Web.com 10Q 2007 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

		For the quarterly period ended March 31, 2007

		or

o		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: 000-51595

Website Pros, Inc.

(Exact name of registrant as specified in its charter)

Delaware		94-3327894
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

12735 Gran Bay Parkway West, Building 200, Jacksonville, FL		32258
(Address of principal executive offices)		(Zip Code)

(904) 680-6600

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

o Large accelerated filer x Accelerated filer o Non-accelerated filer

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

Common Stock, par value $0.001 per share, outstanding as of April 30, 2007: 17,393,541

Website Pros, Inc.

Quarterly Report on Form 10Q

For the Quarterly Period ended March 31, 2007

Index

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Website Pros, Inc.

Consolidated Statements of Operations
(in thousands except per share amounts)
(unaudited)

	Three months ended
	March 31, 2007			March 31, 2006
Revenue:
Subscription	$	15,138		$	9,959
License	1,028			1,205
Professional services	258			449
Total revenue	16,424			11,613
Cost of revenue (excluding depreciation and amortization shown separately below):
Subscription (a)	6,815			4,418
License	298			291
Professional services	301			380
Total cost of revenue	7,414			5,089
Gross profit	9,010			6,524
Operating expenses:
Sales and marketing (a)	3,947			2,837
Research and development (a)	778			549
General and administrative (a)	2,908			2,296
Depreciation and amortization	681			372
Total operating expenses	8,314			6,054
Income from operations	696			470
Interest, net	502			551
Income before income taxes	1,198			1,021
Income tax expense	(566		)	—
Net income	$	632		$	1,021
Basic net income attributable per common share	$	0.04		$	0.06
Diluted net income attributable per common share	$	0.03		$	0.05
Basic weighted average common shares outstanding	17,339			16,526
Diluted weighted average common shares outstanding	19,672			19,343

(a) Stock-based compensation included above:
Subscription (cost of revenue)	$	42		$	25
Sales and marketing	$	109		$	72
Research and development	59			55
General and administrative	583			244
	$	751		$	371

See accompanying notes to consolidated financial statements

Website Pros, Inc.

Consolidated Balance Sheets
(in thousands)

	March 31, 2007			December 31, 2006
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	41,459		$	42,155
Accounts receivable, net of allowance of $347 and $280, respectively	4,419			4,202
Inventories, net of reserves of $53 and $48, respectively	34			69
Prepaid expenses	554			616
Prepaid marketing fees and other current assets	954			986
Deferred tax asset	531			531
Total current assets	47,951			48,559
Property and equipment, net	2,381			2,337
Goodwill	34,017			31,587
Intangible assets, net	7,642			7,590
Deferred tax asset	2,130			2,669
Other assets	677			618
Total assets	$	94,798		$	93,360

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	176		$	920
Accrued expenses	2,668			3,028
Deferred revenue	5,662			4,594
Accrued marketing fees	268			234
Notes payable, current	102			95
Obligations under capital leases, current	51			52
Other liabilities	124			102
Total current liabilities	9,051			9,025
Accrued rent expense	142			158
Notes payable, long term	139			162
Obligations under capital leases, long-term	19			32
Other long-term liabilities	27			27
Total liabilities	9,378			9,404

Stockholders’ equity:
Common stock, $0.001 par value; 150,000,000 shares authorized, 17,355,715 and 17,331,626 shares issued and outstanding at March 31, 2007 and December 31, 2006	17			17
Additional paid-in capital	143,933			143,101
Accumulated deficit	(58,530		)	(59,162		)
Total stockholders’ equity	85,420			83,956
Total liabilities and stockholders’ equity	$	94,798		$	93,360

See accompanying notes to consolidated financial statements

Website Pros, Inc.

