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 heading Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008 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

Our Business

We provide real estate professionals with the tools and services they need to manage and grow their real estate businesses. We have been an innovator in internet-based marketing services for real estate professionals since the Company's inception in 1999. Our HouseValues and JustListed lead generation products deliver home seller or buyer leads to customers via an online software tool that is generally bundled with the offerings. These products have accounted for the majority of customer relationships and revenue throughout the Company's history and continued to do so in the first quarter of 2009.

In 2008 we began to shift our business model from our original lead generation model toward offerings that combine software-as-a-service with access to industry-leading advertising buying and lead generation services.

In November 2008 we introduced Growth Leader, a personalized website and proprietary customer relationship management tool for real estate agents, as well as a related product for agent teams, Team Leader. Together with RealtyGenerator, a turnkey lead generation and lead management system for real estate brokerage companies that we acquired in 2007, these offerings constitute the new products that support the shift in our business model. These products feature Vision, a personalized website optimized to generate consumer response, a proprietary customer relationship management (CRM) tool for real estate agents that is integrated with the website, and access to industry-leading advertising buying and lead generation services to help real estate professionals attract new clients and promote themselves throughout their community.

Review of First Quarter 2009

Revenue for the first quarter was $6.5 million, down 42% from the same period in 2008. The change in revenue was due primarily to a decline in our customer base, as well as lower average revenue per customer.

We believe our revenue trend continues to reflect the broader real estate market conditions, which have been further affected by challenges in the global banking, credit and mortgage-lending markets. In the first quarter, U.S existing home sales declined 18% from the fourth quarter of 2008, based upon research published by the National Association of Realtors. This decline defied the seasonal improvement typically seen in the first quarter. Fewer transactions, along with lower prices impact the commissions earned by real estate professionals, and we believe reduce the marketing investments that they are able and willing to make, leading to a slower pace of customer acquisition in the first quarter than we have experienced in the past. Despite the market backdrop, our customer retention rate improved in the first quarter to 92.8 percent compared to 92.2 percent in the fourth quarter of 2008.

We also made progress shifting our business model toward our Vision-based products. While the majority of $1.5 million in Vision product revenue in the first quarter came from our RealtyGenerator product, we saw early promising results from our new Growth Leader product as our agent sales team began selling this new product more broadly. Growth Leader also played an important role in our customer retention efforts as we began transitioning some existing customers to this new product, effectively converting some who intended to cancel into advocates of Growth Leader and the company. At the end of the quarter approximately 450 of our new and existing customers were Growth Leader customers.

We believe that the features of our Vision product set and the success that many of our Vision customers are experiencing despite today's industry downturn enable the testing of new sales methods. In another initiative designed to expand our Vision-based customer base, we announced in April 2009 a strategic partnership with Realty Executives International, a leading real estate company

with more than 700 brokerage company franchisees in its network. Realty Executives is launching a strategy to help each of its franchisees build their Internet presence into a source of lead generation and profits, and they plan to achieve this goal by offering our RealtyGenerator product. To support this initiative, we structured a program to greatly reduce the customers' initial risk by waiving many of the fees that we would normally collect in the initial months of service. Realty Executives also is supporting this program by providing participating franchisees with co-marketing funds. As a result of this promotion, we expect to achieve better penetration into their franchise brokerage network than would otherwise be possible if limited to our traditional sales approaches. We expect modest revenue contribution and expense as we support these customers through a discounted trial period, with more significant positive contribution in 2010.

Over the past three years, we have adapted to changing market conditions by better aligning expenses with expected revenue in an effort to avoid non-strategic uses of cash. We believe that selective acquisitions, share repurchases and continued investments in our business can all potentially be strategic uses of cash. We were able to reduce a significant non-strategic expense as a result of our successful renegotiation of our Kirkland, Washington facilities lease. With this amendment, we eliminated the expense of excess facilities, avoided the fee for early lease termination, and kept the team in our current location focused on building the business. We will begin to realize these savings beginning in the second quarter.

