3.8
              
              
              
              10,635
              
              
              
              (6,524
              )
              
              
              4,111Domain
      name
              
              
              4.9
              
              
              
              19,632
              
              
              
              (10,366
              )
              
              
              9,266Total
              
              
              
              
              
              $
              46,866
              
              
              $
              (26,786
              )
              
              $
              20,080
 -58-


As
      of December 31, 2008Average
            
            
            GrossEstimated
            
            
            Carrying
            
            
            Accumulated
            
            
            NetUseful
      Lives
            
            
            Amount
            
            
            Amortization
            
            
            AmountAcquired
      technology
            
            
            3.8
            
            
            
            4,579
            
            
            
            (2,234
            )
            
            
            2,345Customer
      relationships
            
            
            5.1
            
            
            
            10,043
            
            
            
            (4,077
            )
            
            
            5,966Content
            
            
            3.5
            
            
            
            9,357
            
            
            
            (3,820
            )
            
            
            5,537Domain
      name
            
            
            5.1
            
            
            
            17,690
            
            
            
            (6,982
            )
            
            
            10,708Total
            
            
            4.4
            
            
            $
            41,669
            
            
            $
            (17,113
            )
            
            $
            24,556






The following table
summarizes the future estimated annual amortization expense for these assets
over the next five years (in thousands):




Years
      Ending December 31, 20092010
              
              $
              8,6242011
              
              
              5,8652012
              
              
              3,0762013
              
              
              1,8722014
              
              
              557Thereafter
              
              
              86$
              20,080


Depreciation and
Amortization—Depreciation and amortization includes the depreciation
expense of property plant and equipment on a straight line basis over the useful
life of assets, and the amortization expense of (1) leasehold improvements
over their remaining useful life or the lease period, whichever is shorter,
(2) internal use software development costs over their estimated useful
life and (3) intangible assets reflecting the period and pattern in which
economic benefits are used up.




Cost of
Revenues—Cost of revenues represent expenses that
vary proportionately with revenues and includes marketing expenses to
fulfill specific customer advertising orders, direct development costs of
licensing revenues, and costs of hosting websites.




Sales and
Marketing—Sales and marketing expenses include online marketing and
advertising costs, sales promotion, compensation and benefit costs related to
the Company's sales and sales support staff, and the direct expenses associated
with the Company's sales force. The Company recognizes advertising expense at
the time the advertisement is first published.




Technology—Technology
expenses include compensation, benefits,
software licenses and other directcosts incurred by the Company to
enhance, manage, support, monitor and operate the Company's websites and related
technologies, and to operate the Company's internal technology infrastructure.




General and
Administrative—General and administrative expenses include compensation,
benefits, office expenses, and other expenses for executive, finance, legal,
business development and other corporate and support-functions personnel.
General and administrative expenses also include fees for professional services,
insurance, business licenses, and provision for doubtful accounts.




Stock-Based
Compensation and Stock-Based Charges—The Company has adopted the
provisions of ASC 718 (previously SFAS No. 123(R), Share-Based Payments), using
the prospective approach and, accordingly, prior periods have not been restated
to reflect the impact of ASC 718. Under ASC 718, stock-based awards granted
after December 31, 2005, are recorded at fair value as of the grant date
and recognized to expense over the employee's requisite service period (the
vesting period, generally three or four years), which the Company has elected to
amortize on a straight-line basis.  The amount of recognized
compensation expense is adjusted based upon an estimated forfeiture
rate.




-59-


The
Company was previously accounting for its stock options under the minimum value
method and adopted ASC 718 prospectively. The Company began its ASC 718
accounting with a historical pool of windfall tax benefits of zero at
January 1, 2006.Beginning in January 2006, the Company began
tracking options on an individual basis to determine the on-going APIC pool,
which is the pool that arises when the tax deduction for a share-based payment
award is greater than the cumulative compensation expense computed using a
fair-value-based measure reported in the financial statements. The APIC pool
balance at December 31, 2009 was zero.




The
Company has a net operating loss carry-forward as of December 31, 2009, and
no excess tax benefits for the tax deductions related to share-based awards that
were recognized in the statements of operations. Additionally, no incremental
tax benefits were recognized from stock options exercised in 2009, 2008 or
2007.




Operating Leases—The Company leases office space and data centers under operating lease
agreements with original lease periods up to 4 years. Certain of the lease
agreements contain rent escalation provisions which are considered in
determining straight-line rent expense to be recorded over the lease term. The
lease term begins on the date of initial possession of the leased property for
the purposes of recognizing lease expense on a straight-line basis over the term
of the lease.




Income Taxes—The Company
accounts for income taxes under ASC 740 (previously SFAS No. 109,Accounting
for Income Taxes). This statement requires
the recognition of deferred tax assets and liabilities for the future
consequences of events that have been recognized in the Company’s financial
statements or tax returns.The Company measures tax assets and liabilities
using the enacted tax rates expected to apply to taxable income in the years in
which the Company expects to recover or settle those temporary differences. The
Company recognizes the effect of a change in tax rates on deferred tax assets
and liabilities in income in the period that includes the enactment date. The
Company provides a valuation allowance against net deferred tax assets unless,
based upon the available evidence, it is more likely than not that the deferred
tax assets will be realized.




In
June 2006, the FASB issued ASC 740-10 (previously Financial Interpretation
No. 48, Accounting for
Uncertainty in Income Taxes—an Interpretation of ASC 740).  ASC
740-10 establishes a single model to address accounting for uncertain tax
positions. ASC 740-10 clarifies the accounting for income taxes by prescribing a
minimum recognition threshold a tax position is required to meet before being
recognized in the consolidated financial statements. ASC 740-10 also provides
guidance on derecognition, measurement, classification, interest and penalties,
accounting in interim periods, disclosure and transition.




The
Company adopted the provisions of ASC 740-10 on January 1, 2007, and
recognized a $0.5 million increase to the liability for uncertain tax positions,
$0.1 million of which was charged to the opening balance of retained earnings.
Therefore, as of the date of adoption, the Company's unrecognized tax benefits
totaled $0.4 million, all of which, if recognized would not affect the Company's
effective tax rate. During the years ended December 31, 2009, a reduction
of $0.1 million was made to the Company's uncertain tax benefits due to the
expiration of certain positions. The Company recognizes interest and penalties
related to unrecognized tax benefits as a component of income tax
expense.




The
Company files income tax returns in the U.S. federal jurisdiction, various
states, local and foreign jurisdictions. The Company is not currently under
examination by the United States Internal Revenue Service.  The Company is currently
under examination by certain jurisdictions but the amounts involved are not
material to the financial statements.





-60-


The
Company’s income tax returns filed for tax years 2006 through 2008 are subject
to examination by the U.S. federal and state, and foreign taxing jurisdictions.
In addition, the Company does not anticipate any change in the amount of
unrecognized tax benefits within the next twelve months.




Earnings
Per Share—Basic earnings per share, or EPS, is calculated in accordance
with ASC 260-10 (previously SFAS No. 128, Earnings per Share) using the
weighted average number of common shares outstanding during each period.




Diluted
EPS assumes the conversion, exercise or issuance of all potential common stock
equivalents unless the effect is to reduce a loss or increase the income per
share. For purposes of this calculation, common stock subject to repurchase by
the Company, options and warrants are considered to be common stock equivalents
and are only included in the calculation of diluted earnings per share when
their effect is dilutive.




Basic net
income (loss) per share is computed by dividing net income (loss) available to
ordinary stockholders by the weighted average number of ordinary shares
outstanding. Diluted net income (loss) per share includes the effect of
potential shares outstanding, including dilutive share options and warrants,
using the treasury stock method as prescribed by ASC 260-10. The Company
maintains a dual-class structure of common stock. Earnings per share for each
class are determined based on an allocation method that considers the
participation rights in undistributed earnings or losses for each class. The net
income per share amounts are the same for Class A and Class B common stock
because the holders of each class are legally entitled to equal per share
distributions whether through dividends or in liquidation. The following table
sets forth the computation of basic and diluted net income per share of Class A
and B common stock (in thousands, except share and per share
amounts):




Year
      ended December 31,2009
              
              
              2008
              
              
              2007Class
      A
              
              
              Class
      B
              
              
              Class
      A
              
              
              Class
      B
              
              
              Class
      A
              
              
              Class
      BNumerator—basic
      and diluted:Net
      income allocated, basic
              
              $
              11,527
              
              
              $
              861
              
              
              $
              10,746
              
              
              $
              813
              
              
              $
              287
              
              
              $
              24Conversion
      of Class B to Class A shares
              
              
              861
              
              
              
              -
              
              
              
              813
              
              
              
              -
              
              
              
              23
              
              
              
              -Reallocation
      of undistributed earnings to Class B shares
              
              
              -
              
              
              
              (48
              )
              
              
              -
              
              
              
              (90
              )
              
              
              -
              
              
              
              (1
              )Net
      income attributable to common stockholders, diluted
              
              $
              12,388
              
              
              $
              813
              
              
              $
              11,559
              
              
              $
              722
              
              
              $
              311
              
              
              $
              23Denominator:Weighted-average
      common shares
              
              
              41,719,399
              
              
              
              3,025,000
              
              
              
              40,701,178
              
              
              
              3,025,000
              
              
              
              37,065,513
              
              
              
              3,025,000Weighted-average
      unvested restricted
                stock
      subject to repurchase
              
              
              (1,230,923
              )
              
              
              -
              
              
              
              (697,948
              )
              
              
              -
              
              
              
              (368,280
              )
              
              
              -Denominator
      for basic calculation
              
              
              40,488,476
              
              
              
              3,025,000
              
              
              
              40,003,230
              
              
              
              3,025,000
              
              
              
              36,697,233
              
              
              
              3,025,000Weighted-average
      effect of dilutive securities:Conversion
      of Class B to Class A shares
              
              
              3,025,000
              
              
              
              -
              
              
              
              3,025,000
              
              
              
              -
              
              
              
              3,025,000
              
              
              
              -Employee
      stock options
              
              
              1,325,250
              
              
              
              -
              
              
              
              1,285,325
              
              
              
              -
              
              
              
              1,600,591
              
              
              
              -Warrants
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Unvested
      restricted stock subject to repurchase
              
              
              1,230,923
              
              
              
              -
              
              
              
              697,948
              
              
              
              -
              
              
              
              368,280
              
              
              
              -Denominator
      for diluted calculation
              
              
              46,069,649
              
              
              
              3,025,000
              
              
              
              45,011,503
              
              
              
              3,025,000
              
              
              
              41,691,104
              
              
              
              3,025,000Net
      income per share—basic
              
              $
              0.28
              
              
              $
              0.28
              
              
              $
              0.27
              
              
              $
              0.27
              
              
              $
              0.01
              
              
              $
              0.01Net
      income per share—diluted
              
              $
              0.27
              
              
              $
              0.27
              
              
              $
              0.26
              
              
              $
              0.26
              
              
              $
              0.01
              
              
              $
              0.01





The computations of diluted net income applicable to common shareholders exclude
preferred stock, warrants and common stock options which were anti-dilutive.
Shares excluded from the computations of diluted net income applicable to common
stockholders amounted to 734,654, 1,409,704 and 2,144,094 for the years ended
December 31, 2009, 2008 and 2007, respectively.




