Looksmart 10-Q 2009 Q1 Quarterly report

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 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: 000-26357

LOOKSMART, LTD.

(Exact Name of Registrant as Specified in its Charter)

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

625 Second Street

San Francisco, California 94107

(415) 348-7000

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

NASDAQ Stock Market LLC

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

Common Stock, par value $0.001 per share

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

None

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, as defined in Rule 12b-2 of the Exchange Act.

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

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

As of April 30, 2009, there were 17,098,236 shares of the registrant’s common stock outstanding, par value $0.001 per share.

TABLE OF CONTENTS

PART I		3
ITEM 1.	FINANCIAL STATEMENTS	3
	CONDENSED CONSOLIDATED BALANCE SHEETS	3
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	4
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	5
	NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	19
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	27
ITEM 4.	CONTROLS AND PROCEDURES	27
PART II	OTHER INFORMATION	27
ITEM 1.	LEGAL PROCEEDINGS	27
ITEM 1A.	RISK FACTORS	28
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	34
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	34
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	34
ITEM 5.	OTHER INFORMATION	34
ITEM 6.	EXHIBITS	34
SIGNATURE		35
EXHIBIT INDEX		36

2

PART I

ITEM 1. FINANCIAL INFORMATION

LOOKSMART, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

	March 31, 2009			December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	25,497		$	22,393
Short-term investments		4,997			10,185
Total cash, cash equivalents and short-term investments		30,494			32,578
Trade accounts receivable, net		5,191			7,017
Prepaid expenses and other current assets		1,251			1,563
Total current assets		36,936			41,158
Property and equipment, net		3,387			3,371
Capitalized software and other assets, net		2,119			1,942
Intangible assets, net		280			293
Total assets	$	42,722		$	46,764
LIABILITIES & STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	3,343		$	4,357
Accrued liabilities		4,921			6,690
Deferred revenue and customer deposits		1,699			1,593
Current portion of long term obligations		2,136			2,275
Total current liabilities		12,099			14,915
Long-term obligations, net of current portion		1,727			1,438
Total liabilities		13,826			16,353
Commitment and contingencies
Stockholders’ equity:
Convertible preferred stock, $0.001 par value; Authorized: 5,000 at March 31, 2009 and December 31, 2008; Issued and Outstanding: none at March 31, 2009 and December 31, 2008		—			—
Common stock, $0.001 par value; Authorized: 200,000 at March 31, 2009 and December 31, 2008; Issued and Outstanding: 17,098 and 17,075 at March 31, 2009 and December 31, 2008, respectively		17			17
Additional paid-in capital		259,817			259,276
Accumulated other comprehensive loss		(20	)		(4	)
Accumulated deficit		(230,918	)		(228,878	)
Total stockholders’ equity		28,896			30,411
Total liabilities and stockholders’ equity	$	42,722		$	46,764

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

3

LOOKSMART, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended March 31,
	2009			2008
Revenue	$	13,254		$	17,544
Cost of revenue		8,102			10,158
Gross profit		5,152			7,386
Operating expenses:
Sales and marketing		1,365			2,216
Product development		2,613			2,905
General and administrative		3,369			2,872
Total operating expenses		7,347			7,993
Loss from operations		(2,195	)		(607	)
Non-operating income, net		54			433
Loss from continuing operations before income taxes		(2,141	)		(174	)
Income tax expense		8			7
Loss from continuing operations		(2,149	)		(181	)
Income (loss) from discontinued operations, net of tax		109			(307	)
Net loss	$	(2,040	)	$	(488	)
Net loss per share - Basic and Diluted
Loss from continuing operations	$	(0.13	)	$	(0.01	)
Income (loss) from discontinued operations, net of tax		0.01			(0.01	)
Net loss per share	$	(0.12	)	$	(0.02	)
Weighted average shares outstanding used in computing basic and diluted net loss per share		17,076			20,458

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

4

LOOKSMART, LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Three Months Ended March 31,
	2009			2008
Cash flows from operating activities:
Net loss	$	(2,040	)	$	(488	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		716			927
Share-based compensation		517			1,024
Gain from sale of assets and other non-cash charges		(146	)		(84	)
Changes in operating assets and liabilities:
Trade accounts receivable, net		1,801			(2,349	)
Prepaid expenses and other assets		304			(211	)
Trade accounts payable		(1,014	)		452
Accrued and other current liabilities		(1,558	)		(928	)
Deferred revenue and customer deposits		106			(335	)
Other long-term liabilities		(297	)		(60	)
Net cash used in operating activities		(1,611	)		(2,052	)
Cash flows from investing activities:
Purchase of short-term investments		(1,019	)		(13,535	)
Proceeds from sale of short-term investments		6,200			13,470
Payments for property and equipment and capitalized software development		(359	)		(297	)
Purchase of intangible assets		—			(280	)
Proceeds from contingent purchase consideration of certain consumer assets		131			75
Net cash provided by (used in) investing activities		4,953			(567	)
Cash flows from financing activities:
Principal payments of notes		(17	)		(15	)
Principal payments of capital lease obligations		(221	)		(110	)
Proceeds from issuance of common stock		—			19
Payments for repurchase of common stock		—			(20,776	)
Net cash used in financing activities		(238	)		(20,882	)
Increase (decrease) in cash and cash equivalents		3,104			(23,501	)
Cash and cash equivalents, beginning of period		22,393			35,743
Cash and cash equivalents, end of period	$	25,497		$	12,242
Supplemental disclosure of noncash activities
Assets acquired through capital lease obligations	$	716		$	351
Increase in other assets associated with the contingent purchase consideration of certain consumer assets	$	—		$	38
Property and equipment received and liability accrued	$	145		$	370

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

5

LOOKSMART, LTD. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Nature of Business and Principles of Consolidation

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

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

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

In 2007, the Company’s management made the decision to exit certain consumer products activities and to sell or otherwise dispose of the various consumer related websites and assets associated with those activities. In the first quarter of 2008, the Company’s management made the decision to exit its remaining consumer products activities and to sell or otherwise dispose of the remaining consumer assets. During 2008, the Company sold the intellectual property rights to the “Wisenut” trademark and related domain names and decided to wind down the Furl operations. In the first quarter of 2009, the Furl assets were sold. The results of operations of consumer product activities, including related gains (losses), have been classified as discontinued operations for all periods presented in the accompanying Unaudited Condensed Consolidated Statements of Operations (see Footnote 3.) At March 31, 2009, the Company continues to own the Wisenut search engine technology, intellectual property rights in such technology and other assets.

The Unaudited Condensed Consolidated Financial Statements as of March 31, 2009 and for the three months ended March 31, 2009 and 2008 include the accounts of the Company and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

Unaudited Interim Financial Information

The accompanying Unaudited Condensed Consolidated Financial Statements as of March 31, 2009 and for the three months ended March 31, 2009 and 2008 reflect all adjustments that are normal and recurring in nature and, in the opinion of management, are necessary for a fair representation of the results of operations for the periods shown. These Unaudited Condensed Consolidated Financial Statements should be read in conjunction with the Company’s Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008. The Unaudited Condensed Consolidated Balance Sheet as of December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The results of operations for the interim period ended March 31, 2009 are not necessarily indicative of results to be expected for the full year.

Use of Estimates and Assumptions

The Unaudited Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue, expenses, and contingent assets and liabilities during the reporting period. The Company bases its estimates on various factors and information which may include, but are not limited to, history and prior experience, experience of other enterprises in the same industry, new related events, and current economic conditions, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. In management’s opinion, all adjustments necessary for a fair statement are reflected in the interim periods presented.

Reclassifications

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

Investments

The Company accounts for investments in securities under Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). SFAS 115 requires the classification of investments in debt and equity securities with readily determinable fair values as “held-to-maturity,” “available-for-sale,” or “trading.”

The Company invests its excess cash primarily in debt instruments of high-quality corporate and government issuers. All highly liquid instruments with maturities at the date of purchase greater than ninety days are considered investments. All instruments with maturities greater than one year from the balance sheet date are considered long-term investments unless management intends to liquidate such securities in the current operating cycle. Such securities are classified as short-term investments. These securities are classified as available-for-sale and carried at fair value in accordance with SFAS No. 157, Fair Value Measures (“SFAS 157”).

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

6

Concentrations, Credit Risk and Credit Risk Evaluation

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, investments, and accounts receivable. As of March 31, 2009 and December 31, 2008, the Company placed its cash equivalents and investments primarily through one financial institution, City National Bank (“CNB”), and mitigated the concentration of credit risk by placing percentage limits on the maximum portion of the investment portfolio which may be invested in any one investment instrument. These amounts at times may exceed federally insured limits. The Company has not experienced any credit losses on these cash equivalents and investment accounts and does not believe it is exposed to any significant credit risk on these funds. The fair value of these accounts is subject to fluctuation based on market prices.

Credit Risk, Customer and Vendor Evaluation

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

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

	March 31, 2009		December 31, 2008
Company 1	32	%	26	%
Company 2	*	*	18	%

** Less than 10%

Revenue Concentrations

The following table reflects the percentage of revenue attributed to the countries that accounted for 10% or more of net revenue.

	Three Months Ended March 31,
	2009		2008
United States	86	%	90	%
Canada	10	%	*	*

** Less than 10%

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

	Three Months Ended March 31,
	2009		2008
Advertising Networks	91	%	90	%
Publisher Solutions	9	%	10	%

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

	Three Months Ended March 31,
	2009		2008
Company 1	20	%	*	*
Company 2	*	*	22	%
Company 3	10	%	*	*

** Less than 10%

7

One publisher customer represented 89% and 83% of Publisher Solutions revenue for the three months ended March 31, 2009 and 2008, respectively.

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

	Three Months Ended March 31,
	2009		2008
Distribution Partner 1	13	%	*	*
Distribution Partner 2	12	%	11	%
Distribution Partner 3	13	%	*	*
Distribution Partner 4	10	%	*	*
Distribution Partner 5	*	*	12	%
Distribution Partner 6	*	*	12	%
Distribution Partner 7	*	*	11	%

** Less than 10%

Internal Use Software Development Costs

The Company accounts for internal use software development costs in accordance with American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) No. 98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use (“SOP 98-1”). In accordance with the capitalization criteria of SOP 98-1, the Company has capitalized external direct costs of materials and services consumed in developing and obtaining internal-use computer software and the payroll and payroll-related costs for employees who are directly associated with and who devote time to developing the internal-use computer software.

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

The Company’s capitalized software development costs were $7.8 million and $7.4 million with related accumulated amortization of $5.7 million and $5.5 million at March 31, 2009 and December 31, 2008, respectively. Amortization expense was $0.2 million and $0.2 million for the three months ended March 31, 2009 and 2008, respectively. Capitalized software development costs are included in capitalized software and other assets and are amortized over three years.

Intangible Assets

The Company amortizes acquired intangible assets with definite lives over periods from two to seven years and the amortization expense is primarily classified as cost of revenues in the Company’s Unaudited Condensed Consolidated Statements of Operations.

Impairment of Long-Lived Assets

In accordance with the provisions of SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), the Company reviews long-lived assets held or used in operations, including property and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. SFAS 144 requires the subject assets to be tested for impairment at the lowest level of operations that generates cash flows that are largely independent of the cash flows from those of other groups of asset and liabilities. Management has determined that the equity of its single reporting unit to be the lowest level of operation at which independent cash flows could be identified. Under SFAS 144, an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Due to the recent downturn in the macroeconomic environment, the Company tested its long-lived assets used in operations for impairment as of December 31, 2008 and determined they were not impaired. Assets to be disposed of are reported at the lower of carrying amount or fair value less cost to dispose.

Revenue Recognition

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

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

The Company also enters into agreements to provide private-labeled versions of its products, including licenses to the AdCenter. These license arrangements include multiple elements: revenue-sharing based on the publisher’s customer’s monthly revenue generated through the AdCenter application; upfront fees; and other license fees. The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104,Revenue Recognition in Financial Statements (“SAB 104”), and FASB EITF Issue No. 00-21,Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). The Company recognizes upfront fees over the term of the arrangement or the expected period of performance, other license fees over the term of the license, and revenue-sharing portions over the period in which such revenue is earned. In all cases, revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the resulting receivable is reasonably assured.