Because we cannot be certain of the depth and duration of the downturn amid this uncertainty we are facing in at least the near-term, we believe that cash has significant option value and that preserving that value will continue to be prudent until we have greater visibility in the economy and our business. That said, we believe that the potential benefits of investment in the business have been enhanced by our recent introduction of innovative products, and we expect to gain share of mind and market by beginning to present our new solutions ahead of the inflection point of the real estate industry downturn. We expect to use some cash in operations in 2009 to maintain support for our strategic initiatives.

Results of Operations

Revenues

Revenues decreased 42% for the quarterly period ended March 31, 2009 compared to the same period in 2008, primarily due to a 32% decline in our average customer base and a 14% decline in our average revenue per customer over the past twelve months. We believe the cyclical downturn in the real estate industry has negatively impacted the ability of real estate professionals to pay for marketing services and other lead generation costs, which is reflected in our decreased customer base and our lower average revenue per customer.

Revenue in the first quarter of 2009 decreased 16% from the fourth quarter of 2008. On a sequential quarterly basis, we experienced a 13% decrease in average real estate customer count and a 4% decrease in average revenue per customer. More information about the sequential change in revenue and customers is included under the heading "Key Operational Metrics" in Management's Discussion and Analysis of Financial Condition and Results of Operations.

We expect the ongoing challenges in the real estate market, as well as the broader negative economic trends will continue to impact real estate professionals and their ability to fund marketing expenditures. Therefore, we expect our current revenue trend to continue for at least the first half of 2009.

We anticipate that revenues from our new Vision products - RealtyGenerator, Team Leader and Growth Leader - will become an increasing part of our revenue base. Based on our experience with the RealtyGenerator product, we believe these additional product offerings will help us to achieve better customer retention rates and improved operating results over time. A combination of factors - the expected shift in our product mix, a smaller customer base, as well as the increased portion of customers that are now at least two-year tenured and demonstrating above-average retention - lead us to expect that the sequential declines in quarterly revenue will significantly moderate in the second half of the year and that this will create an opportunity for us to build on this baseline and return the business to growth as economic conditions improve.

Sales and Marketing



                                                            Three months ended
                                                                 March 31,
                                                             2009          2008
    Total sales and marketing expense (in thousands)      $    4,742      $ 7,430

    Total sales and marketing expense as a % of revenue           73 %         66 %

Sales and marketing expense decreased for the three month period ended March 31, 2009 compared to the same period in 2008, primarily due to reduced advertising costs and reduced payroll and related costs. The decrease in advertising costs was generally consistent with our decrease in revenues for the three month period ended March 31, 2009 compared to the same period in 2008. Staffing costs declined on lower headcount as we realigned our staffing levels and cost structure to the current business environment. Headcount at March 31, 2009 for our sales and marketing groups decreased 16% to 103, compared to 122 at March 31, 2008. While we have managed a lower overall expense level, sales and marketing expense has increased relative to revenue on the lower revenue base.

Sales and marketing expense declined 13% in the first quarter of 2009 compared to the fourth quarter of 2008. The decline was primarily due to reduced advertising and customer acquisition expenses as well as costs incurred in the fourth quarter related to our Market Leader rebranding efforts that were not repeated in the first quarter of 2009.

For the second quarter of 2009, we expect sales and marketing costs to increase modestly as we support sales initiatives for our Vision-based products. Also, given the expected shift in our product mix to our Vision-based products, we anticipate advertising costs will become an increased percentage of revenue, driving an overall increase in sales and marketing expenses as a percentage of revenue during the remainder of 2009.

Technology and Product Development



                                                                   Three months ended
                                                                        March 31,
                                                                   2009            2008
Total technology and product development expense (in
thousands)                                                      $    1,407        $ 1,958

Total technology and product development expense as a % of
revenue                                                                 22 %           17 %

Technology and product development expense decreased for the three month period ended March 31, 2009 compared to the same period in 2008, primarily due to lower staffing costs related to a decrease in average headcount. While we have managed a lower overall expense level, technology and product development expense increased relative to our lower revenue base.

Technology and product development expense decreased 8% in the first quarter of 2009 when compared to the fourth quarter of 2008 primarily due to reduced consulting expenses.

