You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q contain forward looking statements relating to our anticipated plans, products, services, and financial performance. The words "believe," "expect," "anticipate," "intend" and similar expressions identify forward-looking statements, but their absence does not mean the statement is not forward looking. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that could affect our actual results include, but are not limited to, those discussed under the Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q, under the heading Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007 and in our other Securities and Exchange Commission filings. Given these risks and uncertainties, you should not place undue reliance on our forward looking statements. The forward-looking statements are made as of the date of this report and we assume no obligation to update any such statements to reflect events or circumstances after the date hereof.

Overview

Revenue from continuing operations was $9.3 million for the third quarter of 2008, a 33% decline compared to the same period in 2007. The change in revenue was due primarily to a 31% decrease in our average customer count and as well as a 4% decrease in average revenue per customer for the quarter ended September 30, 2008 compared to the same period in 2007. The declines in revenue were partially offset by the addition of Realty Generator revenues of $1.6 million.

We incurred a net loss from continuing operations of $1.8 million for the third quarter of 2008 compared to a net loss from continuing operations of $0.9 million for the third quarter of 2007.

Our operating results for the quarter continue to reflect the broader real estate market conditions, which remain challenging and we expect will be further affected by crisis conditions in the global banking, credit and mortgage-lending markets. We believe these broader economic trends negatively impact our customers, real estate professionals, and the investment in marketing that they are able and willing to make.

Over the past several quarters, we have adapted to changing market conditions by better aligning our expenses with our expected revenue. We are focused on preserving our strong liquidity as a key asset to enable us to make strategic investments in our business going forward. One key investment will be our continued investment in new products and technologies aimed at better serving our real estate professional customers.

Significant Business Developments

The following events impact the comparability of our 2007 and 2008 operating results.

Purchase of Realty Generator. On November 1, 2007, we completed our acquisition of substantially all of the assets of Realty Generator, LLC and a related entity for approximately $10.2 million in cash and assumed liabilities as well as incentives based on the future performances of the acquired business through June 30, 2009. Realty Generator provides services to real estate brokers, including a web site, a proprietary customer relationship management tool that enables communication with prospective customers, past clients and local real estate professionals, marketing materials and dedicated training and account management support. Realty Generator systems include an administrative function that enables brokers to allocate the leads generated from website traffic to the agents on their teams and to monitor the follow-through performance of each agent. We have accounted for this as a business combination and have included Realty Generator's results of operations from the acquisition date forward.

Investment in ActiveRain. On November 16, 2007, we acquired 32.4% of the outstanding voting stock of ActiveRain Real Estate Network for $2.75 million. ActiveRain is a professional community and social networking platform serving the real estate community. ActiveRain has grown its membership over the past two years to more than 100,000 real estate professionals. Our investment in ActiveRain is recorded using the equity method of accounting which requires that we record our proportionate share of their net loss adjusted for any difference between our cost and the underlying equity in their net assets at the acquisition date.

As broader market conditions have contributed to the decline in our revenue, we have taken a series of actions since January 2007 to significantly reduce our cost structure to align with our revenue trends.

• Reduction in Workforce. In January 2008, we reduced our workforce by approximately 45 employees. We recorded cash severance charges of approximately $0.6 million and additional accelerated vesting charges of $0.2 million related to equity compensation in the second quarter of 2008. We expect to realize about $5 million in savings to our expense structure on an annualized basis as a result of this action.

In January 2008, we terminated our lease for the Yakima facility and in a second related transaction, assigned our purchase option for the Yakima facility and its remaining assets to a third party for net cash of $1.2 million. We recorded a gain of $0.8 million on this transaction in the first quarter of 2008.

• Discontinued Mortgage Operations. In January 2007, we announced our exit from the mortgage lead generation business and our intention to scale back or eliminate initiatives that were not critical to our real estate agent customers. These activities resulted in an overall reduction of our workforce by approximately 60 employees. In connection with the discontinuation of our mortgage operations and the reduction in workforce, we paid payroll and related costs of approximately $0.5 million in 2007 and incurred accelerated stock compensation expense estimated of approximately $0.5 million.

Results of Operations

Our discussion of operating results addresses results from continuing operations, which consists of our real estate business. Our former mortgage business is presented in our financial statements as discontinued operations.

Revenues

Revenues decreased 33% for the quarterly period and 36% for the year-to-date period ended September 30, 2008 when compared to the same periods in 2007, primarily due to a 31% decline in our average real estate professional customer base and a 4% decline in our average revenue per customer over the past twelve months. The declines in revenue were partially offset by the addition of Realty Generator revenues of $1.6 and $4.3 million for the quarter and year-to-date period ended September 30, 2008. We believe that slower existing home sales are creating financial pressure on real estate professionals that are reflected in our decreased customer base and our lower average revenue per customer.