The Company provides a provision against revenue for estimated reductions resulting from billing adjustments and customer refunds. The amounts of these provisions are evaluated periodically based upon customer experience and historical trends. The allowance for returns included in trade receivables, net is $0.2 million and $0.3 million at March 31, 2009 and December 31, 2008, respectively.

8

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

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts for estimated losses resulting from customers failing to make required payments. This valuation allowance is reviewed on a periodic basis to determine whether a provision or reversal is required. The review is based on factors including the application of historical collection rates to current receivables and economic conditions. The Company will record an increase or reduction of its allowance for doubtful accounts if collection rates or whether economic conditions are more or less favorable than it anticipated. Additional allowances for doubtful accounts may be required if there is deterioration in past due balances, if economic conditions are less favorable than the Company anticipated or for customer-specific circumstances, such as bankruptcy. The allowance for doubtful accounts included in trade accounts receivable, net is $0.2 million and $0.3 million at March 31, 2009 and December 31, 2008, respectively. Bad debt (recovery) expense included in sales and marketing expense is ($0.1) million and $0.1 million for the three months ended March 31, 2009 and 2008, respectively.

Traffic Acquisition Costs

The Company enters into agreements of varying durations with its distribution network partners that display the Company’s listings ads on their sites in return for a percentage of the revenue-per-click that the Company receives when the ads are clicked on those partners’ sites.

The Company also enters into agreements of varying durations with third party affiliates that integrate the Company’s pay-for-performance search service into their websites. There are generally three economic structures of the affiliate agreements: guaranteed fixed payments which often carry reciprocal performance guarantees from the affiliate, variable payments based on a percentage of the Company’s revenue or based on a certain metric, such as number of searches or paid clicks, or a combination of the two.

The Company expenses, as cost of revenues, traffic acquisition costs under two methods; agreements with fixed payments are expensed pro-rata over the term the fixed payment covers, and agreements based on a percentage of revenue, number of paid introductions, number of searches, or other metrics are expensed based on the volume of the underlying activity or revenue, multiplied by the agreed-upon price or rate.

Share-Based Compensation

The Company accounts for share-based compensation costs in accordance with SFAS No. 123R, Share-Based Payment (“SFAS 123R”), which revised SFAS No. 123, Accounting for Share-based Compensation (“SFAS 123”). SFAS 123R requires all share-based payment transactions with employees, including grants of employee stock options and employee stock purchases related to the Employee Stock Purchase Plan to be recognized as compensation expense over the requisite service period based on their relative fair values. SFAS 123R requires the recognition of the fair value of stock compensation in net income (loss).

Share-based compensation expense recognized under SFAS 123R was $0.5 million and $1.0 million for the three months ended March 31, 2009 and 2008, respectively, which was related to stock grants, options and employee stock purchases. SFAS 123R requires companies to estimate the fair value of share-based payment awards on the grant date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company’s Unaudited Condensed Consolidated Statement of Operations over the requisite service periods.

SFAS 123R requires forfeitures to be estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The forfeiture rate is determined at the end of each fiscal quarter, based on historical rates. Share-based compensation expense recognized in the Company’s Unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2009 and 2008 includes (i) compensation expense for share-based payment awards granted prior to, but not yet fully vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the pro forma provisions of SFAS 123 and (ii) compensation expense for the share-based payment awards granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R.

Under the provisions of SFAS 123R the Company uses the Black-Scholes method of valuation for share-based awards granted. The Company has elected to adopt the alternative transition method for calculating the tax effects of share-based compensation to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee share-based compensation awards that are outstanding upon adoption of SFAS 123R.

Income Taxes

The Company accounts for income taxes using the liability method in accordance with SFAS No. 109,Accounting for Income Taxes (“SFAS 109”) and FASB Interpretation (“FIN”) No. 48Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109 (“FIN 48”). Under SFAS 109, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. In accordance with the provisions of FIN 48, the Company records liabilities, where appropriate, for all uncertain income tax positions. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within operations as income tax expense.

Comprehensive Loss

The Company has adopted the accounting treatment prescribed by SFAS No. 130,Comprehensive Income (“SFAS 130”). Other comprehensive loss as of March 31, 2009 and December 31, 2008 consists of unrealized gains and losses on marketable securities categorized as available-for-sale.

Net Income (Loss) per Common Share

SFAS No. 128, Earnings per Share (“SFAS 128”), establishes standards for computing and presenting net income (loss) per share. Basic net income (loss) per share is calculated using the weighted average shares of common stock outstanding. Diluted net income (loss) per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding during the period, using the treasury stock method for stock options and warrants.

9

Recently Issued Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141R, Business Combinations (“SFAS 141R”), which replaces SFAS No. 141, Business Combinations (“SFAS 141”) issued in 2001. Whereas SFAS 141 applied only to business combinations in which control was obtained by transferring consideration, the revised standard applies to all transactions or other events in which one entity obtains control over another. SFAS 141R defines the acquirer as the entity that obtains control over one or more other businesses and defines the acquisition date as the date the acquirer achieves control. SFAS 141R requires the acquirer to recognize assets acquired, liabilities assumed and any noncontrolling interest in the acquiree at their respective fair values as of the acquisition date. The revised standard changes the treatment of acquisition-related costs, restructuring costs related to an acquisition that the acquirer expects but is not obligated to incur, contingent consideration associated with the purchase price and pre-acquisition contingencies associated with acquired assets and liabilities. Under the guidance of SFAS 141R, acquisition costs associated with business combinations will generally be expensed as incurred. Prior to the adoption of SFAS 141R, similar costs associated with a successful acquisition were capitalized. SFAS 141R retains the guidance in SFAS 141 for identifying and recognizing intangible assets apart from goodwill. The revised standard applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Thus the Company is required to apply the provisions of SFAS 141R to any business acquisition which occurs on or after January 1, 2009, but this standard will have no effect on prior acquisitions.

In April 2009, the FASB issued FSP No. 141R-1,Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (“FSP FAS 141R-1”) which amends the provisions of SFAS 141R for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. FSP FAS141R-1 eliminates the distinction between contractual and non-contractual contingencies, including the initial recognition and measurement criteria in SFAS 141R and instead carries forward most of the provisions in SFAS 141 for acquired contingencies. FSP FAS141R-1 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Thus the Company is required to apply the provisions of FSP FAS 141R-1 to any business acquisition which occurs on or after January 1, 2009, but this standard will have no effect on prior acquisitions. The effect of the adoption of FSP FAS 141R-1 will depend upon the nature of any future business combinations undertaken.

In February 2008, the FASB issued FSP FAS No. 157-2, Effective Date of FASB Statement No. 157 (“FSP FAS 157-2”) which delayed the effective date of SFAS 157 to fiscal years beginning after November 15, 2008 for certain nonfinancial assets and nonfinancial liabilities. FSP FAS 157-2 became effective for the Company on January 1, 2009. The adoption of FSP FAS 157-2 did not have a material effect on the Company’s results of operations, financial position or liquidity.

In April 2008, the FASB issued FSP 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”) which amended the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS 142. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and became effective for the Company on January 1, 2009. Early adoption was prohibited. The adoption of FSP FAS 142-3 did not have a material effect on the Company’s results of operations, financial position or liquidity.

In April 2009, the FASB issued Staff Position SFAS 107-1 and APB 28-1,Interim Disclosures about Fair Value of Financial Instruments (“FSP FAS 107-1”), which amends FASB Statement No. 107,Disclosures about Fair Values of Financial Instruments, to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. FSP FAS 107-1 also amends Accounting Principles Board Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. FSP FAS 107-1 is effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company does not expect that the adoption of FSP FAS 107-1 on April 1, 2009 will have a material impact on the Company’s results of operations, financial position or liquidity.

In April 2009, the FASB issued Staff Position SFAS 115-2 and SFAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairments, which amends the other-than-temporary guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP FAS 115-2 and FAS 124-2 is effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company does not expect that the adoption of FSP FAS 115-2 and FAS 124-2 on April 1, 2009 will have a material impact on the Company’s results of operations, financial position or liquidity.

In April 2009, the FASB issued Staff Position SFAS 157-4,Determining Fair Value when the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FSP FAS 157-4), which provides additional guidance in estimating fair value in accordance with SFAS 157 when the volume and level of activity for both financial and nonfinancial assets or liabilities have significantly decreased. FSP FAS 157-4 is effective for fiscal years and interim periods beginning after July 1, 2009 and shall be applied prospectively. Early adoption for periods ending before March 15, 2009 is not permitted. The Company does not expect that the adoption of FSP FAS 157-4 on July 1, 2009 will have a material impact on the Company’s results of operations, financial position or liquidity.

2. Fair Value of Financial Instruments

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

Level 1: Unadjusted quoted market prices for identical assets or liabilities in active markets that the Company has the ability to access.

Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, default rates, etc.) or can be corroborated by observable market data.

Level 3: Valuations based on models where significant inputs are not observable. The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use.

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The Company’s assets measured at fair value on a recurring basis subject to the disclosure requirements of SFAS 157 at March 31, 2009 and December 31, 2008, were as follows (in thousands):

	Balance at March 31, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash equivalents:
Money market funds	$	3,269	$	3,269	$	—
Certificates of deposit		1,250		—		1,250
Commercial paper		6,542		—		6,542
Corporate bonds		1,003		—		1,003
		12,064		3,269		8,795
Short-term investments:
Corporate bonds		1,742		—		1,742
Zero Coupon Municipal Bonds - California		985		—		985
United States government debt securities		2,020		—		2,020
Certificates of deposit		250		—		250
		4,997		—		4,997
Total assets measured at fair value	$	17,061	$	3,269	$	13,792
	Balance at December 31, 2008		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Cash equivalents:
Money market funds	$	17,279	$	17,279	$	—
Certificates of deposit		500		—		500
		17,779		17,279		500
Short-term investments:
Corporate bonds		5,195		—		5,195
Zero Coupon Municipal Bonds - California		958		—		958
United States government debt securities		2,032		—		2,032
Certificates of deposit		2,000		—		2,000
		10,185		—		10,185
Total assets measured at fair value	$	27,964	$	17,279	$	10,685

The fair value of our available-for-sale securities in an unrealized loss position was $2.7 million and $8.2 million at March 31, 2009 and December 31, 2008, respectively, with an unrealized loss of an insignificant amount. All of the securities in a loss position are investment-grade debt securities. The Company has the intent and ability to hold these securities until the market values recover or the securities mature and has concluded that for those securities in an unrealized loss position, no other-than-temporary loss exists at March 31, 2009 and December 31, 2008. The Company had an insignificant level 3 investment at March 31, 2009 and did not hold any investments categorized as level 3 at December 31, 2008. As of March 31, 2009 and December 31, 2008, the Company did not hold any investments in auction rate securities or collateralized debt obligations.

Valuation of Investments

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

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

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

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

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

The Company validates the prices received from the pricing service using various methods including, applicability of FDIC or other national government insurance or guarantees, comparison of proceeds received on individual investments subsequent to reporting date, prices received from publically available sources, and review of transaction volume data to confirm presence of active markets. The Company does not adjust the prices received from the pricing service unless such prices are determined to be inconsistent with SFAS 157. At March 31, 2009 and December 31, 2008, the Company did not adjust prices received from the pricing service.

3. Discontinued Operations

Foreign Operations

In 2004, the Company’s management made the decision to cease operating and liquidate its foreign legal entities, and reclassified its financial statements to reflect these foreign entity expenses as discontinued. During the three months ended March 31, 2009 and 2008, the loss related to the liquidation of the Company’s foreign legal entities was not significant. The Company expects to complete the dissolution of these entities in 2009. As of March 31, 2009 and December 31, 2008, there were no net assets related to the discontinued foreign legal entities.