Consolidated Statements of Cash Flows
(in thousands)
(unaudited)

	Three months ended March 31,
	2007			2006
Cash flows from operating activities
Net income	$	632		$	1,021
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	681			372
Stock-based compensation expense	793			396
Deferred income tax	539			—
Changes in operating assets and liabilities:
Accounts receivable	226			177
Inventories	35			(3		)
Prepaid expenses and other assets	37			(169		)
Accounts payable, accrued expenses and other liabilities	(1071		)	(779		)
Deferred revenue	313			19
Net cash provided by operating activities	2,185			1,034
Cash flows from investing activities
Business acquisitions, net of cash received	(2,374		)	—
Purchase of property and equipment	(415		)	(361		)
Investment in intangible assets	(100		)	(3		)
Net cash used in investing activities	(2,889		)	(364		)
Cash flows from financing activities
Stock issuance costs	—			(622		)
Payments of debt obligations	(31		)	(16		)
Proceeds from exercise of stock options	39			25
Net cash provided by (used in) financing activities	8			(613		)
Net (decrease) increase in cash and cash equivalents	(696		)	57
Cash and cash equivalents, beginning of period	42,155			55,746
Cash and cash equivalents, end of period	$	41,459		$	55,803

Supplemental cash flow information
Interest paid	$	5		$	—
Income taxes paid	$	37		$	—

See accompanying notes to consolidated financial statements

Website Pros, Inc.
Notes to Consolidated Financial Statements
(unaudited)

1. The Company and Summary of Significant Accounting Policies

Description of Company

Website Pros, Inc. (the Company) is a provider of Do-It-For-Me Web services and lead generation products that enable small and medium-sized businesses to establish, maintain, promote, and optimize their Internet presence. The Company’s primary service offerings are comprehensive performance-based packages that include Website design and publishing, Internet marketing and advertising, search engine optimization, search engine submission, lead generation, and easy-to-understand Web analytics. In addition to the Company’s primary service offerings, the Company provides a variety of premium services to customers who desire more advanced capabilities, such as e-commerce solutions and other sophisticated Internet marketing services and online lead generation.

The Company has reviewed the criteria of Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and Related Information, and has determined that the Company is comprised of only one segment, Web services and products.

Certain prior period amounts have been reclassified to conform to current year presentation.

Basis of Presentation

The accompanying consolidated balance sheet as of March 31, 2007, the consolidated statements of operations and cash flows for the three months ended March 31, 2007 and 2006 and the related notes to the consolidated financial statements for the three months ended March 31, 2007 and 2006 are unaudited. These unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the year ended December 31, 2006, except that certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. have been condensed or excluded as permitted.

In the opinion of management, the unaudited consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of the Company’s financial position as of March 31, 2007 and the Company’s results of operations and cash flows for the three months ended March 31, 2007 and 2006. The results of operations for the three months ended March 31, 2007 are not necessarily indicative of the results to be expected for the year ending December 31, 2007.

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission, or SEC, on March 9, 2007.

Use of Estimates

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

Goodwill and Other Intangible Assets

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill determined to have an indefinite useful life is tested for impairment, at least annually or more frequently if indicators of impairment arise. If impairment of the carrying value based on the calculated fair value exists, the Company measures the impairment through the use of discounted cash flows. The Company completed its annual goodwill impairment test during the fourth quarter of 2006 and determined that the carrying amount of goodwill was not impaired. In addition, there were no indicators of impairment during the quarter ended March 31, 2007.

Intangible assets acquired as part of a business combination are accounted for in accordance with SFAS No. 141, Business Combinations, and are recognized apart from goodwill if the intangible arises from contractual or other legal rights or the asset is capable of being separated from the acquired enterprise. Indefinite-lived intangible assets are tested for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that the asset might be impaired in accordance with SFAS No. 142. The Company completed its annual impairment test during the fourth quarter of

2006 and determined that the carrying value of its indefinite-lived intangible assets was not impaired. In addition, there were no indicators of impairment during the quarter ended March 31, 2007.

Definite-lived intangible assets are amortized over their useful lives, which are three to eight years.

Earnings per Share

The Company computes earnings per share in accordance with SFAS No. 128, Earnings Per Share. Basic net income attributable per common share includes no dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted net income attributable per common share includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities, as well as, certain nonfinancial instruments that are similar to financial instruments, at fair value (the “fair value option”). The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is selected for an instrument, the Statement specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. The Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is currently assessing the impact of SFAS 159, but does not expect it to have a material impact on its financial position, results of operations, cash flows or disclosures.