Comprehensive
Income—Comprehensive income includes all changes in equity during a
period from non-owner sources. Other comprehensive income refers to gains and
losses that under generally accepted accounting principles are recorded as an
element of stockholders' equity but are excluded from net income. For the years
ended December 31, 2009, 2008 and 2007, the Company's comprehensive income
consisted of its net income, unrealized gains and losses on investments
classified as available for sale and cumulative translation adjustments. The tax
effect of the translation adjustments was not significant.




Foreign Currency—The financial position and results of operations of the Company's
Canadian and British subsidiaries are measured using the Canadian Dollar and
Pound Sterling as the functional currencies, respectively. Revenues and expenses
of these subsidiaries have been translated into U.S. dollars at average exchange
rates prevailing during the period. Assets and liabilities have been translated
at the rates of exchange on the balance sheet date. The resulting translation
gain and loss adjustments are recorded as foreign currency translation
adjustment, a component of other comprehensive income (loss).




-61-


During the first three
quarters of 2008, the Company recognized foreign exchange gains and
losses on the statement of operations for intercompany balances that were
denominated in currencies other than the reporting currency.  For the nine
months ended September 30, 2008, the Company charged $1.1 million to its income
statement. In the fourth quarter of 2008, the Company determined that
intercompany balances between the Company and its subsidiaries would not be
settled in the foreseeable future; as a result, the foreign exchange gains and
losses were recorded as part of cumulative translation adjustment on the balance
sheet.




Gains and
losses that arise from exchange rate fluctuations on transactions denominated in
a currency other than the functional currency are included in the consolidated
results of operations in accordance with ASC 830 (previously SFAS No. 52,
Foreign Currency
Translation). During the year ended December 31, 2009 the Company
recognized a $0.2 million loss on currency transactions. For the years ended
December 31, 2008 and 2007, the Company's foreign currency transaction
losses and gains were $1.2 million and $1.1 million, respectively.




NOTE
3. RECENTLY ISSUED ACCOUNTING STANDARDS




Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(FASB) Accounting Standards Codification (ASC or Codification) and the Hierarchy
of Generally Accepted Accounting Principles under ASC Topic 105. This standard
establishes only two levels of U.S. generally accepted accounting principles, or
GAAP: authoritative and nonauthoritative. The Codification became the source of
authoritative, nongovernmental GAAP, except for rules and interpretive releases
of the SEC, which are sources of authoritative GAAP for SEC registrants. All
other non-grandfathered, non-SEC accounting literature not included in the
Codification became nonauthoritative. The Company began using the new guidelines
and numbering system prescribed by the Codification when referring to GAAP, and
references to specific accounting authority within the ASC are referred to by
their Topic number. As the Codification was not intended to change or alter
existing GAAP, it did not have a material impact on our financial
statements.




In June
2009, the FASB issued ASC 855 (previously SFAS No. 165, Subsequent Events), which
establishes general standards of accounting for and disclosures of events that
occur after the balance sheet date, but before the financial statements are
issued or available to be issued. It is effective for interim and annual periods
ending after June 15, 2009. There was no material impact upon the adoption of
this standard on the Company’s consolidated financial statements. The Company
has considered subsequent events up to March 2, 2010 in preparing the
consolidated financial statements appearing elsewhere in this Form
10-K.





In
October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, which
amends ASC Topic 605,Revenue
Recognition, to require companies to allocate revenue in multiple-element
arrangements based on an element’s estimated selling price if vendor-specific or
other third-party evidence of value is not available. ASU 2009-13 is effective
beginning January 1, 2011. Earlier application is permitted. The Company is
currently evaluating both the timing and the impact of the pending adoption of
the ASU on our consolidated financial statements.





In
October 2009, the FASB issued ASU 2009-14, which amends ASC Topic 985-605, Software-Revenue Recognition,
to exclude from its requirements (a) non-software components of tangible
products and (b) software components of tangible products that are sold,
licensed, or leased with tangible products when the software components and
non-software components of the tangible product function together to deliver the
tangible product's essential functionality. ASU 2009-14 will be effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, and early adoption will be
permitted. The Company is currently in the process of determining the effect, if
any, the adoption of ASU 2009-14 will have on our consolidated financial
statements.




NOTE
4. ACQUISITIONS




The
Company uses the purchase method of accounting and the results of the acquired
businesses are included in the income statement since the date of acquisition.
Amounts allocated to intangible assets are amortized over their estimated useful
lives of between three to nine years; no amounts have been allocated to
in-progress research and development. Goodwill represents the excess of
consideration paid over the net identifiable assets of businesses acquired; all
goodwill acquired in 2009, 2008 and all but $27.9 million acquired in 2007,
respectively, is deductible for income tax purposes. The Company has entered
into earnout agreements that are contingent on the acquired business achieving
agreed upon performance milestones. For acquisitions completed prior to January
1, 2009, the Company accounts for earnout consideration paid as an addition to
goodwill in the period earned (see Note 13, Commitments and Contingencies,
for further discussion).




-62-




Acquisitions
Completed in 2009—During the year ended December 31, 2009, the
Company completed 18 acquisitions in the Consumer Internet segment for a total
aggregate purchase price of $19.9 million. The acquisitions were designed to
extend and further diversify the Company's audiences and advertising base.
Goodwill recognized in those transactions amounted to $14.7 million. Intangible
assets, consisting of acquired technology, customer relationships, and domain
names and trademarks, amounted to $5.2 million and will be amortized over a
weighted-average period of 4.2 years.





2009(in
      thousands)Goodwill
              
              $
              14,662Amortizable
      intangible assets:Acquired
      technology
              
              
              436Customer
      relationships
              
              
              1,559Content
              
              
              1,259Domain
      names and trademarks
              
              
              1,940Total
              
              $
              19,856


Acquisitions Completed in 2008




2008(in
      thousands)Goodwill
            
            $
            47,600Amortizable
      intangible assets:Acquired
      technology
            
            
            348Customer
      relationships
            
            
            5,496Content
            
            
            2,736Domain
      names and trademarks
            
            
            6,458Total
      assets acquired
            
            
            62,638





Pro Forma
Results --The acquisitions we consummated in 2009 are not material
individually; however, in aggregate they represent a material portion of our net
income and assets. The unaudited pro forma results presented below include the
effect of these acquisitions as if they were consummated as of January 1,
2008.  However, the pro forma results do not include the effect of
anticipated synergies which typically drive the growth in revenue and earnings
that arise once these acquisitions have been moved onto our operating platform.





The unaudited pro forma financial information below is not necessarily
indicative of either future results of operations nor of results that might have
been achieved had the acquisitions been consummated as of January 1, 2008 (in
thousands):


Year
      EndedDecember
      31,2009
            2008Revenue
            
            $
            100,873
            $105,718Income
      from operations
            
            
            21,351
            20,902Net
      income
            
            
            12,593
            11,858Basic
      net income per share
            $
            0.29
            $0.28Diluted
      net income per share
            $
            0.27
            $0.26







-63-


NOTE
5. PROPERTY AND EQUIPMENT, NET




Property
and equipment is recorded at cost and consists of the following (in thousands):




Years
      ended December 31,2009
              
              
              2008Computer
      equipment and purchased software
              
              
              23,137
              
              
              
              17,940Capitalized
      website development costs
              
              
              30,043
              
              
              
              22,113Furniture
      and equipment
              
              
              383
              
              
              
              2,648Leasehold
      improvements
              
              
              4,138
              
              
              
              3,82157,701
              
              
              
              46,522Less
      accumulated depreciation and amortization
              
              
              (42,576
              )
              
              
              (35,062
              )Total
      property and equipment, net
              
              
              15,125
              
              
              
              11,460


The
Company recorded $6.9 million, $5.1 million and $3.1 million of amortization and
depreciation expense for the years ended December 31, 2009, 2008 and 2007,
respectively.




NOTE
6. INVESTMENTS




The
Company's investment portfolio consists of government and high-quality corporate
debt securities. Investments in both fixed rate and floating rate interest
earning instruments carry a degree of interest rate risk. Fixed rate securities
may have their fair market value adversely impacted due to a rise in interest
rates, while floating rate securities may produce less income than expected when
interest rates fall. The longer the term of the securities, the more susceptible
they are to changes in interest rates. Investments are reviewed periodically to
identify possible other-than-temporary impairment. When evaluating the
investments, the Company reviews factors such as the length of time and extent
to which fair value has been below cost basis, the financial condition of the
issuer and the Company's ability and intent to hold the investment for a period
of time sufficient to recover the initial cost of the investment. The Company
expects to realize the full book value of all of its investments.




The
following table summarizes the investments in available-for-sale securities as
of December 31, 2009 (in thousands):




Amortized
              Cost
            
            
            Unrealized
              Gains
            
            
            Unrealized
              Losses
            
            
            Estimated
              Fair
      ValueGovernment
      and agency securities
            
            $
            21,104
            
            
            $
            64
            
            
            $
            (10
            )
            
            $
            21,158Corporate
      debt securities
            
            
            558
            
            
            
            20
            
            
            
            -
            
            
            
            578Total
      investments in available-for-sale securities
            
            $
            21,662
            
            
            $
            84
            
            
            $
            (10
            )
            
            $
            21,736Contractual
      maturity dates for investment in bonds and notes:Less
      than one year
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            19,504One
      to five years
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            2,232$
            21,736








-64-


The
following table summarizes the investments in available-for-sale securities as
of December 31, 2008 (in thousands):





Amortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              EstimatedCost
              
              
              Gains
              
              
              Losses
              
              
              Fair
      ValueGovernment
      and agency securities
              
              $
              3,689
              
              
              $
              38
              
              
              $
              (1
              )
              
              $
              3,726Corporate
      debt securities
              
              
              6,705
              
              
              
              67
              
              
              
              (213
              )
              
              
              6,559Asset
      backed securities
              
              
              2,745
              
              
              
              -
              
              
              
              (24
              )
              
              
              2,721Equity
      securities
              
              
              642
              
              
              
              75
              
              
              
              -
              
              
              
              717Total
      investments in available-for-sale securities
              
              $
              13,781
              
              
              $
              180
              
              
              $
              (238
              )
              
              $
              13,723Contractual
      maturity dates for investments in bonds and notes:Less
      than one year
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              10,050One
      to five years
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,673$
              13,723


During
the years ended December 31, 2009, 2008 and 2007, the Company determined
that an other-than-temporary impairment to the fair market value of a certain
investment held as available-for-sale had occurred. As a result, the value of
the investment was written down by $0.4 million, $0.4 million and $0.6 million
for the years ended December 31, 2009, 2008 and 2007, respectively, and was
accounted for as realized loss in the corresponding periods.