Consumer Products

In 2007, the Company’s management made the decision to exit certain consumer products activities and to sell or otherwise dispose of the various related websites and assets associated with those activities and has reclassified its financial statements to reflect these consumer activities as discontinued. During 2007, the Company sold FindArticles, the assets relating to Grub, the websites and trademark associated with Zeal, and completed the shutdown of the Wisenut website and search functionality.

In the first quarter of 2008, the Company’s management made the decision to exit the remaining consumer products activities and to sell or otherwise dispose of the remaining consumer assets. The various related websites and assets associated with the consumer products activities previously disposed of, and the foreign operations previously disposed of, met the discontinued operations criteria in accordance with the provisions of SFAS 144. The results of operations related to assets to be disposed of, and of previously disposed assets, including any related gains and losses are classified as discontinued operations in the accompanying Unaudited Condensed Consolidated Statements of Operations.

As of March 31, 2009 and December 31, 2008, the Company owns the Wisenut search engine technology, intellectual property rights in such technology and other assets.

The following table reflects revenue, gross profit, operating expenses, gain on disposal and net income (loss) of discontinued operations for the three months ended March 31, 2009 and 2008 (in thousands):

	Three Months Ended March 31,
	2009		2008
Revenue	$	8	$	26
Gross profit (loss)	$	8	$	(49	)
Product development expenses		36		331
General and administrative expenses		—		40
Total operating expenses		36		371
Gain on disposal		137		113
Net income (loss) from discontinued operations	$	109	$	(307	)

Furl

In the first quarter of 2008, the Company’s management made the decision to exit the remaining consumer products activities and to sell or otherwise dispose of the remaining consumer assets. As a result, beginning in the first quarter of 2008, Furl assets, consisting of property and equipment, capitalized software, goodwill and intangibles, were accounted for under the guidance of SFAS 144 as “assets held for sale.” In the fourth quarter of 2008, the Company determined that the Furl assets were impaired due to the lack of marketability and the decision to wind down the Furl operations. As a result, the Company recognized an impairment charge of $1.4 million during 2008. On February 26, 2009, the Company sold the Furl assets and received a warrant to purchase 1.3 million shares of the acquirer’s non-marketable common stock at an exercise price of $0.30 per share (in each case, subject to certain adjustments in certain circumstances). The Company determined the warrants received had no significant value and did not record a gain on the disposal. The Furl assets had no net book value.

Net Nanny

On January 22, 2007, the Company completed the sale of Net Nanny to Content Watch, Inc. (“Content Watch”). The sale proceeds were comprised of contingent purchase consideration that may be realized at future dates based on the amount of revenue received by Content Watch. The Company recorded contingent purchase consideration of $0.1 million for the three months ended March 31, 2009 and 2008 and has been classified as gain on disposal.

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4. Prepaid expenses and other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

	March 31, 2009		December 31, 2008
Investment bank retainer fees	$	—	$	325
Other prepaid expenses		761		688
Other current assets		490		550
Total	$	1,251	$	1,563

Effective upon the adoption of SFAS 141R on January 1, 2009, the prepaid investment bank retainer fees at December 31, 2008 relating to evaluating strategic growth alternatives have been expensed and classified as general and administrative expenses. Fees paid in the future of a similar nature will be expensed as incurred.

5. Property and Equipment

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

	March 31, 2009							December 31, 2008
	Cost		Accumulated Depreciation			Net Book Value		Cost		Accumulated Depreciation			Net Book Value
Computer equipment	$	16,710	$	(13,614	)	$	3,096	$	16,362	$	(13,393	)	$	2,969
Furniture and fixtures		1,151		(1,109	)		42		1,151		(1,105	)		46
Software		3,765		(3,759	)		6		3,765		(3,746	)		19
Leasehold improvements		2,901		(2,658	)		243		2,901		(2,564	)		337
Total	$	24,527	$	(21,140	)	$	3,387	$	24,179	$	(20,808	)	$	3,371

Depreciation expense on property and equipment for the three months ended March 31, 2009 and 2008, including property and equipment under capital lease, was approximately $0.5 million and $0.6 million, respectively. Equipment under capital lease totaled $3.7 million as of March 31, 2009 and $3.1 million as of December 31, 2008. Depreciation expense on equipment under capital lease was $0.2 million and $0.1 million for the three months ended March 31, 2009 and 2008, respectively. Additionally, accumulated depreciation on equipment under capital lease was $0.9 million as of March 31, 2009 and $0.7 million as of December 31, 2008.

6. Intangible Assets

The Company’s intangible assets consist of purchased technology that have estimated useful lives of three years and are as follows (in thousands):

	March 31, 2009							December 31, 2008
	Gross Amount		Accumulated Amortization			Net Book Value		Gross Amount		Accumulated Amortization			Net Book Value
Amortizable purchased technology	$	358	$	(78	)	$	280	$	358	$	(65	)	$	293

Intangible asset amortization expense was not significant for the three months ended March 31, 2009 and $0.1 million for the three months ended March 31, 2008, and has been classified as discontinued operations. As of March 31, 2009, purchased technology totaling $0.3 million had not been deployed.

7. Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

	March 31, 2009		December 31, 2008
Accrued compensation and related expenses	$	582	$	722
Accrued distribution and partner costs		2,576		3,173
Accrued legal costs and other professional service fees		1,092		499
Accrued legal proceedings liability		339		339
Accrued indemnification liability		26		1,019
Accrued equipment purchases		145		370
Other		161		568
Total accrued liabilities	$	4,921	$	6,690

See Footnote 10, Commitments and Contingencies, for complete discussion of the accrued legal proceedings and indemnification liabilities.

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8. Lease Restructuring and Other Liabilities

Between 2003 and 2006, the Company vacated portions of its leased headquarter office facilities, and incurred lease restructuring costs related to closing these facilities. Additionally, the Company entered into various subleases.

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

	March 31, 2009		December 31, 2008
Lease restructuring	$	863	$	1,160
Sublease deposits		212		243
Total lease restructuring and other liabilities	$	1,075	$	1,403

As of March 31, 2009 and December 31, 2008, the lease restructuring liability was approximately $1.1 million and $1.4 million, respectively, and is included in the current portion of long-term obligations.

The following table sets forth lease restructuring activity during the three months ended March 31, 2009 and year ended December 31, 2008 (in thousands):

	Lease Restructuring Costs
Balance at December 31, 2007	$	2,498
Amortization of lease restructuring costs		(1,203	)
Lease restructuring credit		(135	)
Balance at December 31, 2008		1,160
Amortization of lease restructuring costs		(297	)
Balance at March 31, 2009	$	863

9. Long-Term Obligations

Long-term obligations consist of the following (in thousands):

	March 31, 2009			December 31, 2008
Note payable	$	46		$	63
Capital lease obligations		2,742			2,247
Total long-term obligations		2,788			2,310
Less: current portion		(1,061	)		(872	)
Long-term obligations, net of current portion	$	1,727		$	1,438

Note Payable

In January 2000, the Company issued an unsecured promissory note in the principal amount of approximately $0.5 million to its landlord to finance tenant improvements. The note bears interest at 9% per annum and is payable in equal monthly installments over a term of 10 years.

Capital Lease Obligations

On April 6, 2007, the Company entered into a master equipment lease agreement with City National Bank (“CNB”) for an original amount of up to $5.0 million for the purchase of computer equipment. On April 30, 2009, the lease line was extended through April 30, 2010. As of March 31, 2009, the Company had drawn down approximately $3.6 million of the available lease line of credit. Interest on the capital lease was calculated using interest rates ranging from 4.32% to 7.95% per annum. As of March 31, 2009, there is $1.3 million available for new capital leases. Interest on new capital leases will be calculated using an interest rate of 6.38% per annum.

The agreements with CNB, consisting of the outstanding standby letters of credit (each an “SBLC”) and the master equipment lease agreement, contain cross-default provisions whereby a default under one is deemed a default for the other. As of March 31, 2009 and December 31, 2008, the Company was not in default on either agreement with CNB (see Footnote 10).

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10. Commitments and Contingencies

Operating Leases

As of March 31, 2009, future minimum payments under the note payable, all capital and operating leases and minimum sublease rental income are as follows (in thousands):

	Note Payable			Capital Leases			Operating Leases		Minimum Sublease Rental Income			Total
Nine months ended December 31, 2009	$	48		$	858		$	3,250	$	(1,576	)	$	2,580
Fiscal years ending December 31,
2010		—			1,108			—		—			1,108
2011		—			777			—		—			777
2012		—			220			—		—			220
Total minimum payments		48			2,963		$	3,250	$	(1,576	)	$	4,685
Less: amount representing interest		(2	)		(221	)
Present value of net minimum payments		46			2,742
Less: current portion		(46	)		(1,015	)
Long-term portion of note payable and capital lease obligations	$	—		$	1,727

Operating Leases

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

Letters of Credit

The Company has outstanding SBLC related to security of a building lease and security for payroll processing services of $1.1 million at March 31, 2009 and December 31, 2008. Each of the SBLCs contains two financial covenants. As of March 31, 2009 and December 31, 2008, the Company was in compliance with all required covenants. On April 14, 2009, the Company amended the building lease SBLC to reduce the outstanding balance by $0.1 million.

The agreements with CNB, consisting of the SBLCs and master equipment lease agreement, contain cross-default provisions whereby a default under one is deemed a default for the other. As of March 31, 2009 and December 31, 3008 the Company was not in default on either agreement with CNB (see Footnote 9).

Guarantees and Indemnities

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

On September 4, 2008, the Company agreed to indemnify one of its Publisher Solutions customers, IAC Search & Media (“IAC”), pursuant to an indemnification agreement contained in an AdCenter for Publishers’ contract. The obligation arose from a Complaint, which was filed on October 16, 2007 in the United States District Court for the Eastern Division of Texas against IAC and others, alleging that the Company’s AdCenter for Publisher violates the plaintiff’s patent and seeks injunctive relief and unspecified damages. See Performance Pricing v. Google, Inc. et. al., Civil Action No. 2:07 cv 00432-LED, United States District Court for the Eastern District of Texas (the “Action”). On or about February 18, 2009, the Company entered into a Settlement Agreement with the plaintiffs whereby the Company agreed to pay the plaintiffs $0.6 million in exchange for a dismissal of the Action against IAC, release of IAC and the Company for any past damages for infringement and a future license for the Company and its customers. On or about February 12, 2009, the Company also agreed to pay IAC’s defense costs in the Action which totaled $0.4 million. On or about March 4, 2009, the Court dismissed the Action against IAC. In March 2009, the Company paid the $0.6 million required by the Settlement Agreement and the $0.4 million IAC defense cost reimbursement.