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157 (SFAS 157), Fair Value Measurements. SFAS 157 establishes a common definition for fair value to be applied to U.S. generally accepted accounting principles requiring the use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of SFAS 157, but does not expect it to have a material impact on its financial position, results of operations, cash flows or disclosures.

2. Income Taxes

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109, or FIN 48, on January 1, 2007. The Company did not have any unrecognized tax benefits and there was no effect on its financial condition or results of operations as a result of implementing FIN 48. The Company is subject to audit by the IRS and various states for all years since inception. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. The Company’s policy is that it recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of the date of adoption of FIN 48, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the quarter ended March 31, 2007.

Prior to the fourth quarter of 2006, all deferred tax assets were fully reserved. In the fourth quarter of 2006, the Company reversed a portion of its valuation allowance related to deferred tax assets based upon its estimate of the amount that is more likely than not to be realized. Therefore, the Company recognized income tax expense in the three months ended March 31, 2007 based upon its estimated annual effective rate. The Company’s effective rate exceeds the statutory rate primarily due to non-deductible expenses associated with incentive stock options.

3. Acquisitions

Acquisition of Substantially All of the Assets of and Assumption of Select Liabilities from Submitawebsite, Inc.

On March 31, 2007, the Company acquired substantially all of the assets of and assumed certain liabilities from Submitawebsite, Inc. (Submitawebsite), based in Scottsdale, Arizona, which is a leader in natural Search Engine Optimization (SEO), a technology which aligns a Website’s code and content with strategic keyword phrase targeting. The Company believes that the Submitawebsite acquisition will allow the Company to leverage and deepen relationships with both companies’ customer bases. Under the terms of the asset purchase agreement, the Company paid cash consideration of approximately $2.1 million and $23 thousand of transaction costs, subject to certain adjustments based on the final balance sheet of Submitawebsite as of March 31, 2007. In addition, if certain requirements are met, such as key employee retention

and revenue performance, during the twelve-month periods following March 31, 2007 and 2008, the Company will pay Submitawebsite contingent consideration up to an additional $250 thousand per year, which will be recorded as goodwill upon payment. As of March 31, 2007, the purchase accounting for this acquisition is subject to final adjustment primarily for amounts allocated to intangible assets based on preliminary valuation studies.

The following table summarizes the Company’s preliminary purchase price allocation as of March 31, 2007 based on the estimated fair values of the assets acquired and liabilities assumed on March 31, 2007 (in thousands):

Tangible current assets	$	444
Tangible non-current assets	32
Non-compete	46
Trade name	231
Goodwill	2,076
Current liabilities	(756		)
Net assets acquired	$	2,073

The intangible assets include non-compete agreements and trade names. The non-compete intangible asset is being amortized over a two-year period, while the trade names have an indefinite life. The goodwill represents business benefits the Company anticipates realizing in future periods.

Acquisition of Substantially All of the Assets of and Assumption of Select Liabilities from 1ShoppingCart.com

On September 30, 2006, the Company acquired substantially all of the assets of, and assumed certain liabilities from 1ShoppingCart.com Canada Corp. and 1ShoppingCart.com Corp. (together, “1ShoppingCart.com”), a leading provider of shopping cart, internet marketing and eCommerce/eBusiness solutions and services based in Barrie, Ontario. The Company believes that the 1ShoppingCart.com acquisition brings a strong group of private-labeled resellers and affiliates that will enable cross- and up-sell opportunities for its complementary Web services, internet marketing and eCommerce solutions, which are all geared to satisfying the needs of small and medium-sized businesses. Under the terms of the asset purchase agreement, the Company paid cash consideration of approximately $12.5 million and $376 thousand of transaction costs, subject to certain adjustments based on the final consolidated balance sheet of 1ShoppingCart.com as of September 30, 2006. As of March 31, 2007, the purchase accounting for this acquisition is still subject to final adjustment primarily for amounts allocated for the fair value of fixed assets acquired during the acquisition.