For the remainder of 2009, we expect the level of technology and product development expenses to remain fairly consistent, but to increase as a percentage of lower revenue, as we continue to build out the infrastructure and enhance our new Vision-based products and to develop new product offerings on the Vision platform.

General and Administrative



                                                                Three months ended
                                                                     March 31,
                                                                 2009          2008
 Total general and administrative expense (in thousands)      $    1,969      $ 2,706

 Total general and administrative expense as a % of revenue           30 %         24 %

General and administrative expense decreased primarily due to reduced payroll related expenses associated with lower staffing levels. General and administrative expenses increased as a percentage of revenues for the three month period ended March 31, 2009 compared to the same period last year on our lower revenue base.

General and administrative expenses remained consistent in the first quarter of 2009 compared to the fourth quarter of 2008.

We expect quarterly general and administrative expenses to decrease modestly for the remainder of 2009, primarily as a result of the lease amendment for our corporate headquarters, and to remain fairly consistent as a percentage of revenue on lower expected revenue.

Gain on sale of fixed assets

During the first quarter of 2008, we terminated our lease for the Yakima facility. We did not pay a fee to terminate the lease. In a related transaction, we assigned our purchase option for the Yakima facility and transferred all remaining assets in the facility to a third party for net cash of $1,209. We recorded a related gain of $791 in the first quarter of 2008.

Depreciation and Amortization of Property and Equipment

Depreciation and amortization of property and equipment decreased for the three months ended March 31, 2009 compared to the same period in 2008 because many assets became fully depreciated during 2008. This decrease was offset, in part, by the acceleration of depreciation related to leasehold improvements in office space that we will vacate in conjunction with our renegotiated office lease.

Interest Income and expense, net

Interest income decreased for the three month period ended March 31, 2009 compared with the same period in 2008 primarily due to decreased rates of return on investments as well as a lower investment balance. 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. At March 31, 2009, we held $57.1 million in cash, cash equivalents and short-term investments, compared to $63.0 million at March 31, 2008.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles. 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. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

Quarterly Consolidated Statements of Income and Operational Data

The following table presents unaudited operational data pertaining to our operations for the five quarters ended March 31, 2009. 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 Annual Report on Form 10-K for the year ended December 31, 2008. Operating results for any quarter apply to that quarter only and are not necessarily indicative of results for any future period.

                                            Mar. 31,      Dec. 31,       Sept. 30,      June 30,      Mar. 31,
                                              2009          2008           2008           2008          2008
                                                                      (in thousands)
Operations Data:
Revenues                                    $   6,529     $   7,783     $     9,258     $  10,131     $  11,196
Expenses:
Sales and marketing                             4,742         5,464           5,842         6,242         7,430
Technology and product development              1,407         1,536           1,424         1,491         1,958
General and administrative                      1,969         1,987           2,320         2,232         2,706
Impairment of goodwill and long-lived
assets                                             -          4,883              -             -             -
Gain on sale of fixed assets                       -             -               -             -           (791 )
Depreciation and amortization of property
and equipment                                     803         1,032           1,040         1,015           959
Amortization of acquired intangible
assets                                            482           454             491           492           492

Total expenses                                  9,403        15,356          11,117        11,472        12,754

Loss from operations                           (2,874 )      (7,573 )        (1,859 )      (1,341 )      (1,558 )
Impairment of and equity in loss of
unconsolidated subsidiary                         (94 )      (1,461 )          (207 )        (185 )        (151 )
Interest income and expense, net                   95           128             289           289           519

Loss before income tax                         (2,873 )      (8,906 )        (1,777 )      (1,237 )      (1,190 )
Income tax expense (benefit)                        2           (58 )            31            34             2

Net loss                                    $  (2,875 )   $  (8,848 )   $    (1,808 )   $  (1,271 )   $  (1,192 )

Key Operational Metrics

The following table presents key operational data and metrics for the five
quarters ended March 31, 2009.