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

The following table sets forth the indemnification liability activity, including the Settlement Agreement payment, IAC defense costs and the Company’s defense costs, during the three months ended March 31, 2009 and the year ended December 31, 2008 (in thousands):

	Indemniciation Liability
Balance at December 31, 2007	$	—
Indemnification costs included in general and administrative expense		1,076
Cash payments		(57	)
Balance at December 31, 2008		1,019
Indemnification costs included in general and administrative expense		54
Cash payments		(1,016	)
Balance at March 31, 2009	$	57

The indemnification liability is classified in trade accounts payable and accrued liabilities on the Company’s Unaudited Condensed Consolidated Balance Sheet. (See Footnote 7)

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Legal Proceedings

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

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

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

On March 30, 2005, the case was removed to United States District Court for the Western District of Arkansas. On April 4, 2005, plaintiffs U.S. Citizens for Fair Credit Card Terms, Inc. and Savings 4 Merchants, Inc. filed a motion of voluntary dismissal without prejudice. The motion was granted on April 7, 2005. Plaintiffs Lane’s Gifts and Collectibles, L.L.C. and Max Caulfield d/b/a Caulfield Investigations filed a motion to remand the case to state court on April 13, 2005, which was granted in September 2005. In July 2005, defendants, including the Company, petitioned the Eighth Circuit Court of Appeals for an appeal of the remand order, and moved to stay the proceedings while the appeal was pending. The petition was denied on September 8, 2005 and the case was remanded to the Circuit Court of Miller County, Arkansas. The Company was served with discovery requests on October 7, 2005. The Company has filed and/or joined motions to dismiss on the basis of failure to state a claim upon which relief can be granted, lack of personal jurisdiction, and improper venue. Pursuant to the court’s initial scheduling order, plaintiffs had until January 27, 2006 to respond to the motions to dismiss for lack of personal jurisdiction and improper venue; and until September 9, 2006 to respond to the motion to dismiss on the basis of failure to state a claim upon which relief can be granted. However the court entered an order staying all proceedings for a period of 60 days on January 9, 2006. On April 20, 2006 the Court preliminarily approved a class settlement among plaintiffs, defendant Google, Inc., and certain defendants who display Google advertisements on their networks (the “Google Settlement”). The Google Settlement purports to release Google of all claims and also purports to release certain defendants, including the Company, for any claims associated with the display of Google advertisements on their networks. On July 24 and 25, 2006, the Court had a final settlement hearing on the Google Settlement, and on July 26, 2006, the Court approved the settlement. On April 21, 2006, the Court ordered the remaining defendants, including the Company, to mediation and further stayed the proceedings to September 21, 2006. The Court further extended the stay as to LookSmart until August 16, 2006. The parties thereafter stipulated that the stay would remain in effect while the parties continue to comply with the Court’s order regarding mediation. On January 10, 2007, the Court further extended the stay until May 1, 2007. On or about November 20, 2007, the Plaintiffs and the Company entered into a Stipulation and Settlement Agreement (the “Settlement Agreement”) to settle the matter in its entirety. On or about November 29, 2007, the Court preliminarily approved the Settlement Agreement and on February 29, 2008, the court entered an order to approve as final the Settlement Agreement. Pursuant to the Settlement Agreement, the Company has agreed to establish a Settlement Fund in the amount of up to approximately $2.5 million to be allocated as follows: (a) the Class Member Fund which should not exceed approximately $2.0 million in advertising credits, (b) the Fees Award to Class Counsel, which shall not exceed the amount of approximately $0.6 million; and (c) the Incentive Award (as hereinafter defined) to the three Class Representatives, which shall not exceed a collective immaterial amount. In the event that the total of the credit claims paid is less than approximately $0.8 million, the difference between the total amount of the credit claims paid and approximately $0.8 million will be paid to charities in the form of advertising credits. Should the total of the credit claims paid to the Settlement Class Members as a group plus any amounts allocated to charities be more than approximately $0.8 million but less than approximately $2.5 million, then the amount if any shall be retained by the Company. Settlement payments from the Class Member Fund will be paid out in advertising credits to members of the Class who file timely claims to participate in the settlement. On December 28, 2007, the Company provided the notices to class members required by the Settlement Agreement who had until February 11, 2008 to file claims. On April 8, 2008, the Company made the Fee Award to Counsel and the Incentive Award payments to plaintiffs’ counsel. On April 29, 2008, the Company began to issue advertising credits to the Class Members who filed timely claims. The Company recorded an estimate in accrued liabilities of the amount of the loss on settlement which management determined was probable and estimable during the year ended December 31, 2007. This estimate may change as a result of the cost of the final settlement arrangement. In addition, during 2007 the Company recovered settlement proceeds from the insurance carrier, which exceeded the recorded estimate of the amount of loss on settlement. Due to the uncertainty relating to the ultimate settlement amount, the excess settlement proceeds have been recorded as an accrued liability at March 31, 2009 and December 31, 2008.

Upon the completion of the thirty day appeals period, which ended on March 30, 2008, the Company on April 7, 2008 paid approximately $0.6 million of legal fees to the plaintiff’s counsel representing the Fees Award to Class Counsel and the Incentive Award as is stipulated in the Settlement Agreement. As of March 31, 2009, the Company has provided approximately $0.1 million of advertising credits to Class Members.

The following table sets forth the legal proceedings liability activity during three months ended March 31, 2009 and the year ended December 31, 2008 (in thousands):

	Legal Proceedings Liability
Balance at December 31, 2007	$	1,000
Amounts paid to plaintiff’s counsel		(602	)
Advertising credits provided to Class Members		(59	)
Balance at December 31, 2008		339
Advertising credits provided to Class Members		—
Balance at March 31, 2009	$	339

The legal proceedings liability is classified in accrued liabilities on the Company’s Unaudited Condensed Consolidated Balance Sheet. (See Footnote 7)

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11. Stockholders’ Equity

Share-Based Compensation

Stock Option Plans

In December 1997, the Company approved the 1998 Stock Option Plan (the “Plan”). In October 2000, the Company acquired Zeal Media, Inc. and assumed all the stock options outstanding under the 1999 Zeal Media, Inc. Stock Plan (the “Zeal Plan”). In April 2002, the Company acquired Wisenut, Inc. and assumed all the stock options outstanding under the Wisenut, Inc. 1999 Stock Incentive Plan (the “Wisenut Plan”). On June 19, 2007, the stockholders approved the LookSmart 2007 Equity Incentive Plan (the “2007 Plan”). Under the 2007 Plan, the Company may grant incentive stock options, nonqualified stock options, stock appreciation rights and stock rights to employees, directors and consultants. Share-based incentive awards are provided under the terms of these four plans (collectively, the “Plans”).

The Company’s Plans are administered by the Compensation Committee of the Board of Directors. Awards under the Plans principally include at-the-money options and fully vested restricted stock. Except for the one time share grants to certain executive officers that become exercisable over a two year period, outstanding stock options generally become exercisable over a three or four year period from the grant date and have a term of ten years. Beginning in 2008, the Company issued fully vested restricted stock to certain directors and executive officers. The number of shares reserved for issuance under the Plans was approximately 5.1 million and 5.2 million shares of common stock at March 31, 2009 and December 31, 2008, respectively. There were 1.3 million shares available to be granted under the Plans at March 31, 2009.

The Company accounts for employee stock options and awards under SFAS 123R and its related interpretations. Share-based compensation expense recorded during the three months ended March 31, 2009 and 2008 was included in the Company’s Condensed Consolidated Statement of Operations as follows (in thousands):

	Three Months Ended March 31,
	2009			2008
Sales and marketing	$	57		$	109
Product development		158			179
General and administrative		326			750
Loss from discontinued operations		—			11
Total share-based compensation		541			1,049
Less amounts capitalized as software development costs		(24	)		(25	)
Total share-based compensation expense	$	517		$	1,024

Total unrecognized share-based compensation expense related to share-based compensation arrangements at March 31, 2009 was $2.9 million and is expected to be recognized over a weighted-average period of approximately 2.4 years. The total fair value of equity awards vested during the three months ended March 31, 2009 and 2008 was $0.5 million and $1.0 million, respectively.

The Company recorded share-based compensation of $0.5 million and $1.0 million for the three months ended March 31, 2009 and 2008, respectively. Of these amounts, insignificant amounts were capitalized related to the development of internal-use software in accordance with SOP No. 98-1.

Option Awards

Stock option activity under the Plans during the three months ended March 31, 2009 and the year ended December 31, 2008 is as follows:

	Shares		Weighted- Average Exercise Price Per Share		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
	(in thousands)				(in years)	(in thousands)
Options outstanding at December 31, 2007	4,341		$	4.65
Granted	1,221			3.44
Exercised	(46	)		3.08
Expired/forfeited	(1,698	)		5.18
Options outstanding at December 31, 2008	3,818			4.05
Granted	78			1.08
Expired/forfeited	(117	)		3.80
Options outstanding at March 31, 2009	3,779		$	3.99	8.03	$	16
Vested and expected to vest at March 31, 2009	3,471		$	4.04	7.98	$	8
Exercisable at March 31, 2009	2,377		$	4.36	7.69	$	8

The aggregate intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between the market price of the Company’s stock on the last trading day of the year and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holder had all option holders exercised their options at year-end. The amount changes based on the fair market value of the Company’s stock.

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The following table summarizes information about stock options outstanding at March 31, 2009:

	Options Outstanding					Options Exercisable
Price Ranges	Shares	Weighted- Average Remaining Contractual Term	Weighted- Average Exercise Price			Shares	Weighted- Average Exercise Price
	(in thousands)	(in years)				(in thousands)
$1.02 - $  3.19	745	8.29	$	2.67		473	$	2.72
$3.20 - $  3.20	1,052	8.61		3.20		362	$	3.20
$3.21 - $  3.68	795	8.71		3.58		623	$	3.58
$3.70 - $  4.61	830	7.54		4.34	��	595	$	4.34
$4.69 - $20.55	357	5.37		9.17		324	$	9.62
$1.02 - $20.55	3,779	8.03		3.99		2,377	$	4.36

Stock Awards

During the three month ended March 31, 2009, the Company issued 23 thousand shares of fully vested restricted stock, with a weighted average grant date fair value of $1.02 per share, under the Plans.

Employee Stock Purchase Plan

Under the 1999 Employee Stock Purchase Plan (the “ESPP”), which was approved by the shareholders in July 1999, the Company is authorized to issue up to 520 thousand shares of Common Stock to Employees of the Company. Under the ESPP, substantially all employees may purchase the Company’s common stock through payroll deductions at a price equal to 85 percent of the lower of the fair market value at the beginning of the offering period or at the end of each applicable purchase period. An offering period is 24 months, composed of four six-month purchase periods. ESPP contributions are limited to a maximum of 15 percent of an employee’s eligible compensation, and ESPP participants are limited to purchasing a maximum of 500 shares per purchase period. ESPP share-based compensation expenses were not significant for the three months ended March 31, 2009 and 2008. As of March 31, 2009, 478 thousand shares have been issued under the ESPP and 42 thousand shares remain available for issuance.

Share-Based Compensation Valuation Assumptions

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

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

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

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

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

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

As share-based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The weighted average grant-date fair value of options granted in the three months ended March 31, 2009 and 2008 was $0.63 and $2.27 per share, respectively.

Exercise of Employee Stock Options and Purchase Plans

There were no options exercised in the three months ended March 31, 2009. The total cash received as a result of exercises under all share-based compensation arrangement and the aggregate intrinsic value of options exercised was not significant for the three months ended March 31, 2008. The Company issues new shares of common stock upon exercise of stock options. No income tax benefits have been realized from exercised stock options.

12. Related Party Transactions

The Company paid one of its board members, Jean-Yves Dexmier, fees totaling $63 thousand during the three months ended March 31, 2009 in connection with Mr. Dexmier providing additional board services to the Company as Chair of its Strategic Direction committee. The Company paid $24 thousand during the three months ended March 31, 2008 in connection with additional board services under a Board Services Agreement with the Company.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

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

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

Business Overview

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

LookSmart offers search advertisers targeted, pay-per-click (PPC) search, and contextual search advertising via a monitored search advertising distribution network (“AdCenter”). The Company’s extensive search advertising distribution network includes publishers and search partners within certain vertical market segments in the United States and certain other countries. The Company’s application programming interface (API) allows search advertisers and their advertising agencies to connect any type of marketing or reporting software with minimal effort, for easier access, management, and optimization of search advertising campaigns. The advertiser network service offering provided 91% and 90% of total revenues in the quarters ended March 31, 2009 and 2008, respectively.

LookSmart also offers publishers licensed private-label search advertiser network solutions based on its AdCenter platform technology (“Publisher Solutions”). Publisher Solutions consist of hosted auction-based ad serving with an ad backfill capability that allows search engines, networks, media companies, social networking sites, retail sites, directories, Internet Service Providers (“ISPs”) and portals to manage their advertiser relationships, distribution channels and accounts. The publisher solutions service offering has provided 9%, and 10% of total revenues in the quarters ended March 31, 2009 and 2008, respectively.