The following table summarizes the Company’s purchase price allocation as of September 30, 2006 based on the fair values of the assets acquired and liabilities assumed on September 30, 2006 (in thousands):

Tangible current assets	$	584
Tangible non-current assets	266
Technical know-how	999
Customer relationships	2,332
Non-compete	167
Trade name	694
Goodwill	9,401
Current liabilities	(1,512		)
Non-current liabilities	(102		)
Net assets acquired	$	12,829

The intangible assets include non-compete agreements, trade name, technical know-how and customer relationships which are being amortized over three to eight year periods, except for the trade name which has an indefinite life. The goodwill represents business benefits the Company anticipates realizing in future periods.

The financial information in the table below summarizes the combined results of operations of the Company and 1ShoppingCart.com on a pro forma basis for the quarter ended March 31, 2006, as though the acquisition had occurred at the beginning of the period. This pro forma financial information is presented for informational purposes only and is not

necessarily indicative of the results of operations that would have been achieved had the acquisition actually taken place at the beginning of the three month period set forth below.

	Three months ended March 31, 2006
Revenue	$	13,070
Net income attributable to common stockholders	1,218
Basic net income attributable per common share	.07
Diluted net income attributable per common share	.06

Acquisition of Substantially All of the Assets of and Assumption of Select Liabilities from Renex, Inc.

On September 30, 2006, the Company acquired substantially all of the assets of, and assumed certain liabilities from Renex, Inc. (“Renex”) an online lead generation marketplace for contractors and homeowners based in Halifax, Nova Scotia. The Company believes that the Renex acquisition will enhance its ability to provide a one-stop shop for comprehensive, affordable Website and online advertising solutions for small and medium-sized businesses and is in-line with the Company’s long-term strategic direction of providing targeted, high value solutions to customers in specific vertical markets. Under the terms of the asset purchase agreement, the Company paid cash consideration of $7.0 million plus $331 thousand in transaction costs and agreed to issue 277,496 shares of its common stock valued at approximately $3.0 million to Renex to be equally distributed on September 30, 2007 and September 30, 2008 as consideration for the acquired assets if certain compliance with representations and warranties are demonstrated. Those common shares are held in escrow until the representations and warranties period has expired. In addition, if certain requirements are met during the twelve months following September 30, 2006, the Company will pay Renex contingent consideration up to an additional $1.0 million. During the six-months ended March 31, 2007, the Company recorded additional goodwill of $500 thousand as a result of the continuing relationship with a certain marketing vendor, which was a contingent condition in the purchase agreement with Renex, of which $250 thousand was paid in the first quarter and the remaining $250 thousand is recorded as a liability at March 31, 2007 and has been paid to Renex in April 2007.

Tangible current assets	$	195
Tangible non-current assets	142
Technical know-how	110
Customer relationships	930
Non-compete	220
Trade name	640
Goodwill	8,387
Current liabilities	(280		)
Net assets acquired	$	10,344

The intangible assets include non-compete agreements, trade name, technical know-how and customer relationships which are being amortized over a three to four year period, except for trade name which has an indefinite life. The goodwill represents business benefits the Company anticipates realizing in future periods.

The financial information in the table below summarizes the combined results of operations of the Company and Renex on a pro forma basis for the quarter ended March 31, 2006, as though the acquisition had occurred at the beginning of the period. This pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved had the acquisition actually taken place at the beginning of the three month period set forth below.

	Three months ended March 31, 2006
Revenue	$	12,717
Net income attributable to common stockholders	985
Basic net income attributable per common share	.06
Diluted net income attributable per common share	.05

4. Earnings per Share

Basic net income attributable per common share is calculated using net income and the weighted-average number of shares outstanding during the reporting period. Diluted net income attributable per common share includes the effect from the potential issuance of common stock, such as common stock issued pursuant to the exercise of stock options or warrants.