NOTE
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES




Accounts
payable and accrued expenses consist of the following (in thousands):




Years
      ended December 31,2009
              
              
              2008Accounts
      payable
              
              $
              3,697
              
              
              $
              3,657Accrued
      payroll and benefits
              
              
              3,010
              
              
              
              2,444Deferred
      rent
              
              
              317
              
              
              
              925Accrued
      marketing costs
              
              
              1,057
              
              
              
              2,327Accrued
      earnouts
              
              
              2,589
              
              
              
              4,094Accrued
      professional fees
              
              
              1,380
              
              
              
              1,153Other
      accrued expenses
              
              
              1,907
              
              
              
              2,443$
              13,957
              
              
              $
              17,043
 -65-
 NOTE 8. INCOME
TAXES


The
provision for income taxes was as follows for the years ended December 31
(in thousands):
  Year
      ended December 31,2009
              
              
              2008
              
              
              2007Current:Federal
              
              $
              109
              
              
              $
              (873
              )
              
              $
              460Foreign
              
              
              1,080
              
              
              
              1,390
              
              
              
              934State
              
              
              (343
              )
              
              
              2,398
              
              
              
              620846
              
              
              
              2,915
              
              
              
              2,014Deferred:Federal
              
              
              5,340
              
              
              
              6,028
              
              
              
              6,686Foreign
              
              
              496
              
              
              
              -
              
              
              
              -State
              
              
              852
              
              
              
              (785
              )
              
              
              1,8776,688
              
              
              
              5,243
              
              
              
              8,563Provision
      for income tax
              
              $
              7,534
              
              
              $
              8,158
              
              
              $
              10,577Income taxes have been based on the following components of pre-tax income
      (in thousands):Year
      ended December 31,2009
              
              
              
              2008
              
              
              
              2007Domestic
              
              $
              17,310
              
              
              $
              7,923
              
              
              $
              3,899Foreign
              
              
              2,612
              
              
              
              11,794
              
              
              
              6,989$
              19,922
              
              
              $
              19,717
              
              
              $
              10,888
 
   Years
      ended December 31,2009
              
              
              2008
              
              
              2007Tax
      computed at federal statutory rates
              
              $
              6,973
              
              
              
              35.0
              %
              
              $
              6,903
              
              
              
              35.0
              %
              
              $
              3,810
              
              
              
              35.0
              %State
      tax, net of federal tax benefit
              
              
              940
              
              
              
              4.7
              %
              
              
              1,033
              
              
              
              5.2
              %
              
              
              610
              
              
              
              5.6
              %Permanent
      items
              
              
              63
              
              
              
              0.3
              %
              
              
              220
              
              
              
              1.1
              %
              
              
              30
              
              
              
              0.3
              %Other
              
              
              139
              
              
              
              0.7
              %
              
              
              (302
              )
              
              
              (1.5
              )%
              
              
              1
              
              
              
              0.0
              %Stock-based
      compensation
              
              
              150
              
              
              
              0.8
              %
              
              
              -
              
              
              
              0.0
              %
              
              
              5,937
              
              
              
              54.5
              %Change
      in valuation allowance
              
              
              (731
              )
              
              
              (3.7
              )%
              
              
              304
              
              
              
              1.6
              %
              
              
              189
              
              
              
              1.7
              %Provision
      for income taxes
              
              $
              7,534
              
              
              
              37.8
              %
              
              $
              8,158
              
              
              
              41.4
              %
              
              $
              10,577
              
              
              
              97.1
              %


-66-





The tax
effect of temporary differences that give rise to significant components of
deferred tax assets and liabilities consist of the following at
December 31, (in thousands):




December
      31,2009
            
            
            2008Amortization
            $
            -
            
            $
            1,608Allowance
      for doubtful accounts
            
            195
            
            
            541Taxes
      credit carryovers
            
            5,800
            
            
            3,616Stock-based
      compensation
            
            1,232
            
            
            554Deferred
      revenue
            
            2,485
            
            
            2,901Depreciation
            
            1,701
            
            
            1,547Reserves
      and accrued expenses
            
            504
            
            
            931Other
            
            
            310
            
            
            -Net
      operating loss carry-forwards
            
            56,314
            
            
            58,667Total
      deferred tax assets
            
            68,541
            
            
            70,365Less:
      valuation allowance
            
            (7,558)
            
            
            (8,288)Net
      deferred tax assets
            
            60,983
            
            
            62,077Deferred
      tax liabilitiesDepreciation
            
            (5,544)
            
            
            -Other
            
            -
            
            
            -Total
      deferred tax liabilities
            
            (5,544)
            
            
            -Net deferred tax assets
            $
            55,439
            
            $
            62,077Reported
      as:Current
      deferred tax assets
            $
            16,184
            
            
            $9,832Long-term
      deferred tax assets
            
            39,255
            
            
            52,245Net deferred tax assets
            $
            55,439
            
            $
            62,077





A
valuation allowance of $7.6 million and $8.3 million at December 31, 2009
and 2008, respectively, has been recorded against deferred tax assets as the
Company was unable to conclude that it is more likely than not that such
deferred tax assets will be realized.




As
of December 31, 2009, the Company had federal and state net operating loss
(NOL) carryforwards of $147.5 million and $64.8 million, respectively. If
not used, the federal and state net operating losses carryforwards will begin
expiring in 2019 and 2012, respectively. As of December 31, 2009, the Company
had federal and state capital loss carryforwards of $0.8 million. If not used,
these capital loss carryforwards will begin expiring in 2012. As of
December 31, 2009, the Company had foreign tax credits of approximately
$3.1 million that will begin expiring in 2015. At December 31, 2009, the
Company has federal and state alternative minimum tax, or AMT, credit
carryforwards of approximately $1.3 million and $0.2 million, respectively. The
federal and state AMT credit carryforwards do not expire.




Utilization
of net operating losses carryforwards, credit carryforwards, and certain
deductions may be subject to a substantial annual limitation due to ownership
change limitations provided by the Internal Revenue Code of 1986, as amended,
and similar state provisions. The tax benefits related to future utilization of
federal and state NOL carryforwards, credit carryforwards, and other deferred
tax assets may be limited or lost if cumulative changes in ownership exceed 50%
within any three-year period. During 2009, we received shareholder approval
regarding an NOL protective measure program whereby the Company may impose certain
restrictions on the transfer of its capital stock in order to preserve the tax
treatment of its NOL carryforwards for federal and state income tax purposes and
certain income tax credits.The NOL protective program
remains in effect until June 30, 2011, or such earlier date as the Board
determines it is appropriate to terminate it.Additional
limitations on the use of these tax attributes could occur in the event of
possible disputes arising in examinations from various taxing authorities. The Company is not
currently under examination by the United States Internal Revenue
Service.The Company is currently under examination by certain
jurisdictions but the amounts involved are not material to the financial
statements. Any net operating loss or credit carryforwards that will expire
prior to utilization as a result of such limitations will be removed from
deferred tax assets.




-67-
 All of the state net operating losses were not available for utilization for the
year ended December 31, 2009.  For taxable years beginning in 2008 and
2009, California has suspended the NOL carryover deduction.  The net
operating losses may be carried over during the suspension
period.




At
December 31, 2009, the Company had net deferred tax assets of $55.4
million. The Company made a prior period adjustment to reduce its deferred tax
assets by $3.8 million on its opening 2007 balance sheet. A significant
component of the Company's deferred tax assets are federal and state tax NOL
carryforwards and credit carryforwards. The future utilization of the Company's
NOL carryforwards to offset future taxable income may be subject to an annual
limitation as a result of ownership changes that may have occurred previously or
that could occur in the future.




The
balance of unrecognized tax benefits decreased by $0.1 million during 2009 due
to lapse of the statute of limitations.  A reconciliation of the
beginning and ending amount of unrecognized tax benefits is as follows (in
thousands):
  Unrecognized
      Tax Benefits:Balance
      at January 1, 2009
                  
                  $
                  109Additions
      based on tax positions related to the current year
                  
                  
                  -Additions
      for tax positions of prior years
                  
                  
                  -Reductions
      for tax positions of prior years
                  
                  
                  (109
                  )Settlements
                  
                  
                  -Balance
      at December 31, 2009
                  
                  $
                  -
  The Company's continuing practice is to recognize estimated interest and/or
penalties related to income tax matters as a component of income tax
expense.  No interest expense or penalties were accrued as of December
31, 2009.  As of December 31, 2009, the reserve for the uncertain tax
positions was zero.




NOTE
9. ACCOUNTING FOR STOCK-BASED COMPENSATION




Stock-Based
Compensation Expense—Under the provisions of ASC 718 (previously EITF
Issue No. 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services), the Company recorded approximately $3.3
million and $2.5 million of stock-based compensation expense in its Statement of
Operations for the years ended December 31, 2009 and 2008 respectively. The
Company utilized the Black-Scholes valuation model for estimating the fair value
of the stock-based compensation granted after the adoption of ASC 718.




The
Company has a net operating loss carry-forward as of December 31, 2009, and
no excess tax benefits for the tax deductions related to share-based awards that
were recognized in the statements of operations. Additionally, no incremental
tax benefits were recognized from stock options exercised in 2009 that would
have resulted in a reclassification to reduce net cash provided by operating
activities with an offsetting increase in net cash provided by financing
activities.




The
Company accounts for stock option grants and similar equity instruments granted
to non-employees under the fair value method, in accordance with ASC
718. Upon
the adoption of ASC 718 on January 1, 2006, the Company estimated the fair
value of each stock-based award on the grant date using the Black-Scholes
valuation model. To facilitate the adoption of ASC 718, the Company applied the
provisions of Staff Accounting Bulletin (SAB 107) in developing its
methodologies to estimate its Black-Scholes valuation model inputs. Option
valuation models, including Black-Scholes, require the input of highly
subjective assumptions, and changes in the assumptions used can materially
affect the grant date fair value of an award. Below is a summary of the
methodologies the Company utilized to estimate the assumptions:




Valuation
and Amortization Method—The Company estimates the fair value of stock
options granted using the Black-Scholes option-pricing formula and a
single-option award approach. This fair value is then amortized on a
straight-line basis over the requisite service period, which is generally the
vesting period.




Expected
Term—The expected term of the Company's stock-based awards represents
the period that the Company's stock-based awards are expected to be outstanding
and is determined based on the simplified method permitted under ASC 718-10,
since the Company does not have adequate history of exercises of its stock-based
awards.




Expected
Volatility—The Company estimates its volatility factor by using the
historical average volatility, over a period equal to the expected term, of
comparable companies since it does not have adequate stock price history of its
own stock to determine volatility.




Expected
Dividend—The Black-Scholes valuation model calls for a single expected
dividend yield as an input. The dividend yield of zero is based on the fact that
the Company has never paid cash dividends and has no present intention to pay
cash dividends in the future.




Risk-Free
Interest Rate—The Company bases the risk-free interest rate used in the
Black-Scholes valuation model on the implied yield currently available on the
U.S. Treasury zero-coupon issues with an equivalent remaining term. Where the
expected term of the Company's stock-based awards does not correspond with the
terms for which interest rates are quoted, the Company performs a straight-line
interpolation to determine the rate from the available maturities.