In 2007, our management made the decision to exit certain consumer products activities and to sell or otherwise dispose of the various consumer related websites and assets associated with those activities. In the first quarter of 2008, our management made the decision to exit its remaining consumer products activities and to sell or otherwise dispose of the remaining consumer assets. During 2008, we sold the intellectual property rights to the “Wisenut” trademark and related domain names and decided to wind down the Furl operations. In the first quarter of 2009, the Furl assets were sold for an insignificant amount. The results of operations of consumer product activities, including related gains (losses), have been classified as discontinued operations for all periods presented in the accompanying Unaudited Condensed Consolidated Statements of Operations (see Footnote 3). At March 31, 2009, the Company continues to own the Wisenut search engine technology and its intellectual property rights in such technology and other assets.

Critical Accounting Policies and Estimates

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

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

Investments

We account for investments in securities under Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities (“SFAS 115”). SFAS 115 requires the classification of investments in debt and equity securities with readily determinable fair values as “held-to-maturity,” “available-for-sale,” or “trading.”

We invest our excess cash primarily in debt instruments of high-quality corporate and government issuers. All highly liquid instruments with maturities at the date of purchase greater than ninety days are considered investments. All instruments with maturities greater than one year from the balance sheet date are considered long-term investments unless management intends to liquidate such securities in the current operating cycle. Such securities are classified as short-term investments. These securities are classified as available-for-sale and carried at fair value in accordance with SFAS No. 157, Fair Value Measures (“SFAS 157”).

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

Fair Value of Financial Instruments

SFAS 157 defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measures required under other accounting pronouncements, but does not change existing guidance as to whether or not an instrument is carried at fair value.

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

Level 1: Unadjusted quoted market prices for identical assets or liabilities in active markets that we have the ability to access.

Level 2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, default rates, etc.) or can be corroborated by observable market data.

Level 3: Valuations based on models where significant inputs are not observable. The unobservable inputs reflect our assumptions about the assumptions that market participants would use.

Revenue Recognition

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

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

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

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

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

Allowance for Doubtful Accounts

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

Valuation of Goodwill and Intangible Assets

In accordance with SFAS No. 142,Goodwill and Other Intangible Assets (“SFAS 142”), goodwill and other intangibles with indefinite useful lives are not amortized but tested for impairment annually or more frequently when events or circumstances indicates that the carrying value of a reporting unit more likely than not exceeds its fair value. Our annual goodwill impairment testing date is December 31 of each year. In addition, we periodically re-assess the valuation and asset lives of intangible assets with definite lives to conform to changes in management’s estimates of future performance.

We have recorded goodwill and intangible assets in connection with our business acquisitions. Management exercises judgment in the assessment of the related useful lives, fair value and recoverability of these assets. As of March 31, 2009 and December 31, 2008, we have no recorded goodwill. The majority of intangible assets are amortized over two to seven years, the period of expected benefit.

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SFAS 142 also requires that intangible assets with definite lives be amortized over their estimated useful life and reviewed for impairment in accordance with SFAS No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). We amortize acquired intangible assets with definite lives over periods from two to seven years and the amortization expense is primarily classified as cost of revenue in our Unaudited Condensed Consolidated Statements of Operations.

Deferred Taxes

We account for income taxes using the liability method in accordance with SFAS No. 109,Accounting for Income Taxes. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Due to our history of losses and the uncertainty of net operating loss utilization, we have established a valuation allowance for the full amount of our deferred tax assets. We adopted Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 48Accounting for Uncertainty for Income Taxes-an interpretation of FASB Statement No. 109 (“FIN 48”) effective January 1, 2007. In accordance with the provisions of FIN 48, we record liabilities, where appropriate, for all uncertain income tax positions. We recognize potential accrued interest and penalties related to unrecognized tax benefits within operations as income tax expense.

Internal Use Software Development Costs

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

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

Restructuring Charges

We have recorded restructuring accruals related to closing of certain leased facilities in accordance with SFAS No. 146,Accounting for Costs Associated with Exit or Disposal of Activities. Management’s judgment is required when estimating when the redundant facilities will be subleased and at what rate they will be subleased.

Share-Based Compensation

We account for share-based compensation costs in accordance with SFAS No. 123R,Share-Based Payment (“SFAS 123R”), which revised SFAS No. 123,Accounting for Share-based Compensation. SFAS 123R requires all share-based payment transactions with employees, including grants of employee stock options and employee stock purchases related to the Employee Stock Purchase Plan to be recognized as compensation expense over the requisite service period based on their relative fair values. SFAS 123R requires the recognition of the fair value of stock compensation in net income (loss).

We use the Black-Scholes method of valuation for share-based awards granted. We elected to adopt the alternative transition method provided in FASB Staff Position No. FAS 123R-3,Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards, for calculating the tax effects of share-based compensation to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects of employee share-based compensation awards that are outstanding upon adoption of SFAS 123R.

Recent Accounting Pronouncements

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

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Results of Operations

Overview of the Three Months Ended March 31, 2009

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

	Three Months Ended March 31,
	2009		2008
Revenue	100.0	%	100.0	%
Cost of revenue	61.1	%	57.9	%
Gross profit	38.9	%	42.1	%
Operating expenses:
Sales and marketing	10.3	%	12.6	%
Product development	19.7	%	16.6	%
General and administrative	25.4	%	16.4	%
Total operating expenses	55.4	%	45.6	%
Loss from operations	(16.5	%)	(3.5	%)
Non-operating income, net	0.4	%	2.5	%
Loss from continuing operations before income taxes	(16.1	%)	(1.0	%)
Income tax expense	0.1	%	0.1	%
Loss from continuing operations	(16.2	%)	(1.1	%)
Income (loss) from discontinued operations, net of tax	0.8	%	(1.7	%)
Net loss	(15.4	%)	(2.8	%)

Revenues

Revenue is derived from the Company’s two service offerings or “products”: Advertiser Networks and Publisher Solutions. Total revenue and revenue from Advertiser Networks and Publisher Solutions for the three months ended March 31, 2009 and 2008 were as follows (in thousands):

	Three Months Ended March 31,
	2009		% of Revenue		2008		% of Revenue		Dollar Change			% Change
Advertiser Networks	$	12,015	91	%	$	15,802	90	%	$	(3,787	)	(24	%)
Publisher Solutions		1,239	9	%		1,742	10	%		(503	)	(29	%)
Total revenue	$	13,254	100	%	$	17,544	100	%	$	(4,290	)	(24	%)

The Company recognized $13.3 million of total revenue during the three months ended March 31, 2009, down 24% from the $17.5 million recognized during the three months ended March 31, 2008. We believe that the $4.3 million decrease in revenue for the first quarter of 2009 as compared to the comparable period of 2008 was primarily due to tightening advertising budgets resulting from the current general economic downturn.

We continue to be dependent upon a few customers for a significant percentage of our revenue. For the three months ended March 31, 2009, two customers accounted for a combined 30% of revenue and for the three months ended March 31, 2008, one customer accounted for 22% of revenue. For the quarter ended March 31, 2009, IAC Search and Media (“IAC”) represented $2.7 million, or 20%, of total revenue and $1.1 million, or 89%, of the Publisher Solutions revenue. Our contract with IAC expires December 31, 2009. IAC is currently soliciting bids for a new contract and we are actively participating in the process.

We recognized $12.0 million of Advertiser Networks revenue during the three months ended March 31, 2009, down 24% from the $15.8 million recognized during the three months ended March 31, 2008. Revenue from Advertiser Networks decreased in the first quarter of 2009 by $3.8 million compared to the same period in 2008 primarily as a result of a decrease in average revenue per click (“RPC”) which was partially offset by an increase in paid clicks. RPC decreased to $0.07 from $0.10 in the first quarter of 2009 as compared to 2008 reflecting the continued shift in the channels used to reach search advertiser network customers and the segment composition of search advertiser network customers. Paid clicks totaled 184 million for first quarter of 2009 as compared to 152 million for the first quarter of 2008, an increase of 21%, but a 9% decrease from the 201 million paid clicks for the fourth quarter of 2008. The increased paid click volume is attributed to an increase in advertisers, improvements in quality of our platform, performance optimization and better match rates.

We recognized $1.2 million of Publisher Solutions revenue during the three months ended March 31, 2009, a 29% decrease from the $1.7 million recognized during the three months ended March 31, 2008. IAC represented 89% and 83% of Publisher Solutions revenue for the three months ended March 31, 2009 and 2008, respectively. Publisher Solutions revenue decreased $0.5 million in the first quarter of 2009 as compared to the same period of 2008 primarily due to reduced revenue from IAC resulting from a contractual reduction of the revenue share percentage in the final year of the contract.

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Cost of Revenue and Gross Margin

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

	Three Months Ended March 31,
	2009		% of Revenue		2008		% of Revenue		Dollar Change			% Change
Traffic acquisition costs	$	7,587	57	%	$	9,713	55	%	$	(2,126	)	(22	%)
Other costs		515	4	%		445	3	%		70		16	%
Total cost of revenue	$	8,102	61	%	$	10,158	58	%	$	(2,056	)	(20	%)
Traffic acquisition costs as percentage of Advertiser Network revenue			63.1	%			61.5	%

Our total cost of revenue during the three months ended March 31, 2009 was $8.1 million, down $2.1 million, or 20% from the $10.2 million in the three months ended March 31, 2008.

Our TAC during the three months ended March 31, 2009 were $7.6 million, down $2.1 million, or 22% from the $9.7 million in the three months ended March 31, 2008. As a percentage of Advertising Network revenue, TAC increased approximately two percentage points from 61.5% in first quarter of 2008 to 63.1% in the first quarter of 2009. These changes are primarily due to the reduced Advertiser Network revenue combined with our network quality enhancement initiatives.

There is no TAC associated with Publisher Solutions revenue and, therefore, Publisher Solutions gross margin percentage is significantly greater than that of Advertiser Network.

Other costs of revenue consist of connectivity costs, expenses relating to hosting advertising operations, and credit card fees. These costs increased in first quarter of 2009 compared to the same period of 2008 primarily due to increased connectivity and hosting expenses related to maintaining the server facilities.

Consistent with the reasons revenue and cost of revenue decreased in the first quarter of 2009 as compared to the first quarter of 2008, gross profit declined approximately 3 percentage points to 39% for the first quarter of 2009 versus 42% for the same quarter in 2008 and gross profit, in absolute dollars, also decreased $2.2 million to $5.2 million.

Operating Expenses

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

	Three Months Ended March 31,
	2009		% of Revenue		2008		% of Revenue		Dollar Change			% Change
Sales and marketing	$	1,365	10	%	$	2,216	13	%	$	(851	)	(38	%)
Product development		2,613	20	%		2,905	17	%		(292	)	(10	%)
General and administrative		3,369	25	%		2,872	16	%		497		17	%
Total operating expenses	$	7,347	55	%	$	7,993	46	%	$	(646	)	(8	%)

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

	Three Months Ended March 31,
	2009			2008
Sales and marketing	$	57		$	109
Product development		158			179
General and administrative		326			750
Loss from discontinued operations		—			11
Total share-based compensation		541			1,049
Less amounts capitalized as software development costs		(24	)		(25	)
Total share-based compensation expense	$	517		$	1,024

Sales and Marketing

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

Our sales and marketing expenses during the three months ended March 31, 2009 were $1.4 million, down 38% from $2.2 million in the same period of 2008. Sales and marketing expense for the first quarter of 2009 decreased $0.9 million compared to the same quarter of the prior year primarily due to decreased staffing costs, of $0.5 million, combined with reduced bad debt expense resulting from successful collection efforts.

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Product Development

Product development costs include all costs related to the continued development, enhancement and technical operating expenses relating to our core technology product, the AdCenter platform. The AdCenter is used to operate both our own Advertiser Network and other publishers’ client networks, and is licensed to publishers to operate their own network. These costs include salaries and associated costs of employment, including share-based compensation, overhead, and facilities. Costs related to the development of software for internal use in the business, including salaries and associated costs of employment, are capitalized after certain milestones have been achieved and amortized over a three year period once the project is placed in service. Software licensing and computer equipment depreciation related to supporting product development functions are also included in product development expenses.