The following table sets forth the computation of basic and diluted net income attributable per common share for the three months ended March 31, 2007 and 2006 (in thousands except per share amounts):

	Three months ended March 31,
	2007		2006
Net income	$	632	$	1,021

Weighted average outstanding shares of common stock	17,339		16,526
Dilutive effect of stock options	1,864		2,535
Dilutive effect of warrants	192		282
Dilutive effect of escrow shares	277		—
Common stock and common stock equivalents	19,672		19,343

Net income attributable per common share:
Basic	$	0.04	$	0.06
Diluted	$	0.03	$	0.05

For the three months ended March 31, 2007 and 2006, options to purchase approximately 923,082 and 178 shares, respectively, of common stock with exercise prices greater than the average fair value of the Company’s stock of $9.03 and $11.31, respectively, were not included in the calculation of the weighted average shares for diluted net income attributable per common share because the effect would have been anti-dilutive.

5. Goodwill and Intangible Assets

The following table summarizes changes in the Company’s goodwill balances as required by SFAS No. 142 for the periods ended (in thousands):

	March 31, 2007		December 31, 2006
Goodwill balance at beginning of period	$	31,587	$	13,650
Goodwill acquired during the period	2,430		17,937
Goodwill impaired during the year	—		—
Goodwill balance at end of period	$	34,017	$	31,587

In accordance with SFAS No. 142, the Company reviews goodwill balances for indicators of impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill below its carrying amount. Upon completion of the annual assessments, the Company determined that goodwill was not impaired. In addition, there were no indicators of impairment during the quarter ended March 31, 2007.

The Company’s intangible assets are summarized as follows (in thousands):

	March 31, 2007			December 31, 2006			Weighted-average Amortization period
Indefinite lived intangible assets:
Domain/Trade names	$	2,745		$	2,387
Definite lived intangible assets:
Non-compete agreements	1,973			1,920			36 months
Customer relationships	4,196			4,175			67 months
Technical know how	1,109			1,100			37 months
Other	84			83
Accumulated amortization	(2,465		)	(2,075		)
	$	7,642		$	7,590

The weighted-average amortization period for the amortizable intangible assets is approximately 54 months. Total amortization expense was $388 thousand and $211 thousand for the three months ended March 31, 2007 and 2006, respectively.

Other indefinite-lived intangible assets are tested for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that the asset might be impaired in accordance with SFAS No. 142. Upon completion of the annual assessments, the Company determined that its indefinite lived intangible assets were not impaired. In addition, there were no indicators of impairment during the quarter ended March 31, 2007.

As of March 31, 2007, the amortization expense for the next five years is as follows (in thousands):

2007	$	1,198
2008	1,213
2009	905
2010	487
2011	292
Thereafter	802
Total	$	4,897

6. Stock Based Compensation

Equity Incentive Plans

An Equity Incentive Plan (“1999 Plan”) was adopted by the Company’s Board of Directors and approved by its stockholders on April 5, 1999. The 1999 Plan was amended in June 1999, May 2000, May 2002 and November 2003 to increase the number of shares available for awards. The 1999 Plan as amended provides for the grant of incentive stock options, non-statutory stock options, and stock bonuses to the Company’s employees, directors and consultants. As of March 31, 2007, the Company has reserved 4,074,428 shares of common stock for issuance under this plan. Of the total reserved as of March 31, 2007, options to purchase a total of 3,160,733 shares of the Company’s common stock were held by participants under the plan, options to purchase 792,105 shares of common stock have been issued and exercised and options to purchase 121,590 shares of common stock were cancelled and became available under the 2005 Equity Incentive Plan (the “2005 Plan”) and are currently available for future issuance.

The Board of Directors administers the 1999 Plan and determines the terms of options granted, including the exercise price, the number of shares subject to individual option awards and the vesting period of options, within the limits set forth in the 1999 Plan itself. Options under the 1999 Plan have a maximum term of 10 years and vest as determined by the Board of Directors. Options granted under the 1999 Plan generally vest either over 30 or 48 months. All options granted during 2002 vest over 30 months, and in general all other options granted vest over 48 months. The exercise price of non-statutory stock options and incentive stock options granted shall not be less than 85% and 100%, respectively, of the fair market value of the stock subject to the option on the date of grant. No 10% stockholder is eligible for an incentive or non-statutory stock option unless the exercise price of the option is at least 110% of the fair market value of the stock at date of grant. The 1999 Plan terminated upon the Closing of the Company’s initial public offering in November 2005.