                                          Mar. 31,       Dec. 31,       Sept. 30,      June 30,      Mar. 31,
                                            2009           2008           2008           2008          2008
Operational Data:
Components of revenue (in thousands):
Real estate professional revenues (1)    $    6,481     $    7,732     $     9,181     $  10,063     $  11,118
Other revenues (2)                               48             51              77            68            78

Total revenues                           $    6,529     $    7,783     $     9,258     $  10,131     $  11,196
Real estate professional customers,
end of period (3)                             6,361          7,245           8,381         9,078         9,550
Average monthly retention rate (4)             92.8 %         92.2 %          93.6 %        93.6 %        92.5 %
Average real estate professional
customers in the quarter (5)                  6,803          7,813           8,730         9,314        10,008
Average monthly revenue per
customer (6)                             $      318     $      330     $       351     $     360     $     370

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

(2) Other revenues consist primarily of miscellaneous revenue streams that are not core to our product offerings.

(3) Real estate professional customers consist of real estate agents subscribing to our HouseValues, JustListed, Growth Leader, Team Leader, HomePages, and Market Leader CRM products and real estate brokers subscribing to our RealtyGenerator product. Customers are included in our key operating metrics when their service is active and are paying monthly service or advertising fees.

(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, divided by the number of months in the quarter.

At the end of the first quarter of 2009, we had 6,361 customers. On a sequential quarter basis, our customer count decreased by 884 customers during the first quarter of 2009, compared to a decrease of 1,136 customers in the fourth quarter of 2008.

It continued to be a challenging real estate market in the first quarter of 2009, 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.

Our average monthly customer retention rate improved to 92.8% for the first quarter of 2009 from 92.2% in the fourth quarter of 2008. Our new Growth Leader product contributed to this improvement in retention as we began transitioning some existing customers to this new product, effectively saving as customers some who intended to cancel. Due to the continued volatility of the real estate market and broader economic concerns, we expect to experience fluctuations in our customer retention rate from quarter to quarter.

Average monthly revenue per customer for the first quarter of 2009 decreased modestly compared to the fourth quarter of 2008 primarily as a result of the shift in our customer mix, as well as customers managing their spend. 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, pricing adjustments we may make in response to the market conditions, the demand for existing services and the acceptance of new product offerings.

Liquidity and Capital Resources

Currently, our principal source of liquidity is our cash, cash equivalents and short-term investments, as well as the cash flow that we may generate from our operations. At March 31, 2009, our cash, cash equivalents and short-term investments totaled $57.1 million as compared to $58.6 million at December 31, 2008.

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. As of March 31, 2009, we have invested in cash equivalents consisting of the money market funds that hold high quality short-term U.S. Government obligations and repurchase agreements collateralized by U.S. Government obligations as well as U. S. Treasury securities. Substantially all of our money market funds are covered by the Temporary Guarantee Program for Money Market Funds provided by the U.S. Treasury as announced in September 2008. Short-term investments are comprised of U. S. Treasury securities and FDIC-insured certificates of deposit with terms of one year or less.

The following table presents summary cash flow data:

                                                     Three months
                                                    Ended March 31,
                                                  2009             2008
                                                (dollars in thousands)
             Cash from operating activities   $        (830 )    $   (126 )
             Cash from investing activities         (15,671 )      28,005
             Cash from financing activities             (41 )        (316 )

Operating Activities

Net cash from operating activities consists of our net loss adjusted for certain non-cash items, including depreciation, amortization, stock-based compensation, deferred income taxes, gain on sales of fixed assets, equity in losses of our unconsolidated subsidiary and the effects of changes in working capital. We used cash in operations of $0.8 million in the first three months of 2009, an increase of $0.7 million compared to the same period in 2008. The increase was primarily due to an increase in our net loss partially offset by a smaller increase in net working capital.

Investing Activities

Cash used in investing activities for the first quarter of 2009 increased by $43.7 million compared to the same period in 2008. During the first quarter of 2009, we invested $15.0 million into short-term investments compared to the first quarter of 2008 liquidation of all of our short-term investments. 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.

Financing Activities

Cash used in financing activities for the first quarter of 2009 decreased by $0.3 million compared to the same period in 2008. The decline was primarily due to the purchase and retirement of common stock in the first quarter of 2008.

. . .