Capitalized software development costs include the costs to develop software for internal use, excluding costs associated with research and development, training and testing.

Product development and capitalized software development costs were as follows:

	Three Months Ended March 31,
	2009			% of Revenue		2008			% of Revenue		Dollar Change			% Change
Product development costs	$	2,987		3	%	$	3,114		18	%	$	(127	)	(4	%)
Capitalized software development costs		(374	)	(3	%)		(209	)	(1	%)		(165	)	79	%
Total product development expenses	$	2,613		20	%	$	2,905		17	%	$	(292	)	(10	%)

Our product development expenses, net of capitalized software development costs, during the three months ended March 31, 2009 was $2.6 million, down 10%, from $2.9 million for the three months ended March 31, 2008. Product development expenses, net of capitalized software development costs, for the 2009 quarter decreased $0.3 million compared to the comparable 2008 quarter primarily due to increased capitalized software development costs combined with slightly decreased staffing costs. The amount of software development costs capitalized during the three months ended March 31, 2009 increased $0.2 million, or 79%, as compared to the comparable 2008 quarter primarily due to the maturation of the technology requiring reduced maintenance support and allowing for more enhancement development.

General and Administrative

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

Our general and administrative expense during the three months ended March 31, 2009 was $3.4 million, up 17% from $2.9 million for the three months ended March 31, 2008. General and administrative expenses for the first quarter of 2009 increased $0.5 million compared to the same quarter of the prior year primarily due to $0.8 million of expense associated with our evaluation of strategic growth alternatives, partially offset by a decrease in share-based compensation of $0.4 million. Of the increase related to the evaluation of strategic growth alternatives, $0.3 million is related to the expensing of investment banker retainer fees that were classified as prepaid expenses at December 31, 2008 as required by the adoption of SFAS 141R in 2009 which requires the immediate expensing of costs related to business combinations. In the first quarter of 2008, share-based compensation expense included $0.3 million of accelerated expense resulting from options granted to the President and Chief Executive Officer.

Loss from Operations(in thousands)

Our loss from operations for the three months ended March 31, 2009 was $2.2 million, an increase from a loss of $0.6 million for the three months ended March 31, 2008. The loss from operations increased $1.6 million primarily due to the factors discussed above, including but not limited to our decreased revenue and gross profit of $4.3 million and $2.2 million, respectively, in the first quarter of 2009 as compared to the comparable quarter of 2008, which were partially offset by $0.6 million of lower operating expenses, including $0.8 million of costs associated with the evaluation of strategic growth alternatives.

Other Continuing Operations Items

The table below sets forth other continuing operations data for the three months ended March 31, 2009 and 2008 (in thousands):

	Three Months Ended March 31,
	2009			% of Revenue		2008			% of Revenue		Dollar Change			% Change
Non-operating income (expense)
Interest income	$	92		1	%	$	459		3	%	$	(367	)	(80	%)
Interest expense		(38	)	0	%		(27	)	0	%		(11	)	41	%
Other income, net		—		0	%		1		0	%		(1	)	(100	%)
Total non-operating income	$	54		0	%	$	433		2	%	$	(379	)	(88	%)
Income tax expense	$	8		0	%	$	7		0	%	$	1		14	%

Interest Income and Expense

Interest income includes income from our cash, cash equivalents and investments, and decreased $0.4 million from the three months ended March 31, 2008 to the three months ended March 31, 2009. This decrease was primarily driven by a sharp decrease in average yields earned on cash and investment balances in the 2009 period compared to 2008 period, combined with nearly a 30% decrease in average cash and investment balance during the same periods.

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Interest expense primarily consists of interest paid on capital leases and our note payable.

Income (Loss) from Discontinued Operations, Net of Tax

In 2007, our management decided to exit certain consumer products activities and to sell the related websites and assets associated with those activities. In the first quarter of 2008, our management further decided to exit our remaining consumer products activities, primarily Furl and Wisenut. This decision, combined with the assets previously disposed of, met the discontinued operations criteria in accordance with SFAS 144, and the results of operations to be disposed of and previously disposed assets, including related gains, have been reclassified as discontinued operations for the three months ended March 31, 2009 and 2008.

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

	Three Months Ended March 31,
	2009		% of Revenue		2008			% of Revenue		Dollar Change		% Change
Income (loss) from discontinued operations, net of tax	$	109	1	%	$	(307	)	(2	%)	$	416	(136	%)

The following table reflects revenue, gross profit, operating expenses, non operating income, gain on disposal, income tax expense and net income (loss) from discontinued operations for the three months ended March 31, 2009 and 2008 (in thousands):

	Three Months Ended March 31,
	2009		2008
Revenue	$	8	$	26
Gross profit (loss)	$	8	$	(49	)
Product development expenses		36		331
General and administrative expenses		—		40
Total operating expenses		36		371
Gain on disposal		137		113
Net income (loss) from discontinued operations	$	109	$	(307	)

In the fourth quarter of 2008, management determined that the Furl assets were impaired due to lack of marketability and decided to wind down the Furl operations. As a result, the Furl assets were fully impaired as of December 31, 2008. In the first quarter of 2009, the Furl assets were sold for an insignificant amount.

The gain on disposal consists of contingent purchase consideration resulting from the sale of Net Nanny to Content Watch, Inc. in 2007.

As of March 31, 2009, we continue to own the Wisenut search engine technology and its intellectual property rights in such technology and other assets.

Liquidity and Capital Resources

Cash flows were as follows (in thousands):

	Three Months Ended March 31,
	2009			2008			Change
Net cash used in operating activities	$	(1,611	)	$	(2,052	)	$	441
Net cash provided by investing activities		4,953			(567	)		5,520
Net cash provided by (used in) financing activities		(238	)		(20,882	)		20,644
Increase (decrease) in cash and cash equivalents	$	3,104		$	(23,501	)	$	26,605

Cash, cash equivalent and short-term investment balances were as follows as of March 31, 2009 and December 31, 2008 (in thousands):

	March 31, 2009			December 31, 2008			Change
Cash and cash equivalents	$	25,497		$	22,393		$	3,104
Short-term investments		4,997			10,185			(5,188	)
Total	$	30,494		$	32,578		$	(2,084	)
% of total assets		71	%		70	%
Total Assets	$	42,722		$	46,764

At March 31, 2009, we had $30.5 million of cash, cash equivalents and short-term investments. Cash equivalents and short-term investments are comprised of highly liquid debt instruments of the U.S. government, municipalities in the U.S., commercial paper, time deposits, money market mutual funds and U.S. corporate securities. See Footnote 2 to the Unaudited Condensed Consolidated Financial Statements, Fair Value of Financial Instruments, which describes further the composition of our cash, cash equivalents and short-term investments.

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Cash, cash equivalents and short-term investments decreased $2.1 million to $30.5 million at March 31, 2009 from $32.6 million at December 31, 2008, primarily due to our operating loss and the use of capital to reduce accounts payable and accrued liabilities, partially offset by accounts receivable collections.

Our primary sources of liquidity are our cash, cash equivalents and short-term investments, as well as our capital lease line and the cash flow that we generate from our operations. We believe that our existing cash, cash equivalents, short-term investments, capital lease line and cash generated from operations will be sufficient to satisfy our current anticipated cash requirements through at least the next 12 months, if not longer. Our liquidity could be negatively affected by a decrease in demand for our services, including the impact of the possible loss of the ASL contract and changes in customer buying behavior that may result from the current general economic downturn. Also, if the banking system or the financial markets continue to deteriorate or remain volatile, our investment portfolio may be impacted and the values and liquidity of our investments could be adversely affected. In addition, we may seek to raise additional capital through public or private debt or equity financings in order to fund our operations and capital expenditures, take advantage of favorable business opportunities, develop and upgrade our technology infrastructure, develop new product and service offerings, take advantage of favorable conditions in capital markets or respond to competitive pressures. In addition, unanticipated developments in the short term requiring cash payments, including the acquisition of businesses with negative cash flows, may necessitate additional financing. We cannot be assured that additional financing will be available on terms favorable to us, or at all. If we issue additional equity or convertible debt securities, our existing stockholders may experience substantial dilution.

Operating Activities

Cash used by operating activities in the three months ended March 31, 2009 consisted of our net loss adjusted for certain non-cash items, including depreciation, amortization, share-based compensation expense, gains on asset sales, as well as the effect of changes in working capital and other activities. Cash used in operations in the first quarter of 2009 was $1.6 million and consisted of a net loss of $2.0 million, adjustments for non-cash items of $1.1 million and cash used by working capital and other activities of $0.7 million. Adjustments for non-cash items primarily consisted of $0.7 million of depreciation and amortization expense on property and equipment, intangible assets and internally developed software and $0.5 million of share-based compensation expense, partially offset by a $0.1 million gain on sale of assets. In addition, changes in working capital activities primarily consisted of a net decrease of $2.6 million in accounts payable and accrued and other current liabilities partially offset by a $1.8 million decrease in accounts receivable. The decrease in accounts payable and accrued and other current liabilities is due to the timing of vendor payments combined with the payment of legal fees and settlement expenses accrued in 2008 related to an indemnification claim. The decrease in accounts receivable is attributed to less revenue from invoiced customers as compared to the previous quarter, combined with successful collection efforts.

Cash used by operating activities in the three months ended March 31, 2008 consisted of our net loss adjusted for certain non-cash items, including depreciation, amortization, share-based compensation expense, gains or losses on asset sales, as well as the effect of changes in working capital and other activities. Cash used in operations in the first quarter of 2008 was $2.1 million and consisted of net loss of $0.5 million, adjustments for non-cash items of $1.9 million and cash used by working capital and other activities of $3.5 million. Adjustments for non-cash items primarily consisted of $0.9 million of depreciation and amortization expense on property and equipment, intangible assets and internally developed software and $1.0 million of share-based compensation expense, partially offset by a $0.1 million gain on sale of assets. In addition, changes in working capital activities were primarily attributed to the business volume growth and consisted of a $2.3 million net increase accounts receivable, a $0.5 million decrease in accounts payable and accrued and other current liabilities and a $0.6 million increase in prepaid expenses, other assets, deferred revenue, customer deposits and other long term liabilities. The increase in accounts receivable was related to more revenue from invoiced customers and a lower percentage of revenue derived from credit card paying customers.

Investing Activities

Cash provided by investing activities in the first quarter of 2009 of $5.0 million was primarily attributed to net proceeds from investments of $5.2 million, partially offset by $0.4 million for capital expenditures. Our first quarter of 2009 capital expenditures consisted of an investment of $0.4 million in internally developed software related to our core service offering. During the three months ended March 31, 2009, most of our $0.4 million investment in computer equipment was financed with capital leases.

Cash used in investing activities in the first quarter of 2008 of $0.6 million was primarily used for capital expenditures. Our first quarter of 2008 capital expenditures consisted of an investment of $0.2 million in internally developed software related to our core service offering, $0.3 million to acquire an intangible asset and $0.1 million for property and equipment. During the three months ended March 31, 2008, an additional $0.3 million of computer equipment was acquired and financed with capital leases.

Financing Activities

Cash used by financing activities in the first quarter of 2009 of $0.2 million is attributed to scheduled capital lease and note payable payments.

Cash used by financing activities in the first quarter of 2008 of $20.9 million was due to the repurchase of our common stock via a combination of a modified Dutch Auction tender offer and stock repurchase program, in the amount of $20.8 million, and $0.1 million used to make scheduled capital lease and note payable payments.

Credit Arrangements

We have outstanding standby letters of credit (“SBLC”) issued by City National Bank (“CNB”) of an aggregate of approximately $1.1 million at March 31, 2009 related to security of a building lease and security for payroll processing services. The SBLC contains two financial covenants. As of March 31, 2009, we were in compliance with both required covenants in each SBLC. On April 14, 2009, we amended the building lease SBLC to reduce the outstanding balance by $0.1 million.