The Company’s Board of Directors adopted, and its stockholders approved, the 2005 Equity Incentive Plan that became effective November 2005. As of March 31, 2007, the Company has reserved 2,010,002 shares for equity incentives to be granted under the plan. The option exercise price cannot be less than the fair value of the Company’s stock on the date of grant. Options generally vest ratably over the three or four years, are contingent upon continue employment, and generally expire ten years from the grant date. As of March 31, 2007, 1,268,118 shares were reserved for future issuance under the plan and 1,134 shares have been issued and exercised.

The Company’s Board of Directors adopted, and its stockholders approved, the 2005 Non-Employee Directors’ Stock Option Plan (the “2005 Directors Plan”), which became effective November 2005. The 2005 Directors Plan calls for the automatic grant of nonstatutory stock options to purchase shares of common stock to nonemployee directors. The aggregate number of shares of common stock that was authorized pursuant to options granted under this plan is 760,000 shares. As of March 31, 2007, options to purchase a total of 350,000 shares of the Company’s common stock were held by participants under the plan, no options have been exercised and 410,000 shares of common stock were available for future issuance. On January 25, 2007, the Board of Directors approved an amendment to the 2005 Directors Plan to modify, among other things, the initial and annual grants to non-employee directors by providing for restricted stock grants and reducing the size of the option grants. This amendment has been submitted to the stockholders for approval as more fully described in the Company’s definitive Proxy Statement relating to its 2007 Annual Meeting of Stockholders filed with the SEC on April 9, 2007.

The Company’s Board of Directors adopted, and its stockholders approved, the 2005 Employee Stock Purchase Plan (the “ESPP”), which became effective November 2005. The ESPP authorizes the issuance of 534,603 shares of common stock pursuant to purchase rights granted to the Company’s employees or to employees of any of its affiliates. The ESPP is intended to qualify as an “employee stock purchase plan” within the meaning of Section 425 of the Internal Revenue Code. As of March 31, 2007, no shares have been issued under the ESPP.

The Board of Directors, or a committee thereof, administers all of the equity incentive plans and determines the terms of options granted, including the exercise price, the number of shares subject to individual option awards and the vesting period of options, within the limits set forth in the stock option plans. Options have a maximum term of 10 years and vest as determined by the Board of Directors.

The fair value of each option award is estimated on the date of the grant using the Black Scholes option valuation model and the assumptions noted in the following table. Expected volatility rates are based on publicly traded industry comparables and their historical volatility on the date of the grant. The expected term of options granted represents the period of time that they are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

	Three months ended March 31,
	2007		2006
Risk-free interest rate	4.41 – 4.89	%	4.27 – 4.82	%
Dividend yield	0	%	0	%
Expected life (in years)	5		5
Volatility	57–60	%	68–70	%

Stock Option Activity

The following table summarizes option activity for all of the Company’s stock options:

	Shares Covered by Options		Exercise Price per Share	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (in thousands)
Balance, December 31, 2006	4,072,812		$0.50 to 14.05	$	5.29

Granted	803,750		8.90 to 8.92	8.91
Exercised	(34,332	)	2.00 to 4.45	1.59
Forfeited	(23,909	)	2.15 to 14.05	10.25
Expired	(1,218	)	2.00 to 14.05	8.25
Balance, March 31, 2007	4,817,103		0.50 to 14.05	5.90		7.61	$	16,702
Exercisable at March 31, 2007	2,918,639		0.50 to 14.05	3.62		6.64	$	16,347

Compensation costs related to the Company’s share-based plans were $793 thousand and $396 thousand for the three months ended March 31, 2007 and 2006, respectively. Compensation expense is generally recognized on a straight-line basis over the vesting period of grants. As of March 31, 2007, the Company had $8.0 million of unrecognized compensation costs related to share-based payments, which the Company expects to recognize through March 2011.