-68-


Estimated
Forfeitures—When estimating forfeitures, the Company considers voluntary
termination behavior as well as an analysis of actual option forfeitures. As
stock-based compensation expense recognized in the Statement of Operations for
the years ended December 31, 2009 and 2008 is based on awards ultimately
expected to vest, it should be reduced for estimated forfeitures. ASC 718
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimates. Pre-vesting forfeitures were estimated based on historical
experience.




Fair Value—The fair value of the Company's stock options granted to employees and
non-employee directors for the years ended December 31, 2009 and 2008 was
estimated using the following assumptions:


2009
            
            2008Range
      of risk-free interest rate
            
            
            2.7%-3.1
            %
            
            
            2.1%-3.2
            %Expected
      term (years)
            
            
            6.2
            
            
            
            6.2Dividend
      yield
            
            
            0.0
            %
            
            
            0.0
            %Weighted-average
      expected volatility
            
            
            55.3
            %
            
            
            42.0
            %




NOTE
10. STOCK PLANS




Stock Plans—The Company has adopted three stock plans referred to as 1998 Stock
Plan, 2000 Stock Plan, and 2007 Equity Plan.




The
Company's 1998 Stock Plan (the 1998 Stock Plan) was amended in May 2003,
February 2005, August 2005 and November 2006 to increase the total number of
shares of Class A common stock available for issuance to a total of
10,675,000, 10,915,000, 10,955,000, and 11,705,000, respectively. The 1998 Stock
Plan provided for the granting of nonstatutory and incentive stock options to
employees, officers, directors and consultants of the Company. Stock purchase
rights may also be granted under the 1998 Stock Plan. Options granted generally
vested over a four-year period and generally expire ten years from the date of
grant. In addition, certain employees have options that have accelerated vesting
provisions upon the transfer of ownership of 50% or more of the Company's common
stock. At December 31, 2009 and 2008, zero shares were available for
future grants under the 1998 Stock Plan. At December 31, 2009 the net
compensation cost related to unvested options awarded under the 1998 Stock Plan
was $0.7 million.





The Company's 2000 Stock Plan (the 2000 Stock Plan) provided for the granting of
nonstatutory and incentive stock options to employees, officers, directors and
consultants of the Company. Stock purchase rights may have been granted under
the 2000 Stock Plan. Options granted generally begin vesting over a four-year
period. Additional options granted to employees previously holding options under
either the 1998 Stock Plan or the 2000 Stock Plan vest quarterly over four
years. Options generally expire ten years from the date of grant. At
December 31, 2009, no shares were available for future grants under the
2000 Stock Plan. At December 31, 2009 the net compensation cost
related to unvested options awarded under the 2000 Stock Plan was $11,000.





On October 23, 2007, the Company adopted the 2007 Equity Plan (the 2007
Equity Plan), which provides for an aggregate of 1,868,251 shares of the
Company's Class A common stock to be available for awards, subject to
annual increases of up to 1,500,000 shares for five years beginning in 2009. The
number of shares available under the 2007 Equity Plan may be further increased
by certain shares awarded under the 2007 Equity Plan, the 1998 Stock Plan, or
the 2000 Stock Plan that are surrendered or forfeited after the effective date
of the 2007 Equity Plan. The maximum number of shares available for awards will
not exceed 24,564,013 and, unless terminated early by the Board of Directors,
the 2007 Equity Plan will expire on October 23, 2017 and no further awards
may be granted after that date.  At December 31, 2009 the net
compensation cost related to unvested options awarded under the 2007 Equity Plan
was $4.1 million. At December 31, 2009, 1,502,655 shares were available for
future grants under the 2007 Equity Plan.




The
intrinsic value of stock options at the date of exercise is the difference
between the fair value of the stock at the date of exercise and the exercise
price. During the years ended December 31, 2009, 2008 and 2007, the total
intrinsic value of options exercised under the 2000 Stock Plan was $281,000,
$35,000 and $31,000, respectively. During the years ended December 31,
2009, 2008 and 2007, the total intrinsic value of options exercised under the
1998 Stock Plan was $1.2 million, $2.0 million and $1.9 million, respectively In
determining the intrinsic value of stock options exercised, the Company
established the exercise price based on the fair value of the Company's stock at
the date of grant as determined by the Board. Aggregate intrinsic value is
calculated as the difference between the exercise price of the underlying awards
and the quoted price of the Company's common stock.


-69-




The
following table summarizes stock option activity under the 1998 Stock Plan, the
2000 Stock Plan and the 2007 Equity Plan:




Weighted-Average
      Exercise Price
            
            Weighted
      Average Remaining Contractual Term
            
            Aggregate
      Intrinsic
              Value
              (in
    thousands)Number
      of SharesOptions
      outstanding at December 31, 2007
            
            2,878,056
            
            $3.40Granted
            
            169,500
            
            7.01Exercised
            
            (337,615)
            
            $1.50Forfeited/expired/repurchased
            
            (155,626)
            
            $7.25Options
      outstanding at December 31, 2008
            
            2,554,315
            
            $3.65
            
            6.44
            
            $6,391Granted
            
            19,500
            
            $5.41Exercised
            
            (260,010)
            
            $1.07Forfeited/expired
            
            (8,563)
            
            $5.65Options
      outstanding at December 31, 2009
            
            2,305,242
            
            $3.95
            
            5.91
            
            $9,106Vested
      and exercisable at December 31, 2009
            
            1,859,991
            
            $3.41
            
            5.57
            
            $6,342





Additional
information with respect to outstanding options under the 1998 Stock Plan, the
2000 Stock Plan and the 2007 Equity Plan as of December 31, 2009 is as
follows:




Options
      Outstanding
            
            
            Options
      ExercisableExercise
      Prices
            
            
            
            Options
      Outstanding
            
            
            Weighted
      Average Remaining Contractual Life (in years)
            
            
            Weighted
      Average Exercise Price
            
            
            Options
      Exercisable
            
            
            Weighted
      Average Exercise Price$
            -
            
            
            
            -
            
            
            $
            0.97
            
            
            
            
            204,722
            
            
            
            2.6
            
            
            $
            0.50
            
            
            
            204,722
            
            
            $
            0.50$
            0.97
            
            
            
            -
            
            
            $
            1.94
            
            
            
            
            203,350
            
            
            
            4.9
            
            
            $
            1.35
            
            
            
            203,350
            
            
            $
            1.35$
            1.94
            
            
            
            -
            
            
            $
            2.91
            
            
            
            
            67,500
            
            
            
            3.8
            
            
            $
            2.13
            
            
            
            60,375
            
            
            $
            2.13$
            2.91
            
            
            
            -
            
            
            $
            3.88
            
            
            
            
            949,999
            
            
            
            5.9
            
            
            $
            3.41
            
            
            
            889,998
            
            
            $
            3.40$
            3.88
            
            
            
            -
            
            
            $
            4.85
            
            
            
            
            480,803
            
            
            
            6.8
            
            
            $
            4.51
            
            
            
            335,847
            
            
            $
            4.46$
            5.82
            
            
            
            -
            
            
            $
            6.79
            
            
            
            
            71,745
            
            
            
            5.9
            
            
            $
            6.52
            
            
            
            29,606
            
            
            $
            6.59$
            6.79
            
            
            
            -
            
            
            $
            7.76
            
            
            
            
            85,000
            
            
            
            8.7
            
            
            $
            6.98
            
            
            
            31,000
            
            
            $
            6.98$
            7.76
            
            
            
            -
            
            
            $
            8.73
            
            
            
            
            90,875
            
            
            
            7.6
            
            
            $
            7.92
            
            
            
            42,093
            
            
            $
            7.91$
            8.73
            
            
            
            -
            
            
            $
            9.70
            
            
            
            
            151,248
            
            
            
            7.5
            
            
            $
            9.21
            
            
            
            63,000
            
            
            $
            9.06Totals
            
            
            2,305,242
            
            
            
            5.9
            
            
            $
            3.95
            
            
            
            1,859,991
            
            
            $
            3.41










-70-


The following
table summarizes restricted stock activity under the 2007 Equity
Plan:




Approximate
      Price at Grant Date
            
            Weighted
      Average Remaining Contractual Term
            
            Aggregate
      Intrinsic Value
              (in
    thousands)Number
      of SharesRestricted
      shares outstanding at December 31, 2007
            
            386,702
            $
            9.70
            
            9.5Granted
            
            432,253
            $
            6.41Vested
            
            (107,945)
            $
            5.99Forfeited/expired
            
            (68,677)
            $
            3.38Restricted
      shares outstanding at December 31, 2008
            
            642,333
            $
            8.33
            
            9.1
            $
            $1,846Granted
            
            748,133
            $
            4.99Vested
            
            (119,167)
            $
            8.98Forfeited/expired
            
            (16,535)
            $
            6.51Restricted
      shares outstanding at December 31, 2009
            
            1,254,764
            $
            6.31
            
            8.8
            $
            $9,825




At December 31, 2009, the Company had 75,000 outstanding options to
purchase Class A common stock of the Company that had been granted outside
the Company's 1998 Stock Plan, 2000 Stock Plan, and 2007 Equity Plan at weighted
average exercise price of $1.50 per share. All of 75,000 options were vested and
exercisable at December 31, 2009 with 5.2 years of remaining
contractual life.




The
following table summarizes information pertaining to options granted, vested,
and exercised during the years ended December 31 (in thousands, except
share amounts):




2009
            
            
            2008
            
            
            2007Weighted
      average fair value of stock options granted
            
            $
            5.41
            
            
            $
            6.30
            
            
            $
            6.37Aggregate
      intrinsic value of stock options vested
            
            $
            8,697
            
            
            $
            5,650
            
            
            $
            8,037Aggregate
      intrinsic value of stock options exercised
            
            $
            1,508
            
            
            $
            2,708
            
            
            $
            1,882




In
accordance with ASC 718-20 (previously EITF Issue 00-23, Issues Related to the Accounting for
Stock Compensation under APB Opinion No. 25 and FASB Interpretation
No. 44) and ASC 718-30 (previously EITF 95-16 Accounting For Stock Compensation
Arrangements with Employer Loan Features under APB Opinion No. 25,
options exercised with notes receivable in the year ended December 31, 2003
were accounted for as variable options. Additional deferred compensation of $6.6
million for the year ended December 31, 2005 was recorded in stockholders'
equity to reflect the fair value change of the underlying common stock for those
options exercised with notes receivable. Deferred stock compensation represents
the excess of the fair value of the common stock over the option exercise price.
In accordance with ASC 718, the balance of deferred stock-based compensation on
the consolidated balance sheet on the date of adoption, January 1, 2006 was
reclassified to additional paid-in capital. In May 2007 the Board of Directors
modified the terms of option notes, and as a result the Company recognized $13.7
million in additional stock-based compensation expenses under ASC 718 during the
year ended December 31, 2007.




Under
terms of an employment agreement, the Company's Chief Operating Officer was
awarded options to purchase 190,000 shares of Class A common stocks
with certain repurchase provisions. These option awards were classified as
liabilities, and stock-based compensation cost is recognized based on the fair
value of the option grant. During the year ended December 31, 2009, the
Company reclassified $0.3 million from additional paid-in-capital to
liabilities for stock-based compensation.