On January 22, 2009, we renewed our master equipment lease agreement with CNB for an amount of up to $1.7 million for the purchase of technical equipment. On April 30, 2009, the lease line was extended through April 30, 2010. As of March 31, 2009, there is $1.3 million available for new capital leases. Interest on new capital leases will be calculated using an interest rate of 6.38% per annum.

Our agreements with CNB, consisting of the SBLC and master equipment lease agreement, contain cross-default provisions whereby a default under one is deemed a default for the other. As of March 31, 2009 we were not in default on either agreement with CNB. On April 14, 2009, we amended the building lease SBLC to reduce the outstanding balance by $0.1 million.

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Off-Balance Sheet Arrangements

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

Contractual Obligations and Commercial Commitments

In comparison with our Annual Report on Form 10-K for the year ended December 31, 2008, we believe that there have been no significant changes in contractual obligations or commercial commitments.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Uncertainties in Credit Markets

Interest Rate Risk

We invest our excess cash primarily in highly liquid debt instruments of the U.S. government and its agencies, municipalities in the U.S., commercial paper, time deposits, money market mutual funds and corporate securities. By policy, we limit the amount of credit exposure to any one issuer.

Investments in both fixed rate and floating rate interest earning securities 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 predicted if interest rates fall. Due in part to these factors, our income from investments may decrease in the future.

We considered the historical volatility of short term interest rates and determined that it was reasonably possible that an adverse change of 100 basis points could be experienced in the near term. A hypothetical 1.00% (100 basis-points) increase in interest rates would have resulted in a decrease in the fair values of our marketable securities that is not significant at March 31, 2009.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Controls

During the period covered by this report, there were no changes in the Company’s internal control over financial reporting that have materially affected, or could be reasonably likely to materially affect, the registrant’s internal control over financial reporting. During the course of our general evaluation of internal controls for the quarter ended March 31, 2009, there were no significant deficiencies identified in the design and operation of our internal controls. For the year ended December 31, 2008, there were two significant deficiencies identified in the design and operation of our internal controls. We are in the process of remediating these significant deficiencies and will continue to work to reduce the occurrence of future significant deficiencies

Limitations on the Effectiveness of Controls

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

PART II

ITEM 1. LEGAL PROCEEDINGS

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

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

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On March 30, 2005, the case was removed to United States District Court for the Western District of Arkansas. On April 4, 2005, plaintiffs U.S. Citizens for Fair Credit Card Terms, Inc. and Savings 4 Merchants, Inc. filed a motion of voluntary dismissal without prejudice. The motion was granted on April 7, 2005. Plaintiffs Lane’s Gifts and Collectibles, L.L.C. and Max Caulfield d/b/a Caulfield Investigations filed a motion to remand the case to state court on April 13, 2005, which was granted in September 2005. In July 2005, defendants, including the Company, petitioned the Eighth Circuit Court of Appeals for an appeal of the remand order, and moved to stay the proceedings while the appeal was pending. The petition was denied on September 8, 2005 and the case was remanded to the Circuit Court of Miller County, Arkansas. The Company was served with discovery requests on October 7, 2005. The Company has filed and/or joined motions to dismiss on the basis of failure to state a claim upon which relief can be granted, lack of personal jurisdiction, and improper venue. Pursuant to the court’s initial scheduling order, plaintiffs had until January 27, 2006 to respond to the motions to dismiss for lack of personal jurisdiction and improper venue; and until September 9, 2006 to respond to the motion to dismiss on the basis of failure to state a claim upon which relief can be granted. However the court entered an order staying all proceedings for a period of 60 days on January 9, 2006. On April 20, 2006, the Court preliminarily approved a class settlement among plaintiffs, defendant Google, Inc., and certain defendants who display Google advertisements on their networks (the “Google Settlement”). The Google Settlement purports to release Google of all claims and also purports to release certain defendants, including the Company, for any claims associated with the display of Google advertisements on their networks. On July 24 and 25, 2006, the Court had a final settlement hearing on the Google Settlement, and on July 26, 2006, the Court approved the settlement. On April 21, 2006, the Court ordered the remaining defendants, including the Company, to mediation and further stayed the proceedings to September 21, 2006. The Court further extended the stay as to LookSmart until August 16, 2006. The parties thereafter stipulated that the stay would remain in effect while the parties continue to comply with the Court’s order regarding mediation. On January 10, 2007, the Court further extended the stay until May 1, 2007. On or about November 20, 2007, the Plaintiffs and the Company entered into a Stipulation and Settlement Agreement (the “Settlement Agreement”) to settle the matter in its entirety. On or about November 29, 2007, the Court preliminarily approved the Settlement Agreement and on February 29, 2008, the court entered an order to approve as final the Settlement Agreement. Pursuant to the Settlement Agreement, the Company has agreed to establish a Settlement Fund in the amount of up to approximately $2.5 million to be allocated as follows: (a) the Class Member Fund which should not exceed approximately $2.0 million in advertising credits, (b) the Fees Award to Class Counsel, which shall not exceed the amount of approximately $0.6 million; and (c) the Incentive Award (as hereinafter defined) to the three Class Representatives, which shall not exceed a collective immaterial amount. In the event that the total of the credit claims paid is less than approximately $0.8 million, the difference between the total amount of the credit claims paid and approximately $0.8 million will be paid to charities in the form of advertising credits. Should the total of the credit claims paid to the Settlement Class Members as a group plus any amounts allocated to charities be more than approximately $0.8 million but less than approximately $2.5 million, then the amount if any shall be retained by the Company. Settlement payments from the Class Member Fund will be paid out in advertising credits to members of the Class who file timely claims to participate in the settlement. On December 28, 2007, the Company provided the notices to class members required by the Settlement Agreement who had until February 11, 2008 to file claims. On April 8, 2008, the Company made the Fee Award to Counsel and the Incentive Award payments to plaintiffs’ counsel. On April 29, 2008, the Company began to issue advertising credits to the Class Members who filed timely claims. The Company recorded an estimate in accrued liabilities of the amount of the loss on settlement which management determined was probable and estimable during the year ended December 31, 2007. This estimate may change as a result of the cost of the final settlement arrangement. In addition, during 2007, the Company recovered settlement proceeds from the insurance carrier, which exceeded the recorded estimate of the amount of loss on settlement. Due to the uncertainty relating to the ultimate settlement amount, the excess settlement proceeds have been recorded as an accrued liability at March 31, 2009 and December 31, 2008.

Upon the completion of the thirty day appeals period, which ended on March 30, 2008, the Company on April 7, 2008 paid approximately $0.6 million of legal fees to the plaintiff’s counsel representing the Fees Award to Class Counsel and the Incentive Award as is stipulated in the Settlement Agreement. As of March 31, 2009, the Company has provided approximately $0.1 million of advertising credits to Class Member and $0.3 million remains recorded as an accrued liability.

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

ITEM 1A.  RISK FACTORS

Other than certain updates to our risk factors regarding our net losses, concentrations of search advertisers and distribution network partners, as set forth below, there have been no material changes to the risk factors that are included in our Annual Report on Form 10-K for the year ended December 31, 2008 that could affect our business, results of operations or financial condition.

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

Risks Related to our Business

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

Search advertisements accounted for substantially all of our revenues for the year ended December 31, 2008. Our success depends upon search advertisers choosing to use, and distribution network partners choosing to distribute, our search advertising networks products. Search advertisers and distribution network partners may not adopt our products at projected rates, or changes in market conditions, such as the current financial crisis, may adversely affect the use or distribution of search advertisements. Because of our revenue concentration in the online search advertising business, such shortfalls or changes could have a negative impact on our financial results. Also, many of our products are offered to website publishers who use them to display or generate revenue from their online advertisements. Our overall revenue is concentrated with three customers each accounting for more than 10% of net revenue and 35% in aggregate for the year ended December 31, 2008. In addition, two customers accounted for more than 10% of net revenue and 30% in aggregate for the quarter ended March 31, 2009. If we are unable to generate significant revenue from our online advertising business, or if market conditions adversely affect the use or distribution of online advertisements generally, or for some of our larger customers specifically, our results of operations, financial condition and/or liquidity will suffer.

Our contract with IAC Search and Media (“IAC”) accounting for 85% of Publisher Solutions revenue and 15% of total revenue in 2008; and 89% of Publisher Solutions revenue and 20% to total revenue for the quarter ended March 31, 2009, expires in December 2009 and if not renewed could result in a significant loss of revenue. IAC is currently soliciting bids for a new contract and we are actively participating in the process.

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

The success of our online search advertisement products depends in large part on the size and quality of our distribution network of search queries. We may be unable to maintain or add distribution network partners of satisfactory quality in our distribution network at reasonable revenue-sharing rates, or at all. Our distribution network is concentrated, with the five largest distribution network partners accounting for approximately 56% of our Advertiser Networks revenue for the year ended December 31, 2008. Our four largest distribution network partners accounted for approximately 54% of our Advertiser Networks revenue for the quarter ended March 31, 2009. If we lose any significant portion of our distribution network, we would need to find alternative sources of quality click traffic to replace the lost paid clicks. In the past, we have lost portions of our distribution network and chose to remove those with poor quality. Although alternate sources of click traffic are currently available in the market, they may not be available at reasonable prices or may be of unacceptable quality. There is significant competition among advertising networks to sign agreements with traffic providers. We may be unable to negotiate and sign agreements with quality traffic providers on favorable terms, if at all. If we are unsuccessful in maintaining and expanding our distribution network, then our ability to generate revenue may be seriously harmed.

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

We had net losses of approximately $2.0 million for the three months ended March 31, 2009, and as of March 31, 2009 our accumulated deficit was approximately $230.9 million. We may be unable to achieve and maintain profitability in the foreseeable future. Our ability to achieve and maintain profitability will depend on our ability to generate additional revenue and contain our expenses. In order to generate additional revenue, we will need to expand our network of distribution network partners, increase the amount our search advertisers spend on our advertising network, expand our advertiser base, offer our publisher products to additional publisher customers and experience an increase in paid clicks across our network and publisher products. We may be unable to accomplish some or any of these goals because of the risks identified in this report or for unforeseen reasons. Also, we may be unable to contain our costs due to the need to make revenue sharing payments to our distribution network partners, to invest in product development, and market our products. Because of the foregoing factors, and others outlined in this report, we may be unable to achieve profitability in the future, which could result in a decline in our stock price.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

• customization of our matching algorithms and ad serving technologies,

• substantial increases in the number of queries to our database,

• substantial increases in the number of searches in our advertising databases, or

• the addition of new products or new features or changes to our products.

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

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

On April 30, 2009, we renewed our capital lease line which expires on April 30, 2010. We may need to renew this lease line or we may need to enter into additional credit facilities to operate the business. The recent global financial crisis, and further financial institution failures, may make it more difficult for us either to utilize our existing debt capacity or otherwise obtain additional financing for our operations, investing activities, or financing activities. This difficulty or inability could materially limit our business operations and adversely affect our business performance.

Risks Related to Operating in our Industry

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

The Company’s operations and performance depend significantly on worldwide economic conditions and their impact on levels of consumer spending, which have recently deteriorated significantly in many countries and regions, including without limitation the United States, and may remain depressed for some time. Some of the factors that could influence the levels of consumer spending and, in turn, online advertising, include continuing volatility in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior and, in turn, online advertising. As evidenced by our recent financial results, these and other economic factors have had, and could in the future have, a material adverse effect on demand for the Company’s products and services and on the Company’s financial condition and operating results.

Additionally, like many other stocks, our stock price has been affected by global economic uncertainties and if investors have concerns that our business, operating results and financial condition will be negatively impacted by a worldwide economic downturn, our stock price could further decrease.

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

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

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

Invalid clicks are an ongoing problem for the Internet search advertising industry, and we are exposed to the risk of invalid clicks on our advertisers’ text advertisements coming from within our distribution network. Invalid clicks occur when a person or robotic software causes a click on a paid listing to occur for some reason other than to view the underlying content. Invalid clicks are commonly referred to as “click fraud.” We continue to invest significant time and resources in preventing, detecting and eliminating invalid traffic from our distribution network.