The total intrinsic value of options exercised during the three months ended March 31, 2007 and 2006 was $262 thousand and $320 thousand, respectively. The weighted average grant-date fair value of options granted during the three months ended March 31, 2007 and 2006 was $4.93, and $11.16, respectively. The fair value of shares vested during the three months ended March 31, 2007 and 2006 was $778 thousand and $342 thousand, respectively.

The following activity occurred under the Company’s equity incentive plans during the three months ended March 31, 2007:

Unvested Shares	Shares		Weighted Average Grant-Date Fair Value
Unvested at December 31, 2006	1,300,070		$	3.88
Granted	803,750		4.93
Vested	(181,447	)	4.30
Forfeited	(23,909	)	5.88
Unvested at March 31, 2007	1,898,464		4.26

Price ranges of outstanding and exercisable options as of March 31, 2007 are summarized below:

	Outstanding Options				Exercisable Options
Exercise Price	Number of Options	Weighted Average Remaining Life (Years)	Weighted Average Exercise Price		Number of Options	Weighted Average Exercise Price
$0.50	684,929	5.17	$	.50	684,929	$	.50
$2.00 – 2.15	1,367,509	6.38	2.00		1,367,509	2.00
$3.25 – 4.48	232,252	7.57	3.83		175,054	3.72
$8.70 – $9.60	1,621,405	8.92	8.96		361,326	8.99
$10.00 – $14.05	911,008	8.99	10.88		329,821	10.87
	4,817,103				2,918,639

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion, especially under the captions “Variability of Results” and “Factors That May Affect Future Operating Results” in this Form 10-Q. Generally, the words “anticipate”, “expect”, “intend”, “believe” and similar expressions identify forward-looking statements. The forward-looking statements made in this Form 10-Q are made as of the filing date of this Form 10-Q with the Securities and Exchange Commission, and future events or circumstances could cause results that differ significantly from the forward-looking statements included here. Accordingly, we caution readers not to place undue reliance on these statements. We expressly disclaim any obligation to update or alter our forward-looking statements, whether, as a result of new information, future events or otherwise after the date of this document.

The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto in Item 1 above and with our financial statements and notes thereto for the year ended December 31, 2006, contained in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on March 9, 2007.

Overview

We believe we are a leading provider, based on our number of subscribers, of Do-It-For-Me Web services and lead generation products that enable small and medium-sized businesses to establish, maintain, promote, and optimize their Internet presence. Our primary service offerings, eWorks! XL and SmartClicks, are comprehensive performance-based packages that include Website design and publishing, Internet marketing and advertising, search engine optimization, search engine submission, lead generation and easy-to-understand Web analytics. As an application service provider, or ASP, we offer our customers a full range of Web services and products on an affordable subscription basis. In addition to our primary service offerings, we provide a variety of premium services to customers who desire more advanced capabilities; such as e-commerce solutions and other sophisticated Internet marketing services and online lead generation. The breadth and flexibility of our offerings allow us to address the Web services needs of a wide variety of customers, ranging from those just establishing their Websites to those that want to enhance their existing Internet presence with more sophisticated marketing and lead generation services. Additionally, as the Internet continues to evolve, we will refine and expand our service offerings to keep our customers at the forefront.

Through the combination of our proprietary Website publishing and management software, automated workflow processes, and specialized workforce development and management techniques, we believe that we achieve production efficiencies that enable us to offer sophisticated Web services at affordable rates. Our technology automates many aspects of creating, maintaining, enhancing, and marketing Websites on behalf of our customers. With approximately 76,600 subscribers to our eWorks! XL, SmartClicks, and premium subscription-based services as of March 31, 2007, we believe we are one of the industry’s largest providers of affordable Web services and products enabling small and medium-sized businesses to have an effective Internet presence.