Revenue in the third quarter of 2008 decreased 9% from the second quarter of 2008. On a sequential quarterly basis, we experienced a 6% decrease in average real estate customer count and a 3% decrease in average revenue per customer during the third quarter of 2008. More information about the sequential change in revenue and customers is included under the heading "Key Operational Metrics" elsewhere in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Because of the ongoing economic challenges in the real estate market, as well as broader economic trends that we anticipate will continue to impact real estate professionals and their ability to fund marketing expenditures, we expect our current revenue trend to continue for the remainder of 2008.

Sales and Marketing



                                                          Three months ended            Nine months ended
                                                            September 30,                 September 30,
                                                          2008           2007          2008           2007
Total sales and marketing expense (in thousands)       $    5,842       $ 8,946      $  19,514      $ 31,574

Total sales and marketing expense as a % of revenue            63 %          65 %           64 %          66 %

Sales and marketing expense decreased in total and as a percentage of revenue for the three and nine month periods ended September 30, 2008 when compared to the same periods in 2007, primarily due to reduced payroll and related costs and reduced lead generation costs. Payroll and related costs declined due to decreased average headcount, as we realigned our cost structure to our projected revenues. Headcount at September 30, 2008 for our sales and marketing groups decreased 30% to 117, which compares to 166 at September 30, 2007. The decrease in lead generation costs was generally consistent with our decrease in revenues for the three and nine month periods ended September 30, 2008 compared to the same periods in 2007.

Sales and marketing expense declined 6% in the third quarter of 2008 compared to the second quarter of 2008 primarily due to reduced lead generation costs and reduced payroll and related expenses.

For the fourth quarter of 2008, we expect sales and marketing costs to increase modestly from the third quarter level as we execute a corporate re-branding and launch of new products.

Technology and Product Development



                                                      Three months ended            Nine months ended
                                                        September 30,                 September 30,
                                                      2008           2007           2008          2007
Total technology and product development
expense (in thousands)                             $    1,424       $ 2,123      $    4,873      $ 7,420

Total technology and product development
expense as a % of revenue                                  15 %          15 %            16 %         16 %

Technology and product development expense decreased in absolute dollars but remained consistent as a percentage of revenue for the three and nine month periods ended September 30, 2008 when compared to the same periods in 2007, as we reduced the number of employees to bring our cost structure into alignment with our lower revenues.

Technology and product development expense decreased 4% in the third quarter of 2008 when compared to the second quarter of 2008 primarily due to reduced payroll and related expenses.

We expect technology and product development costs to increase modestly in total dollars and as a percentage of revenue for the remainder of 2008 as we continue to focus on product development initiatives.

General and Administrative



                                                      Three months ended            Nine months ended
                                                        September 30,                 September 30,
                                                      2008           2007           2008          2007
Total general and administrative expense (in
thousands)                                         $    2,320       $ 2,864      $    7,258      $ 9,431

Total general and administrative expense as a %
of revenue                                                 25 %          21 %            24 %         20 %

General and administrative expenses decreased in total dollars, but increased as a percentage of revenues for the three and nine month periods ended September 30, 2008 when compared to the same periods last year due to our lower revenue base. General and administrative expense decreased primarily due to reduced salaries and related expenses associated with lower staffing levels and reduced rent and related expenses partially offset by increased stock-based compensation expense.

General and administrative expenses increased 4% in the third quarter of 2008 compared to the second quarter primarily due to an increase in stock-based compensation.

We expect general and administrative expenses to stabilize for the remainder of 2008, but to increase as a percentage of revenue.

Depreciation and Amortization of Property and Equipment

Depreciation and amortization of property and equipment decreased for the three and nine months ended September 30, 2008 primarily due to the lower asset values resulting from the early retirement of an internally developed software product related to our HomePages website in the first quarter of 2007, impairment charges taken against our capital assets during 2007, and the closure of our Yakima facility during the third quarter of 2007.

Amortization of Intangible Assets

Amortization of intangible assets increased for the three and nine month periods ended September 30, 2008 when compared to the same period in 2007, due to the new intangible assets related to the Realty Generator acquisition in the fourth quarter of 2007. This increase was partially offset by the early retirement of a mapping technology asset in March 2007.