At
December 31, 2009 the total compensation cost related to unvested
stock-based awards granted to employees under the provisions of ASC 718 and the
Company's stock award plans, but not yet recognized was approximately $4.1
million, which will be amortized on a straight-line basis over a
weighted-average period of 1.5 years and will be adjusted for subsequent
changes in estimated forfeitures.


-71-




Total
non-cash charges included in the consolidated statement of operations from stock
options, restricted stock grants and warrants were as follows (in thousands):




Years
      ended December 31,2009
            
            
            2008
            
            
            2007Employee
      and director stock optionsand
      restricted stock grants
            
            $
            3,277
            
            
            $
            2,491
            
            
            $
            15,195




NOTE
11. CAPITALIZATION




On
October 4, 2007 the Board of Directors approved a reverse stock split of
the Company's common stock, which the pricing committee subsequently determined
to be a 1-for-2 reverse stock split, that occurred following the conversion of
the Company's Series A, Series B, Series C, Series D, and
Series E preferred stock and Class C and Class D common stock
into shares of the Company's Class A common stock on a one-to-one basis
prior to consummation of the Company's initial public offering.




Effective
November 21, 2007 all of the outstanding shares of Series A, B, C, D
and E Preferred Stock and Class C and D of Common Stock were converted into
Class A Common Stock in accordance with Sections 3(a)(ii), 3(c)(i) and
3(d)(i) of the Amended and Restated Certificate of Incorporation of the Company.




All
share and per share amounts in the accompanying consolidated financial
statements have been retroactively adjusted for all periods presented to give
effect to the stock split.




On
November 16, 2007, a registration statement relating to the initial public
offering of Class A common stock was declared effective by the Securities
and Exchange Commission. Under this registration statement, the Company
registered 6,000,000 shares of its Class A common stock, and another
900,000 shares subject to the underwriters' over-allotment option. The
underwriters did not exercise the over-allotment option. The remaining 6,000,000
shares of Class A common stock registered under the registration statement
were sold at a price to the public of $8.00 per share. 2,350,115 shares were
sold by the Company, and 3,649,885 shares were sold by the selling stockholders
identified in the registration statement. The offering closed on
November 21, 2007. The sole book-running manager was Thomas Weisel
Partners LLC, and the co-lead manager was Jefferies & Company.




The
aggregate gross proceeds from the shares of Class A common stock sold by
the Company through the initial public offering were $18.8 million. The
aggregate net proceeds to the Company from the offering were approximately
$13.3 million, after deducting an aggregate of approximately
$1.3 million in underwriting discounts and commissions paid to the
underwriters and an estimated $4.2 million in other expenses incurred in
connection with the offering.





-72-


2009
            
            
            2008
            
            
            2007Preferred
      stock Series ABalance
      at beginning of year
            
            
            -
            
            
            
            -
            
            
            
            5,000,000Converted
      to Class A common stock
            
            
            -
            
            
            
            -
            
            
            
            (5,000,000
            )Balance
      at end of year
            
            
            -
            
            
            
            -
            
            
            
            -Preferred
      stock Series BBalance
      at beginning of year
            
            
            -
            
            
            
            -
            
            
            
            4,779,286Converted
      to Class A common stock
            
            
            -
            
            
            
            -
            
            
            
            (4,779,286
            )Balance
      at end of year
            
            
            -
            
            
            
            -
            
            
            
            -Preferred
      stock Series CBalance
      at beginning of year
            
            
            -
            
            
            
            -
            
            
            
            4,971,502Converted
      to Class A common stock
            
            
            -
            
            
            
            -
            
            
            
            (4,971,502
            )Balance
      at end of year
            
            
            -
            
            
            
            -
            
            
            
            -Preferred
      stock Series DBalance
      at beginning of year
            
            
            -
            
            
            
            -
            
            
            
            6,884,149Converted
      to Class A & B common stock
            
            
            -
            
            
            
            -
            
            
            
            (6,884,149
            )Balance
      at end of year
            
            
            -
            
            
            
            -
            
            
            
            -Preferred
      stock Series EBalance
      at beginning of year
            
            
            -
            
            
            
            -
            
            
            
            785,295Converted
      to Class A common stock
            
            
            -
            
            
            
            -
            
            
            
            (785,295
            )Balance
      at end of year
            
            
            -
            
            
            
            -
            
            
            
            -Common
      stock equivalent of Preferred Series A-E
            
            
            -
            
            
            
            -
            
            
            
            -








-73-





2009
            
            
            2008
            
            
            2007Common
      stock Class ABalance
      at beginning of year
            
            
            40,946,826
            
            
            
            40,177,834
            
            
            
            10,330,692Exercise
      of options & warrants
            
            
            260,008
            
            
            
            337,615
            
            
            
            1,381,988Recissions
      of options exercised with notes receivable
            
            
            -
            
            
            
            (2,371
            )
            
            
            -Repurchase
      of stock from former employee
            
            
            -
            
            
            
            (12,500
            )
            
            
            -Restricted
      stock used to pay taxes
            
            
            (7,994
            )
            
            
            -
            
            
            
            -Grant
      of restricted stock, net of stock repurchased
            
            
            748,133
            
            
            
            385,243
            
            
            
            25,126Common
      stock issued for acquisition
            
            
            217,642
            
            
            
            125,000
            
            
            
            -Conversion
      of preferred stock
            
            
            -
            
            
            
            -
            
            
            
            22,420,232Conversion
      of Class C & D common stock
            
            
            -
            
            
            
            -
            
            
            
            3,669,681Initial
      public offering
            
            
            -
            
            
            
            -
            
            
            
            2,350,115Retirement
      of stocks returned by sellers of ClientShop acquistion
            
            
            -
            
            
            
            (11,702
            )
            
            
            -Stock
      options exercised
            
            
            (16,535
            )
            
            
            (52,293
            )
            
            
            -Balance
      at end of year
            
            
            42,148,080
            
            
            
            40,946,826
            
            
            
            40,177,834Common
      stock Class BBalance
      at beginning of year
            
            
            3,025,000
            
            
            
            3,025,000
            
            
            
            3,025,000Balance
      at end of year
            
            
            3,025,000
            
            
            
            3,025,000
            
            
            
            3,025,000Common
      stock Class CBalance
      at beginning of year
            
            
            -
            
            
            
            -
            
            
            
            98,252Exercise
      of options
            
            
            -
            
            
            
            -
            
            
            
            5,840Converted
      to Class A common stock
            
            
            -
            
            
            
            -
            
            
            
            (104,092
            )Balance
      at end of year
            
            
            -
            
            
            
            -
            
            
            
            -Common
      stock Class DBalance
      at beginning of year
            
            
            -
            
            
            
            -
            
            
            
            3,565,589Converted
      to Class A common stock
            
            
            -
            
            
            
            -
            
            
            
            (3,565,589
            )Balance
      at end of year
            
            
            -
            
            
            
            -
            
            
            
            -Total
      Common stock
            
            
            45,173,080
            
            
            
            43,971,826
            
            
            
            43,202,834




Preferred Stock—Each share of Preferred Stock was converted into shares of Class A
common stock at the Conversion Price prior to the closing of the Company's
initial public offering. As of December 31, 2009 there were no shares of
preferred stock issued and outstanding.




Class A
Common Stock—Each share of Class A Common Stock has a single vote.
The number of authorized shares of Class A common stock as of
December 31, 2009 and 2008 were 125,000,000, of which 42,148,080 and
40,946,826 respectively were issued and outstanding.




Class A
Restricted
Stock—During the years ended December 31, 2009 and 2008, the
Company issued 748,133 and 432,253 shares, respectively, of restricted
shares of Class A common stock. The stock generally vests over three
years. As of December 31, 2009 and 2008, zero and 23,439 shares,
respectively, were unvested and subject to repurchase by the Company.


-74-


Class B
Common Stock—The Company has 6,050,000 authorized shares of Class B
Common Stock. Each share of Class B Common Stock has 20 votes and shall
vote together with the shares of the Company's Class A Common Stock as a
single class. All shares of Class B Common Stock are held by a single
stockholder.




Each
share of Class B Common Stock shall be converted at the option of the
holder thereof, at any time after the date of issuance, into one share of
Class A Common Stock. Upon the transfer or disposition of any share of
Class B Common Stock to any person or entity other than to an affiliate of
the current stockholder, each such share of Class B Common Stock shall
automatically be converted into one share of Class A common stock. If and
when the current stockholder or its affiliates collectively cease to
hold at least 15% of the shares of the Company's outstanding capital stock,
each outstanding share of Class B Common Stock shall automatically be
converted into one share of Class A Common Stock.




As
of December 31, 2009 and 2008 there were 3,025,000 shares of Class B
Common Stock issued and outstanding.




Class C
Common Stock & Class D Common Stock—Class C & Class D Common Stocks of the Company were
canceled upon conversion of all outstanding shares of each class into
Class A Common Stock prior to the consummation of the Company's initial
public offering and no shares were issued and outstanding at December 31,
2009 or 2008, respectively.




As
of December 31, 2009, Idealab Holdings, L.L.C. and its affiliates own
5,633,180 shares of Class A Common Stock and all of the shares of
Class B Common Stock.




NOTE
12. EMPLOYEE BENEFIT PLAN




The
Company offers a 401(k) Profit Sharing Plan (the Plan) to all employees who meet
the Plan's eligibility requirements. Under the Plan, participating employees may
defer a percentage of their eligible pretax earnings up to the Internal Revenue
Service's annual contribution limit. Company matching and profit sharing
contributions are discretionary. For the years ended December 31, 2009,
2008 and 2007, the Company made no contributions to the plan.




NOTE
13. COMMITMENTS AND CONTINGENCIES




Leases—The Company leases its offices in United States, United Kingdom, and
Canada under operating leases, with periodic rate increases, which expire
through 2014, if not renewed. Future minimum lease payments, net of foreign
exchange where applicable, under non-cancelable operating leases are as follows
(in thousands):




Years
      Ending December 31,
            
            Operating2010
            
            
            1,4292011
            
            
            1,3442012
            
            
            1,3832013
            
            
            1,4242014
            
            
            716Total
            
            $
            6,296




The
Company records rental expense on a straight-line basis over the term of the
lease. Rental expense for the years ended December 31, 2009, 2008 and 2007
was approximately $1.2 million, $1.1 million and $1.0 million, respectively.




The
landlord tenant improvement allowances of approximately $2.2 million associated
with the 2004 and 2006 corporate headquarters build-out in El Segundo,
California, and $1.4 million for offices of the Company's subsidiary in Canada
are capitalized as leasehold improvements and amortized over the shorter of
their estimated useful lives or the remaining lease term, while the tenant
improvement allowance is recorded as deferred rent and will be recovered ratably
over the remaining term of the lease.




At
December 31, 2009 the Company had a $0.5 million letter of credit, or LOC,
in favor of a landlord; this LOC is fully collateralized by an investment
included in Other Assets on the balance sheet.