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

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

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

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

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

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

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

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

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

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

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

Internet, technology and media companies, as well as patent holding companies often possess a significant number of patents. Further, many of these companies and other parties are actively developing online advertising, search, indexing, electronic commerce and other Web-related technologies, as well as a variety of online business models and methods. We believe that these parties will continue to take steps to protect these technologies, including, but not limited to, seeking patent protection. As a result, we may face claims of infringement of patents and other intellectual property rights held by others. Also, as we expand our business, acquire and maintain our customer base, and develop new technologies, products and services, we may become increasingly subject to intellectual property infringement claims. In

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the event that there is a claim or determination that we infringe third-party proprietary rights such as patents, copyrights, trademark rights, trade secret rights or other third party rights such as publicity and privacy rights, we could incur substantial monetary liability, be required to enter into costly royalty or licensing agreements or be prevented from using the rights, which could require us to change our business practices in the future and limit our ability to compete effectively. We may also incur substantial expenses in defending against third-party infringement claims regardless of the merit of such claims. The occurrence of any of these results could harm our brand and negatively impact our operating results. In addition, many of our agreements with our customers, partners and affiliates require us to indemnify them for certain third-party intellectual property infringement claims or determinations, which could increase our costs in defending such claims and our damages. For example, in October 2008, we agreed to indemnify one of our Publisher Solutions customers relating to a patent infringement suit filed against it pursuant to an AdCenter for Publishers’ agreement between it and the Company.

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

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

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

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

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

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

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

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

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

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

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

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

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

Risks Related to the Capital Market

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

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

• change in the composition of our Advertiser Network customer base,

• change in composition of our AdCenter customer base,

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

• changes in the number of search advertisers who do business with us, or the amount of spending per customer,

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

• change in our traffic acquisition costs (TAC) related to our Advertiser Network,

• systems downtime on our Advertiser Network, our website or the websites of our distribution network partners, or

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

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

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

The stock market has experienced significant price and volume fluctuations in recent years, and the stock prices of Internet companies have been extremely volatile. The low trading volume of our common stock may adversely affect its liquidity and reduce the number of market makers and/or large investors willing to trade in our common stock, making wider fluctuations in the quoted price of our common stock more likely to occur. You should evaluate our business in light of the risks, uncertainties, expenses, delays and difficulties associated with managing and growing a business in a relatively new industry, many of which are beyond our control.

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

• changes in the market valuations of Internet companies in general and comparable companies in particular,

• quarterly fluctuations in our operating results,

• the termination or expiration of our distribution agreements,

• our potential failure to meet our forecasts or analyst expectations on a quarterly basis,

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

• the loss of key personnel, or our inability to recruit experienced personnel to fill key positions,

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

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

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

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

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

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

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

• fund the additional operations and capital expenditures,

• take advantage of favorable business opportunities, including geographic expansion or acquisitions of complementary businesses or technologies,

• develop and upgrade our technology infrastructure beyond current plans,

• develop new product and service offerings,

• take advantage of favorable conditions in capital markets, or

• respond to competitive pressures.

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

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

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

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

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

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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

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SIGNATURE

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

LOOKSMART, LTD.

Dated: May 5, 2009

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

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EXHIBIT INDEX

Exhibits

Number	Description of Document
3.1	Restated Certificate of Incorporation (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 14, 2005).
3.2	Bylaws (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 14, 2000).
4.1	Form of Specimen Stock Certificate (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 14, 2005).
4.2++	Forms of Stock Option Agreement used by the Registrant in connection with grants of stock options to employees, directors and other service providers in connection with the Amended and Restated 1998 Stock Plan (Filed with the Company’s Current Report on Form 8-K filed with the SEC on October 22, 2004).
4.3++	Form of cover sheet for use with Stock Option Agreement for grants of stock options to executives in connection with the Company’s Executive Team Incentive Plan, Plan Year 2006 (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2006).
4.4++	Form of Indemnification Agreement entered into between the Registrant and each of its directors and officers (Filed with the Company’s Registration Statement on Form S-1 (File No. 333-80581) filed with the SEC on September 14, 1999).
4.5++	Form of cover sheet for use with stock option agreement for grants of stock options to executives in connection with the Company’s Executive Team Incentive Plan, Plan Year 2007 (Filed with the Company’s Current Report on Form 8-K filed with the SEC on March 2, 2007).
10.1++	Form of Indemnification Agreement entered into between the Registrant and each of its directors and officers (Filed with the Company’s Registration Statement on Form S-1 (File No. 333-80581) filed with the SEC on September 14, 1999).
10.2	Amended and Restated 1998 Stock Plan (Filed with the Company’s Registration Statement on Form S-1 (File No. 333-80581) filed with the SEC on September 14, 1999).
10.3	1999 Employee Stock Purchase Plan as amended (Filed with the Company’s Registration Statement on Form S-8 (File No. 333-129987) filed with the SEC on November 29, 2005).
10.5++	LookSmart, Ltd. Executive Team Incentive Plan, Plan Year 2007 (Filed with the Company’s Current Report on Form 8-K filed with the SEC on March 2, 2007).
10.6++	LookSmart, Ltd. 2008 Executive Team Incentive Plan (Filed with the Company’s Current Report on Form 8-K filed with the SEC on February 19, 2008).
10.7	Zeal Media, Inc. 1999 Stock Plan (Filed with the Company’s Registration Statement on Form S-8 filed with the SEC on December 7, 2000).
10.8	Wisenut, Inc. 1999 Stock Incentive Plan (Filed with the Company’s Registration Statement on Form S-8 filed with the SEC on April 18, 2002).
10.9++	LookSmart 2007 Equity Incentive Plan (Filed with the Company’s Definitive Proxy Statement and Amended Definitive Proxy Statement with the SEC on April 30 and September 11, 2007, respectively).
10.12	Lease Agreement with Rosenberg SOMA Investments III, LLC for property located at 625 Second Street, San Francisco, California, dated May 5, 1999 (Filed with the Company’s Registration Statement on Form S-1 (File No. 333-80581) filed with the SEC on September 14, 1999).
10.13++	LookSmart, Ltd. Form Change of Control/Severance Agreement (Filed with The Company’s Quarterly report on Form 10-Q filed with the SEC on November 9, 2007).
10.14++	Employment Offer Letter between the Company and its Chief Financial Officer dated November 15, 2007 (Filed with the Company’s Current Report on Form 8-K/A filed with the SEC on December 27, 2007).
10.15	Preferred Shares Rights Agreement dated November 15, 2007 between the Company and Mellon Investor Services LLC (Filed with the Company’s Current Report on Form 8-K with the SEC on November 21, 2007).
10.16	Asset Purchase Agreement between the Company and CNET Networks, Inc. dated November 5, 2007 (Filed with the Company’s Current Report on Form 8-K with the SEC on November 7, 2007).
10.17	Amendment to LookSmart Preferred Shares Rights Agreement dated July 8, 2008 (Filed with the Company’s Current Report on Form 8-K with the SEC on July 8, 2008).
10.18++	LookSmart, Ltd. Form Amended and Restated Change of Control/Severance Agreement (Filed with the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2009).
10.31	Fourth Addendum to AdCenter License, Hosting and Support Agreement between the Registrant and IAC Search & Media dated September 14, 2007 (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2007).

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10.32	Sponsored Links Master Terms and Conditions between the Registrant and eBay, Inc. dated March 12, 2007 (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 9, 2007).
10.33+	LookSmart Reseller Terms and Conditions with MeziMedia dated September 7, 2005. (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2007).
10.34	Co-Location Services Agreement between the Registrant and Savvis Communications Corporation dated March 29, 2008 (Filed with the Company’s Quarterly Report on Form 10-Q with the SEC on May 12, 2008).
10.35+	Second Addendum to AdCenter License, Hosting and Support Agreement between the Registrant and IAC Search & Media dated May 16, 2006 (Filed with the Company’s Form 10-Q with the SEC on August 8, 2006).
10.36+	Third Addendum to AdCenter License, Hosting and Support Agreement between the Registrant and IAC Search & Media dated January 1, 2007. (Filed with the Company’s Annual Report on Form 10-K on March 16, 2007).
10.37+	AdCenter License, Hosting and Support Agreement between the Registrant and Ask Jeeves, Inc. dated May 16, 2005 (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2006).
10.38+	Addendum to AdCenter License, Hosting and Support Agreement between the Registrant and Ask Jeeves, Inc. dated January 20, 2006 (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2006).
10.39+	Paid Listings License Agreement between the Registrant and SearchFeed.com dated April 15, 2006 (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2006).
10.40+	License Agreement between the Registrant and SearchFeed.com dated November 23, 2003, as Amended on March 29, 2004 and March 21, 2005 (Filed with the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2006).
10.41++	Promotion letter between the Company and its Vice-President, Technology dated September 7, 2007 (Filed with the Company’s Current Report on Form 8-K with the SEC on September 12, 2007).
10.42++	Amendment to employment offer between the Company and its Chief Financial Officer dated August 27, 2007 (Filed with the Company’s Current Report on Form 8-K with the SEC on September 4, 2007).
10.43++	Employment offer letter between the Registrant and its Vice President, East Coast dated March 22, 2007 (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 10, 2007).
10.45++	Promotion letter between the Registrant and its Vice President, Finance and Principal Accounting Officer dated July 10, 2007. (Filed with the Company’s Current Report on Form 8-K filed with the SEC on July 16, 2007).
10.46++	Severance Agreement and General Release between the Company and Dave Hills dated August 2, 2007 (Filed with the Company’s Current Report on Form 8-K filed with the SEC on August 7, 2007).
10.47+	Paid Listings License Agreement between the Registrant and Kontera Technologies, Inc. dated July 17, 2006. (Filed with the Company’s Quarterly Report on Form 10-Q with the SEC on November 9, 2007).
10.48+	License Agreement between the Registrant and Oversee.net dated April 1, 2004 (Filed with the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 9, 2007).
10.49	Letter from Oversee.net to the Registrant dated January 21, 2008 terminating Agreement between Registrant and Oversee.net dated April 1, 2004 effective September 30, 2008 (Filed with the Company’s Annual Report on Form 10-K filed with the SEC on March 17, 2008).
10.50+	Backfill Agreement between the Registrant and Internext Media Corp. dated February 8, 2008 (Filed with the Company’s Quarterly Report on Form 10-Q on May 12, 2008).
10.51+	Paid Listings License Agreement between the Registrant and PeakClick GMBH dated April 15, 2006 (Filed with the Company’s Amended Quarterly Report on Form 10-Q/A on February 9, 2009).
10.52+	Advertiser Terms and Conditions between the Registrant and MeziMedia dated September 26, 2008. (Filed with the Company’s Amended Quarterly Report on Form 10-Q/A on February 9, 2009).
10.53*‡	Paid Listings License Agreement between the Registrant and Wellbourne Limited dated March 15, 2006.
10.59++	Employment offer letter between the Registrant and its General Counsel and Senior Vice President dated as of July 11, 2005 (Filed with the Company’s Current Report on Form 8-K filed with the SEC on July 14, 2005).
10.60++	Employment offer letter between the Registrant and its Chief Financial Officer dated August 1, 2008 (Filed with the Company’s Current Report on Form 8-K filed with the SEC on August 5, 2008).
10.61++	Board Services Agreement between the Registrant and its Director dated July 1, 2008 (filed with the Company’s Amended Annual Report on Form 10-K/A on April 30, 2009)

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10.62++	Amendment to offer letter between Registrant and its Chief Financial Officer dated March 23, 2009 (filed with the Company’s Current Report on Form 8-K filed with the SEC on March 26, 2009).
31.1*	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(*) Filed herewith

(‡) Material in the exhibit marked with a “***” has been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Securities and Exchange Commission.

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

(++) Management contract or compensatory plan or arrangement.

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