Interest Income

Interest income decreased for the three and nine month periods ended September 30, 2008 when compared with the same periods in 2007 primarily due to a decrease in our rate of return as well as a reduction in the amount of cash, cash equivalents and short-term investments held. Early in 2008, we modified our investment strategy to preserve the security and liquidity of our funds, which has resulted in significantly lower rates of return. In the first quarter of 2008, we completed the liquidation of our investments in auction rate securities at par and invested the proceeds in money market funds that invest in high quality short-term U.S. Government obligations and repurchase agreements collateralized by U.S. Government obligations. At September 30, 2008, we held $62.0 million in cash and cash equivalents, compared to $74.4 million in cash, cash equivalents and short-term investments at September 30, 2007.

Income Taxes

Our effective tax rate for continuing operations was (2%) for the nine months ended September 30, 2008, compared to 44% for the same period in 2007. Our effective tax rate decreased due to our expected operating loss for the year and our establishment of a valuation allowance for our deferred tax assets at December 31, 2007.

Substantially all of our deferred tax assets and liabilities are expected to reverse over the next five years, except for the net operating losses. We believe that based on the decline in the national real estate market, our recent history of operating losses and the lack of carryback periods, it is more likely than not that we will be unable to generate sufficient taxable income to realize our deferred tax assets.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Accordingly, our actual results may differ from these estimates under different assumptions or conditions.

Quarterly Consolidated Statements of Income and Operational Data

The following tables present unaudited operational data pertaining to our continuing operations for the seven quarters ended September 30, 2008. This quarterly information has been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflects all adjustments necessary for a fair representation of the information for the periods presented. This data should be read in conjunction with our audited consolidated financial statements and the related notes included in our 2007 Annual Report on Form 10-K. Operating results for any quarter apply to that quarter only and are not necessarily indicative of results for any future period.

                                    Sept 30,      June 30,      Mar. 31,      Dec. 31,       Sept. 30,      June 30,      Mar. 31,
                                      2008          2008          2008          2007           2007           2007          2007
Continuing Operations Data, in
thousands:
Revenues                            $   9,258     $  10,131     $  11,196     $  12,189     $    13,797     $  15,984     $  17,838
Expenses:
Sales and marketing                     5,842         6,242         7,430         7,879           8,946        10,241        12,387
Technology and product
development                             1,424         1,491         1,958         1,694           2,123         2,507         2,790
General and administrative              2,320         2,232         2,706         2,735           2,864         3,015         3,552
Impairment of long-lived assets            -             -             -          4,916           1,200            -             -
Gain on sale of fixed assets               -             -           (791 )          -               -             -             -
Depreciation and amortization of
property and equipment                  1,040         1,015           959         1,064           1,170         1,245         2,155
Amortization of intangible assets         491           492           492           333              16            16           395

Total expenses                         11,117        11,472        12,754        18,621          16,319        17,024        21,279

Loss from operations                   (1,859 )      (1,341 )      (1,558 )      (6,432 )        (2,522 )      (1,040 )      (3,441 )
Equity in loss of unconsolidated
subsidiary                               (207 )        (185 )        (151 )        (162 )            -             -             -
Interest income, net                      289           289           519           762             883           751           586

Loss before income tax expense
(benefit)                              (1,777 )      (1,237 )      (1,190 )      (5,832 )        (1,639 )        (289 )      (2,855 )
Income tax expense (benefit)               31            34             2         4,041            (761 )         (51 )      (1,275 )

Net loss from continuing
operations                          $  (1,808 )   $  (1,271 )   $  (1,192 )   $  (9,873 )   $      (878 )   $    (238 )   $  (1,580 )

Key Operational Metrics

With the acquisition of Realty Generator and the offering of Market Leader as a standalone product, we have broadened our customer and product mix. Our previously disclosed metrics were based on our lead generation products and their customers. As a result of this change, we have expanded our metrics to include all real estate professionals with whom we do business, ensuring our metrics provide meaningful insight into our business.

The following table presents operational data and metrics for the seven quarters ended September 30, 2008.

                                    Sept 30,      June 30,      Mar. 31,      Dec. 31,       Sept. 30,      June 30,      Mar. 31,
                                      2008          2008          2008          2007           2007           2007          2007
Operational Data:
Components of revenue (in
thousands):
Real estate professional
revenues (1)                       $    9,181     $  10,063     $  11,118     $  12,151     $    13,756     $  15,883     $  17,748
Other revenues (2)                         77            68            78            38              41           101            90

Total revenues                     $    9,258     $  10,131     $  11,196     $  12,189     $    13,797     $  15,984     $  17,838
Real estate professional
customers, end of period (3)            8,381         9,078         9,550        10,465          11,833        13,364        14,667
Average monthly retention
rate (4)                                 93.6 %        93.6 %        92.5 %        91.4 %          91.2 %        91.4 %        90.3 %
Average real estate professional
customers in the quarter (5)            8,730         9,314        10,008        11,149          12,599        14,016        15,209
Average monthly revenue per
customer (6)                       $      351     $     360     $     370     $     363     $       364     $     378     $     389

(1) Real estate professional revenues consist of all revenue generated from our real estate professional customers, primarily for our HouseValues, JustListed, Realty Generator, HomePages, and Market Leader products.