-75-


On
October 15, 2009, we entered into an amendment of our corporate headquarters
office lease whereby the leaseextends for a period of four years, from
July 1, 2010 to June 30, 2014.  Under the terms of the amendment, the
total aggregate base rent for the facilities for the period from July 1, 2010
through June 30, 2014, is approximately $5.4 million. The Lease Amendment
also provides an option to further renew the lease for two additional years on
substantially the same terms, a tenant improvement allowance, and certain
expansion rights, among other provisions.





On
October 7, 2008, the Company entered into a Loan and Security Agreement
with Silicon Valley Bank pursuant to which the Company will receive up to a $35
million revolving line of credit that will mature on October 7, 2012. 
The interest to be paid on the used portion of the credit facility will be based
upon LIBOR or the prime rate plus a spread based on the ratio of debt to
adjusted earnings before interest, taxes, depreciation and amortization. In
addition, the obligations under the Loan and Security Agreement are secured by a
lien on substantially all of the assets of the Company.




Contingencies—From time to time, the Company has been party to various litigation and
administrative proceedings relating to claims arising from its operations in the
normal course of business. Based on the information presently available,
including discussion with counsel, management believes that resolution of these
matters will not have a material adverse effect on the Company's business,
consolidated results of operations, financial condition, or cash flows.




In
its normal course of business, the Company has made certain indemnities,
commitments and guarantees under which it may be required to make payments in
relation to certain transactions. Those indemnities include intellectual
property indemnities to the Company's customers in connection with the sale of
its products and the licensing of its technology, indemnities for liabilities
associated with the infringement of other parties' technology based upon the
Company's products and technology, and indemnities to directors and officers of
the Company to the maximum extent permitted under the laws of the State of
Delaware. The duration of these indemnities, commitments and guarantees varies,
and in certain cases, is indefinite. The majority of these indemnities,
commitments and guarantees do not provide for any limitation of the maximum
potential future payments that the Company could be obligated to make. The
Company has not recorded any liability for these indemnities, commitments and
guarantees in the accompanying balance sheets. The Company does, however, accrue
for losses for any known contingent liability, including those that may arise
from indemnification provisions, when future payment is probable.




Earnout
Agreements—
The Company has entered into earnout agreements as part of the consideration for
certain acquisitions. The Company accounts for earnout consideration
in accordance with ASC 805 (previously SFAS No.141R, Business Combinations), as an
addition to goodwill and accrued expenses at the present value of all future
earnouts at the acquisition date for acquisitions occurring in fiscal years
beginning after December 15, 2008.  Subsequent changes to the
earnout estimates will be recorded as expense or income in the statement of
operations in the period of change. Additionally, the Company is required to
review its estimates on at least a quarterly basis.Earnouts occurring
from acquisitions prior to December 31, 2008 are accounted for under
EITF 95-8, Accounting for
Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a
Purchase Combination as an addition to compensation expense or goodwill
in the period earned. As of December 31, 2009, the Company paid earnouts
totaling $3.7 million relating to earnout
consideration for acquisitions that occurred prior to 2009.  In
accordance with ASC 805, the Company recorded approximately $0.1 million to
goodwill and accrued expenses for the present value of the most probable
earnouts for all future years relating to acquisitions that occurred during
fiscal year 2009.





As of
December 31, 2009, the Company anticipates that the most probable earnout
amount in 2010 will be approximately $2.6 million related to acquisitions prior
to the adoption of ASC 805 which was recorded as an addition to goodwill
and accrued expenses. The Company cannot
reasonably estimate maximum earnout payments, as a significant number of
agreements do not contain maximum payout clauses.





Capital
Lease Obligations — The Company has entered into leases for certain
information technology equipment and software and has accounted for them as
capital leases in accordance with ASC 840 (previously SFAS No. 13, Leases). As of December 31,
2009, the Company has assets of $0.4 million of net property, plant and
equipment with short-term liabilities of $0.2 million and long-term liabilities
of $0.3 million recorded on its consolidated balance sheet associated with these
capital leases.


-76-





The Company’s
future minimum lease payments, including interest and service fees, over the
next three years are as follows (in thousands):





2010
            
            $
            1732011
            
            
            1592012
            
            
            106438Less:
      interest expense
            
            
            (18)Present
      value of
              minimum
      lease payments
            
            $
            420




Severance Payment
Agreements—The Company has entered into severance payment agreements
with certain members of management which provide for minimum salaries,
perquisites and payments due upon certain defined future events.




LegalContingencies— On August 8, 2008, Versata Software, Inc. (Versata Software)
and Versata Development Group, Inc. (Versata Development) filed suit
against the Company and its subsidiaries,  Autodata Solutions Company
(Autodata) and Autodata Solutions, Inc. (Autodata Solutions) in the United
States District Court for the Eastern District of Texas, Marshall Division,
claiming that certain software and related services the Company and its
Autodata subsidiaries offer violate Versata Development’s  U.S. Patent
No. 7,130,821 entitled “Method and Apparatus for Product Comparison” and
its U.S. Patent No. 7,206,756 entitled “System and Method for Facilitating
Commercial Transactions over a Data Network,” breach of a settlement agreement
entered into in 2001 related to a previous lawsuit brought by the Versata
entities, and tortious interference with an existing contract and prospective
contractual relations.  On August 25, 2008, Versata Software and
Versata Development filed an amended complaint against the Company, Autodata and
Autodata Solutions, asserting additional claims that certain software and
related services offered by the Company and its Autodata subsidiaries violate
Versata Development’s U.S. Patent No. 5,825,651 entitled “Method and
Apparatus for Maintaining and Configuring Systems,” Versata Development’s 
U.S. Patent No. 6,675,294 entitled “Method and Apparatus for Maintaining
and Configuring Systems,” and Versata Software’s  U.S. Patent
No. 6,405,308 entitled “Method and Apparatus for Maintaining and
Configuring Systems” and seeking declaratory judgment regarding the validity of
the Versata entities’ revocation and termination of licenses included in the
2001 settlement agreement.  Versata Software and Versata Development seek
unspecified damages, attorneys’ fees and costs and permanent injunctions against
the Company, Autodata and Autodata Solutions.  In December 2008, we filed a
Motion to Dismiss for lack of personal jurisdiction, which was denied in August
2009. Discovery is pending.




On August
12, 2009, the Company, Autodata and Autodata Solutions filed suit in the
District Court of Travis County, Texas, in which we assert unauthorized
disclosure, misappropriation and conversion of proprietary, trade secret and
confidential information imparted by the Company to Versata Software
and Versata Development in 1997 and 1998. The Company alleges that
Versata Software and Versata Development disclosed such confidential information
to the U.S. Patent & Trademark Office in their applications for U.S. Patent
No. 7,130,821 and U.S. Patent No. 7,206,756, and claimed it as their
own. The company's petition seeks declaratory relief to quiet title
resulting from Versata Software and Versata Development’s claimed ownership of
the technology and confidential information underlying the patents as well as
unspecified damages, attorneys’ fees and costs. In January 2010, Versata filed
its Answer, which included among other things, a plea for dismissal for lack of
jurisdiction, which is pending.





On August
12, 2009, Versata Software and Versata Development filed suit for declaratory
judgment against the Company, Autodata and Autodata Solutions, in the United
States District Court for the Western District of Texas, Austin Division,
alleging apprehension of a potential lawsuit by The Company against
them for their breach of a confidentiality agreement between the parties.
Versata voluntarily dismissed the suit without prejudice in January
2010.





The
Company believes the remaining claims against it are without merit and
intend to vigorously defend the lawsuits, but the Company cannot
predict the outcome of these matters, and an adverse outcome could have a
material impact on our financial condition, results of operations or cash
flows.  Even if the Company is successful in defending the
lawsuits, the Company may incur substantial costs and diversion of
management time and resources to defend the litigation. The Company
is not able to estimate a probable loss, if any.






-77-


NOTE
14. SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION
  The
Company's consolidated supplemental cash flow information for the three years
ended December 31, 2009 is provided below (in thousands):


Years
      ended December 31,2009
              
              
              2008
              
              
              2007Non-cash
      investing and financing activities:Repayment
      (cancellation) of notes receivable from stockholders in connection with
      repurchases
              
              $
              -
              
              
              $
              15
              
              
              $
              2,426Common
      Stock issued in acquisitions
              
              
              1,825
              
              
              
              1,250
              
              
              
              -Common
      Stock returned (cancellation) by seller of acquisiton
              
              
              -
              
              
              
              (47
              )
              
              
              -Decrease
      in goodwill through release of deferred tax
              
              
              
              
              
              
              274
              
              
              
              2,689


NOTE
15.  SEGMENT REPORTING




As
discussed previously in Note 2, Summary of Significant Accounting Policies,
the Company manages its business within two identifiable segments. The following
tables present the summarized information by segment (in thousands):




Year
      Ended December 31,2009
            
            
            2008
            
            
            2007Consumer
      InternetRevenues
            
            $
            66,154
            
            
            $
            71,564
            
            
            $
            63,738Investment
      and other income
            
            
            971
            
            
            
            805
            
            
            
            6,441Depreciation
      and amortization
            
            
            13,564
            
            
            
            10,729
            
            
            
            6,743Segment
      pre-tax income
            
            
            12,500
            
            
            
            13,012
            
            
            
            5,508Provision
      for income tax
            
            
            5,993
            
            
            
            6,640
            
            
            
            9,643Stock-based
      compensation
            
            
            3,277
            
            
            
            2,491
            
            
            
            15,195Segment
      assets
            
            
            350,985
            
            
            
            340,294
            
            
            
            324,451LicensingRevenues
            
            
            33,602
            
            
            
            32,472
            
            
            
            26,151Investment
      and other income (loss)
            
            
            (1,283
            )
            
            
            (308
            )
            
            
            (408
            )Depreciation
      and amortization
            
            
            3,026
            
            
            
            2,825
            
            
            
            1,287Segment
      pre-tax income
            
            
            7,422
            
            
            
            6,705
            
            
            
            5,380Provision
      for income tax
            
            
            1,541
            
            
            
            1,518
            
            
            
            934Stock-based
      compensation
            
            
            -
            
            
            
            -
            
            
            
            -Segment
      assets
            
            
            40,958
            
            
            
            37,395
            
            
            
            35,201TotalRevenues
            
            
            99,756
            
            
            
            104,036
            
            
            
            89,889Investment
      and other income (loss)
            
            
            (312
            )
            
            
            497
            
            
            
            6,033Depreciation
      and amortization
            
            
            16,590
            
            
            
            13,554
            
            
            
            8,030Pre-tax
      income
            
            
            19,922
            
            
            
            19,717
            
            
            
            10,888Provision
      for income tax
            
            
            7,534
            
            
            
            8,158
            
            
            
            10,577Stock-based
      compensation
            
            
            3,277
            
            
            
            2,491
            
            
            
            15,195Total
      assets
            
            
            391,943
            
            
            
            377,689
            
            
            
            359,652




2008 and
2007 asset totals include the effect of a $3.8 million prior period adjustment
to correct deferred tax assets.





During
the year ended December 31, 2009 and 2008, the Company generated
approximately $15.3 million and $18.6 million of revenue from its Canadian and
United Kingdom operations, respectively. The U.K. operations were acquired on
June 18, 2007.


-78-


NOTE
16.  SUBSEQUENT EVENT





From January
1, 2010 through March 2, 2010, the Company acquired websites in its Consumer
Internet segment for an aggregate purchase price of approximately $7 million in
 cash, stock and earnouts.
  NOTE
17. VALUATION AND QUALIFYING ACCOUNTS


(
      in thousands)
            
            Beginning
      Balance
            
            
            Charged
      to Cost and Expense
            
            
            Additions
      Charged to Other Accounts
            
            
            Deductions
      and Write Offs
            
            
            Release
      of Valuation Allowance
            
            
            Ending
      BalanceYear
      ended December 31, 2009Allowance
      for doubtful accounts
            
            $
            1,513
            
            
            
            68
            
            
            
            41
            
            
            
            (1,004
            )
            
            
            -
            
            
            $
            618Valuation
      allowance for deferred tax asset
            
            
            8,288
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (730
            )
            
            
            7,558Year
      ended December 31, 2008Allowance
      for doubtful accounts
            
            $
            1,139
            
            
            
            1,575
            
            
            
            142
            
            
            
            (1,343
            )
            
            
            -
            
            
            $
            1,513Valuation
      allowance for deferred tax asset
            
            
            9,848
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,560
            )
            
            
            8,288Year
      ended December 31, 2007Allowance
      for doubtful accounts
            
            $
            1,267
            
            
            
            320
            
            
            
            35
            
            
            
            (483
            )
            
            
            -
            
            
            $
            1,139Valuation
      allowance for deferred tax asset
            
            
            9,659
            
            
            
            189
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            9,848







NOTE
18. QUARTERLY FINANCIAL RESULTS


Quarters
      ended(unaudited,
      in thousands)
            
            December
      31, 2009
            
            
            September 30,
      2009
            
            
            June 30,
      2009
            
            
            March 30,
      2009
            
            
            December 31,
      2008
            
            
            September 30,
      2008
            
            
            June 30,
      2008
            
            
            March 30,
      2008Revenues
            
            $
            27,678
            
            
            $
            25,322
            
            
            $
            23,228
            
            
            $
            23,528
            
            
            $
            26,978
            
            
            $
            26,853
            
            
            $
            25,264
            
            
            $
            24,941Cost
      of revenues
            
            
            5,122
            
            
            
            4,470
            
            
            
            4,406
            
            
            
            4,783
            
            
            
            6,349
            
            
            
            6,658
            
            
            
            5,558
            
            
            
            5,387Income
      from operations
            
            
            6,377
            
            
            
            5,626
            
            
            
            4,492
            
            
            
            3,739
            
            
            
            5,411
            
            
            
            4,725
            
            
            
            4,553
            
            
            
            4,531Net
      income
            
            
            4,285
            
            
            
            3,295
            
            
            
            2,545
            
            
            
            2,263
            
            
            
            3,054
            
            
            
            2,562
            
            
            
            2,923
            
            
            
            3,020Basic
      Earnings per Share
            
            $
            0.10
            
            
            $
            0.08
            
            
            $
            0.06
            
            
            $
            0.05
            
            
            $
            0.07
            
            
            $
            0.06
            
            
            $
            0.07
            
            
            $
            0.07Diluted
      Earnings per Share
            
            $
            0.09
            
            
            $
            0.07
            
            
            $
            0.06
            
            
            $
            0.05
            
            
            $
            0.07
            
            
            $
            0.06
            
            
            $
            0.07
            
            
            $
            0.07








-79-
 ITEM
9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE




None.




ITEM
9A.    CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures




Under
the supervision and with the participation of the Company's management,
including our Chief Executive Officer and Chief Financial Officer, the Company
has evaluated the effectiveness of the design and operation of it's
disclosure controls and procedures, as such term is defined under
Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, as of the
end of the period covered by this Annual Report on Form 10-K. Based on
their evaluation as of December 31, 2009, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures were effective as of December 31, 2009. "Disclosure controls and
procedures" are controls and procedures that are designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms, and
include controls and procedures designed to ensure that such information is
accumulated and communicated to the company's management, including its chief
executive officer and chief financial officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure.





Changes in Internal Control Over Financial Reporting





The Company monitors and evaluates on an ongoing basis, its internal control
over financial reporting in order to improve its overall effectiveness. In the
course of these evaluations, the Company modifies and refines its internal
processes as conditions warrant. As required by Rule 13a-15(d), the
Company’s management, including the Chief Executive Officer and the Chief
Financial Officer, also conducted an evaluation of the Company's internal
control over financial reporting to determine whether any changes occurred
during the quarter ended December 31, 2009 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting. Based on that evaluation, there has been no such
change during the fourth quarter of fiscal year 2009.





Management’s Annual Report on Internal Control Over Financial
Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15(d)-15(f). Our internal control system is designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements in accordance with GAAP.




Under
the supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, our management assessed the
design and operating effectiveness of internal control over financial reporting
as of December 31, 2009 based on the framework set forth in Internal Control—Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, our management concluded that our
internal control over financial reporting was effective as of December 31,
2009, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements in accordance with GAAP.BDO Seidman,
LLP, an independent registered public accounting firm, has issued an attestation
report on management's assessment of our internal control over financial
reporting as of December 31, 2009. That report appears below.





-80-
 Report
of Independent Registered Public Accounting Firm






Board of
Directors and Stockholders


Internet
Brands, Inc.


El
Segundo, California





We have
audited Internet Brands, Inc. (“the Company”)  internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). The Company’s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Item 9A, Controls and Procedures. Our
responsibility is to express an opinion on the company’s internal control over
financial reporting based on our audit.
  We conducted
our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
  A company’s
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
  Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  In our
opinion, Internet Brands, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on the
COSO criteria.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Internet
Brands, Inc.  as of December 31, 2009 and 2008, and the related
consolidated statements of operations and comprehensive income (loss),
stockholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2009 and our report dated March 2, 2010 expressed an
unqualified opinion thereon.


/s/ BDO
SEIDMAN, LLP







BDO
Seidman, LLP


L os
Angeles, California


March 2,
2010





-81-
 ITEM
9B.    OTHER INFORMATION




None.




























-82-


PART
III






ITEM
10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE




The
information required by this Item 10 is incorporated herein by reference from
the information to be contained in our 2010 Proxy Statement under the headings
“Proposal: Election of
Directors,” “Executive Compensation” and “Corporate Governance”or
elsewhere in such document, to be filed with the U.S. Securities and Exchange
Commission, or SEC, in connection with the solicitation of proxies for our 2010
Annual Meeting of Stockholders, or 2010 Proxy Statement. Such Proxy Statement
will be filed with the SEC within 120 days after the end of the fiscal year to
which this report relates.




Executive
Officers of the Registrant




The
following table sets forth information about our executive officers as of
February 28, 2010:




Name
            
            Age
            
            PositionRobert
      N. Brisco
            
            
            47
            
            Chief
      Executive Officer, President and DirectorScott
      A. Friedman
            
            
            36
            
            Chief
      Financial OfficerCharles
      E. Hoover
            
            
            45
            
            Chief
      Marketing OfficerLisa
      Morita
            
            
            47
            
            Chief
      Operating OfficerJoe
      Rosenblum
            
            
            35
            
            Chief
      Technology OfficerB.
      Lynn Walsh
            
            
            52
            
            Executive
      Vice President of Corporate Development, General Counsel, and Corporate
      Secretary




Mr. Brisco
has served as Chief Executive Officer, President, and Director since 1999. From
1998 to 1999, Mr. Brisco served as the President of Universal Studios
Hollywood Theme Park, an entertainment company, and Citywalk, an entertainment
and shopping complex. Prior to Universal, Mr. Brisco was Senior Vice
President of Advertising, Marketing, and New Business Development for The Los Angeles Times, a
newspaper company, from 1993 to 1998. Prior to that, Mr. Brisco was a
consultant with McKinsey & Co. and the Boston Consulting Group, where
he specialized in media and consumer products. Mr. Brisco has a B.A. from
the University of Southern California and an M.B.A. from the University of
California at Los Angeles.




Mr. Friedman
joined us in August 2008 as Chief Financial Officer.  Previously, from
September 2006 to August 2008, Mr. Friedman served as Chief Financial Officer of
WPT Enterprises, Inc., an entertainment and consumer products company and from
September 2004 to September 2006 served as its Vice President of Finance &
Controller.  From 2003 to 2004, Mr. Friedman served as Controller of
Sony Pictures Digital, a digital entertainment company.  From 1998 to
2003, Mr. Friedman served in various capacities at The Walt Disney Company, an
entertainment corporation.  Mr. Friedman has a B.A. from George
Washington University and received a Certified Public Accountant certificate
from the Commonwealth of Virginia.




Mr. Hoover
served as Senior Vice President of Marketing and Business Development from 2001
to 2007 and has served as Chief Marketing Officer since January 2007. He
joined us in 1999. From 1998 to 1999, Mr. Hoover served as Director of
Consumer Marketing of Homestore.com, an operator of real estate websites. From
1997 to 1998, Mr. Hoover served as Vice President of Marketing for
PeopleLink, a provider of business-to-business community services.
Mr. Hoover has a B.A. from Occidental College and an M.B.A. from Stanford
University.




Ms. Morita
joined us in February 2007 as Executive Vice President and General Manager
and became Chief Operating Officer in May 2007. Previously, from
October 2002 to February 2007, Ms. Morita served as the Senior
Vice President of Customer Care and Content Solutions at Yahoo! Search
Marketing/Overture Services, an Internet company, where she was responsible for
leading the customer and editorial operations that supported online advertisers.
From 2001 to October 2002, Ms. Morita served as Senior Vice President
and General Manager, Online Business & Marketing, at GoTo.com. As
Senior Vice-President of Marketing at eMind, LLC, an online learning company
serving the financial services industry, Ms. Morita led product management,
marketing, advertising, customer service and public relations from 1999 to 2001.
From 1993 to 1999, Ms. Morita served as Vice President of Advertising and
Marketing at The Los Angeles
Times. Ms. Morita has a B.A. from Occidental College and an M.B.A.
from Stanford University.




-83-


Mr. Rosenblum
has served as Chief Technology Officer since May 2008. Mr. Rosenblum served as
our Vice President, Technology Development, from January 2006 to May 2008. From
February 2004 to January 2006, Mr. Rosenblum served as
Engineering Manager, Portal Applications at EarthLink, Inc., an Internet
service provider, where he managed a team of software engineers through all
aspects of development for EarthLink Search and myEarthLink. From
September 2003 to February 2004, Mr. Rosenblum served as a staff
engineer at EarthLink, designing architecture and overseeing implementation for
"Private Labeling" of the EarthLink Personal Start Page for MCI. From
September 2002 to September 2003, Mr. Rosenblum served as senior
software engineer at EarthLink. From 2000 to September 2002,
Mr. Rosenblum served as a software engineer and technical lead at
Epinions.com, Inc., an Internet company for consumer reviews and price
information. Mr. Rosenblum has a B.A., and a master's degree in Modern
Thought and Literature, from Stanford University.