(2) Other revenues consist primarily of miscellaneous revenue streams that are not core to our product offerings, such as advertising revenues and runoff mortgage revenues.

(3) Real estate professional customers consist of real estate agents subscribing to our HouseValues, JustListed, HomePages, and Market Leader products and real estate brokers subscribing to our Realty Generator product.

(4) One minus our average monthly churn rate equates to our average monthly retention rate. Average monthly customer churn is calculated by dividing the number of customers who canceled during the quarter by the average customers in the quarter, divided by the number of months in the quarter. Other companies may calculate churn and retention differently, and their churn and retention data may not be directly comparable to ours.

(5) Average real estate professional customers in the quarter are calculated as the average of customers at the beginning and at the end of the quarter.

(6) Average monthly revenue per customer is calculated as real estate professional revenue for the quarter divided by the average number of customers in the quarter.

On a sequential quarter basis, our customer count decreased by 697 customers during the third quarter of 2008, compared to a decrease of 472 customers in the second quarter of 2008. While the number of cancelling customers decreased this quarter, the decreases to customer additions more than offset that improvement. Ending customers at September 30, 2008 decreased 29% compared to September 30, 2007.

It continued to be a challenging real estate market in the third quarter of 2008, which has been further complicated by broader economic conditions. We believe this trend impacts the investment in marketing that real estate professionals are willing to make, resulting in a slowing of new sales, as well as the possibility of lower retention rates. The average monthly retention rate for our customers was 93.6% for the third quarter of 2008, consistent with the second quarter of 2008. Due to the continued volatility of the real estate market, we expect to experience fluctuations in our customer retention rate from quarter to quarter.

Average monthly revenue per customer for the third quarter of 2008 decreased modestly compared to the second quarter of 2008 primarily as a result of customers reducing their spend, as well as pricing adjustments made in response to the current market conditions. Average revenue per customer will fluctuate from quarter to quarter based on the mix of sales for products priced differently across lower and higher priced geographies, the demand for existing services and the acceptance of new product offerings.

Liquidity and Capital Resources

The following table presents summary cash flow data:



                                                      Nine months
                                                  Ended September 30,
                                                  2008            2007
                                                (dollars in thousands)
             Cash from operating activities   $       1,391     $    (718 )
             Cash from investing activities          26,154       (14,204 )
             Cash from financing activities            (975 )        (270 )

Our principal sources of liquidity are our cash and cash equivalents, which totaled $62.0 million at September 30, 2008, as well as the cash flow that we may generate from our operations.

Early in 2008, we modified our investment strategy to preserve the security and liquidity of our funds, which has resulted in significantly lower rates of return. In the first quarter, we completed the liquidation of our investments in auction rate securities at par and invested the proceeds in money market funds that invest in high quality short-term U.S. Government obligations and repurchase agreements collateralized by U.S. Government obligations. Substantially all of our funds are covered by the Temporary Guarantee Program for Money Market Funds provided by the U.S. Treasury as announced in September 2008.

Operating Activities

Net cash from operating activities consists of our net operating results adjusted for certain non-cash items, including depreciation, amortization, stock-based compensation, deferred income taxes, gains on sales of fixed assets, equity in losses of our unconsolidated subsidiary and the effect of changes in working capital. Cash flow provided by operations for the first nine months of 2008 was $1.4 million, an improvement of $2.1 million from the same period in 2007 primarily due to a smaller increase in net working capital.

Investing Activities

Cash from investing activities for 2008 increased by $40.4 million compared to the same period last year. During 2008, we liquidated all of our short-term investments consisting of auction rate securities at par and invested the proceeds in money market funds. Also in 2008, we received proceeds of $1.2 million from the assignment of our purchase option for the Yakima facility and the transfer of all remaining assets in the facility and made earn-out payments related to our acquisition of Realty Generator of approximately $0.6 million. Future earn-out payments related to Realty Generator will be based on revenue goals through June 30, 2009 as well as payments equal to 75% of Realty . . .