Ms. Walsh
has served as Executive Vice President of Corporate Development, General
Counsel, and Corporate Secretary since 2000. From 1998 to 2000, Ms. Walsh
was a partner in the Technology group at Alston & Bird LLP in Atlanta,
Georgia, where she specialized in public and private offerings of securities,
mergers and acquisitions and corporate finance. From 1992 to 1998,
Ms. Walsh was a partner in the Corporate and Securities group at
Hunton & Williams LLP, in its Atlanta office. Ms. Walsh has a B.A.
from the University of Michigan and a J.D. from Wayne State University Law
School.




ITEM
11.    EXECUTIVE COMPENSATION




The
information required by this Item 11 is incorporated herein by reference from
the information to be contained in our 2010 Proxy Statement under the headings
“Executive
Compensation” and “Compensation Discussion and
Analysis” or elsewhere in such document.




ITEM
12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS




The
information required by this Item 12 is incorporated herein by reference from
the information to be contained in our 2010 Proxy Statement under the headings
“Security Ownership of Certain
Beneficial Owners and Management” and “Executive
Compensation.”





ITEM
13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE




The
information required by this Item 13 is incorporated herein by reference from
the information to be contained in our 2010 Proxy Statement under the headings
“Certain Relationships and
Related Party Transactions” and “Corporate
Governance.”




ITEM
14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES




The
information required by this Item 14 is incorporated herein by reference from
the information to be contained in our 2010 Proxy Statement under the heading
“Independent Auditor Fees and
Services.”












-84-


PART IV






ITEM
15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES




(a)    Documents
filed as part of this report




(1)
and (2)  All Financial Statements and Financial Statement Schedules.




The
information called for by this section of Item 15 is set forth in the
Financial Statements and Auditors' Report beginning at page 46 of this
report. The index to Financial Statements and Schedules is set forth at
page 45 of this report.




(3)  Exhibits
Required by Item 601 of Regulation S-K.




The
information required by this Item 15 is set forth on the Exhibit Index
immediately following the signature page of this report.










-85-
 SIGNATURES






Pursuant
to the requirements of Section 13 or 15(d) 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.




Dated: March
      2, 2010
            
            INTERNET
      BRANDS, INC.By:
            /s/   ROBERT N.
      BRISCO
              President
      and Chief Executive Officer
              (Principal
      Executive Officer)






Power
of Attorney




Each
person whose signature appears below hereby constitutes and appoints Robert N.
Brisco and B. Lynn Walsh, and each of them acting individually, as his or her
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, to execute for him or her and in his or her name, place and
stead, in any and all capacities, any and all amendments to this report as the
attorney-in-fact to file the same, with all exhibits thereto and any other
documents required in connection therewith with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents and their
substitutes, and each of them, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their or his or her substitutes may lawfully do or cause to be done by virtue
hereof.




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:




Signature
            
            Title
            
            Date/s/   ROBERT N.
      BRISCO
            
            Director,
      President andChief
      Executive Officer
            
            March
      2, 2010Robert
      N. Brisco
            
            (Principal
      Executive Officer)/s/   SCOTT A.
      FRIEDMAN
            
            Chief
      Financial Officer
            
            March
      2, 2010Scott
      A. Friedman
            
            (Principal Financial and
      Accounting Officer)/s/  
      HOWARD LEE MORGAN
            
            Director
            
            March
      2, 2010Howard
      Lee Morgan/s/  
      KENNETH B. GILMAN
            
            Director
            
            March
      2, 2010Kenneth
      B. Gilman




/s/  
      MARCIA GOODSTEIN
            
            Director
            
            March
      2, 2010Marcia
      Goodstein/s/  
      WILLIAM GROSS
            
            Director
            
            March
      2, 2010William
      Gross/s/  
      MARTIN R. MELONE
            
            Director
            
            March
      2, 2010Martin
      R. Melone/s/  
      JAMES R. UKROPINA
            
            Director
            
            March
      2, 2010James
      R. Ukropina












EXHIBIT
INDEX







Incorporation
      by Reference HereinExhibit
      Number
            
            Description
            
            Form
            
            Filing
      Date/
              Period
      End Date3.1
            
            Restated
      Certificate of Incorporation
            
            Current
      Report on Form 8-K (File No. 001-33797)
            
            November 28,
      20073.2
            
            Form
      of Certificate of Amendment to the Restated Certificate of
      Incorporation
            
            Form DEF
      14A (File No. 001-33797)
            
            April
      30, 20093.3
            
            Amended
      and Restated Bylaws
            
            Registration
      Statement on Form S-1, as amended (File
    No. 333-144750)
            
            October 30,
      20073.4
            
            Certificate
      of Amendment to the Amended and Restated Bylaws
            
            Current
      Report on Form 8-K (File No. 001-33797)
            
            June
      3, 20083.5
            
            Certificate
      of Amendment to the Amended and Restated Bylaws
            
            Current
      Report on Form 8-K (File No. 001-33797)
            
            June
      15, 20094.1
            
            Form
      of Specimen Certificate for Registrant’s Class A Common
      Stock
            
            Registration
      Statement on Form S-1, as amended (File
    No. 333-144750)
            
            October 30,
      20074.2
            
            Share
      Exchange Agreement, between Registrant and Idealab Holdings, L.L.C., dated
      March 10, 2005
            
            Registration
      Statement on Form S-1, as amended (File
    No. 333-144750)
            
            July 20,
      20074.3
            
            Final
      Conformed Form of Lock-up Agreement, between Registrant and Idealab
      Holdings, L.L.C., dated October 26, 2007
            
            Quarterly
      Report on Form 10-Q (File No. 001-33797)
            
            May
      8, 20084.4
            
            Fifth
      Amended and Restated Investor Rights Agreement, among Registrant and
      certain of its stockholders, dated February 6, 2001
            
            Registration
      Statement on Form S-1, as amended (File
    No. 333-144750)
            
            July 20,
      200710.1
            **
            2007
      Equity Incentive Plan, and forms of agreements
            
            Quarterly
      Report on Form 10-Q (File No. 001-33797)
            
            May
      8, 200810.2
            **
            2000
      Stock Plan, as amended, and form of agreement
            
            Registration
      Statement on Form S-8 (File No. 333-148257)
            
            December 21,
      200710.3
            **
            1998
      Stock Plan, as amended, and forms of agreements
            
            Registration
      Statement on Form S-8 (File No. 333-148257)
            
            December 21,
      200710.4
            **
            Form
      of Indemnification Agreement for directors and executive
      officers
            
            Registration
      Statement on Form S-1, as amended (File
    No. 333-144750)
            
            October 30,
      200710.5
            **
            Offer
      Letter to Lisa Morita, dated December 27, 2006
            
            Registration
      Statement on Form S-1, as amended (File
    No. 333-144750)
            
            July 20,
      200710.6
            **
            Employment
      Agreement, between Registrant and Robert Brisco, dated November 8,
      1999, as amended
            
            Registration
      Statement on Form S-1, as amended (File
    No. 333-144750)
            
            July 20,
      200710.7
            
            Office
      Lease for 909 North Sepulveda, Suite 940, 10th and
      11th Floors, El Segundo, California, between Registrant and Kilroy
      Realty, L.P., dated June 25, 2004, as amended by First Amendment
      to Office Lease, dated November 11, 2005
            
            Registration
      Statement on Form S-1, as amended (File
    No. 333-144750)
            
            July 20,
      200710.8
            
            Second
      Amendment to Office Lease, between Registrant and Kilroy Realty, L.P.,
      dated October 15, 2009
            
            Current
      Report on Form 8-K (File No. 001-33797)
            
            October
      19, 200910.9
            **
            Letter
      Agreement, dated August 29, 2008, between Registrant and Scott
      Friedman
            
            Current
      Report on Form 8-K (File No. 001-33797)
            
            August
      29, 200810.10
            
            Loan
      and Security Agreement, dated as of October 7, 2008, among Registrant,
      Autodata, Inc., Autodata Solutions, Inc., CarsDirect Mortgage Services,
      Inc., CD1Financial.com, LLC, Internet Media Solutions, Inc., LoanApp, Inc.
      and Silicon Valley Bank
            
            Current
      Report on Form 8-K (File No. 001-33797)
            
            October
      10, 200810.11
            **
            Severance
      Payment Agreement, between Registrant and Robert N. Brisco, dated as of
      November 4, 2008
            
            Quarterly
      Report on Form 10-Q (File No. 001-33797)
            
            November
      5, 200810.12
            **
            Severance
      Payment Agreement, between Registrant and Scott Friedman, dated as of
      November 4, 2008
            
            Quarterly
      Report on Form 10-Q (File No. 001-33797)
            
            November
      5, 200810.13
            **
            Severance
      Payment Agreement, between Registrant and Chuck Hoover, dated as of
      November 4, 2008
            
            Quarterly
      Report on Form 10-Q (File No. 001-33797)
            
            November
      5, 200810.14
            **
            Severance
      Payment Agreement, between Registrant and Lisa Morita, dated as of
      November 4, 2008
            
            Quarterly
      Report on Form 10-Q (File No. 001-33797)
            
            November
      5, 200810.15
            **
            Severance
      Payment Agreement, between Registrant and Joseph Rosenblum, dated as of
      November 4, 2008
            
            Quarterly
      Report on Form 10-Q (File No. 001-33797)
            
            November
      5, 200810.16
            **
            Severance
      Payment Agreement, between Registrant and B. Lynn Walsh, dated as of
      November 4, 2008
            
            Quarterly
      Report on Form 10-Q (File No. 001-33797)
            
            November
      5, 200810.17
            **
            Severance
      Payment Agreement, between Registrant and Scott Friedman, dated as of
      November 3, 2009
            
            Quarterly
      Report on Form 10-Q (File No. 001-33797)
            
            November
      4, 200914.1
            
            Registrant’s
      Code of Ethics
            
            Annual
      Report on Form 10-K (File No. 001-33797)
            
            March
      12, 200821.1
            *
            Subsidiaries
      of Registrant23.1
            *
            Consent
      of BDO Seidman, LLP24.1
            *
            Power
      of Attorney (included on signature page of this report)31.1
            *
            Certification
      of Chief Executive Officer, as required by Section 302 of the
      Sarbanes-Oxley Act of 200231.2
            *
            Certification
      of Chief Financial Officer, as required by Section 302 of the
      Sarbanes-Oxley Act of 200232.1
            ***
            Certification
      of Chief Executive Officer, as required by Section 906 of the
      Sarbanes-Oxley Act of 200232.2
            ***
            Certification
      of Chief Financial Officer, as required by Section 906 of the
      Sarbanes-Oxley Act of 2002





*
            Filed
      herewith.**
            Indicates
      management plan or compensatory plan, contract or
    arrangement.***
            Furnished
      herewith.




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