We sell our Web services and products to customers identified primarily through strategic relationships with established brand name companies that have a large number of small and medium-sized business customers, including Discover Financial Services, LLC, or Discover. We have a direct sales force based at our national sales center in Spokane, Washington, that utilizes leads generated by our strategic marketing relationships to acquire new customers. Our sales force specializes in selling to small and medium-sized businesses across a wide variety of industries throughout the United States.

To increase our revenue and take advantage of our market opportunity, we plan to expand our subscriber base as well as increase our revenue from existing subscribers. We intend to continue to invest in hiring additional personnel, particularly in sales and marketing; developing additional services and products; adding to our infrastructure to support our growth; and expanding our operational and financial systems to manage our growing business. As we have in the past, we will continue to evaluate acquisition opportunities to increase the value and breadth of our Web services and product offerings and expand our subscriber base.

Key Business Metrics

Management periodically reviews certain key business metrics to evaluate the effectiveness of our operational strategies, allocate resources and maximize the financial performance of our business. These key business metrics include:

Net Subscriber Additions

We grow our subscriber base through a combination of adding new subscribers and retaining existing subscribers. We define net subscriber additions in a particular period as the gross number of new subscribers added during the period, less subscriber cancellations during the period. For this purpose, we only count as new subscribers those customers whose subscriptions have extended beyond the free trial period. Additionally, we do not treat a subscription as cancelled, even if the customer is not current in its payments, until either we have attempted to contact the subscriber twenty times or 60 days have passed since the most recent failed billing attempt, whichever is sooner. In any event, a subscriber’s account is cancelled if payment is not received within approximately 80 days.

We review this metric to evaluate whether we are performing to our business plan. An increase in net subscriber additions could signal an increase in subscription revenue, higher customer retention, and an increase in the effectiveness of our sales efforts. Similarly, a decrease in net subscriber additions could signal decreased subscription revenue, lower customer retention, and a decrease in the effectiveness of our sales efforts. Net subscriber additions above or below our business plan could have a long-term impact on our operating results due to the subscription nature of our business.

Monthly Turnover

Monthly turnover is a metric we measure each quarter, and which we define as customer cancellations in the quarter divided by the sum of the number of subscribers at the beginning of the quarter and the gross number of new subscribers added during the period, divided by three months. Customer cancellations in the quarter include cancellations from gross subscriber additions, which is why we include gross subscriber additions in the denominator. In measuring monthly turnover, we use the same conventions with respect to free trials and subscribers who are not current in their payments as described above for net subscriber additions. Monthly turnover is the key metric that allows management to evaluate whether we are retaining our existing subscribers in accordance with our business plan. An increase in monthly turnover may signal deterioration in the quality of our service, or it may signal a behavioral change in our subscriber base. Lower monthly turnover signals higher customer retention.

Sources of Revenue

We derive our revenue from sales of subscriptions, licenses, and services to our customers. Our revenue generally depends on the sale of a large number of subscriptions to small and medium-sized businesses. Leads provided by a relatively small number of companies with which we have strategic marketing relationships generate most of these sales. Customers acquired through our strategic marketing relationship with Discover accounted for 42% and 53% of our total revenue in the three months ended March 31, 2007 and 2006, respectively. Customers acquired through our strategic marketing relationship with Discover accounted for 46% and 61% of our subscription revenue in the three months ended March 31, 2007 and 2006, respectively.

Subscription Revenue

We derive the majority of our revenue from fees associated with our subscription services, which are generally sold through our eWorks! XL, SmartClicks, Visibility Online, Renex and 1ShoppingCart.com offerings. A majority of our subscription contracts include the design of a five-page Website, its hosting, and several additional Web services. In the case of eWorks! XL, upon the completion and initial hosting of the Website, our subscription services are offered free of charge for a 30-day trial period during which the customer can cancel at any time. After the 30-day trial period has ended, the revenue is recognized on a daily basis over the life of the contract. No 30-day free trial period is offered to customers for our Visibility Online services, and revenue is recognized on a daily basis over the life of the contract.

The typical subscription is a monthly contract, although terms range up to 12 months. We bill a majority of our customers on a monthly basis through their credit cards, bank accounts, or business merchant accounts. For the three months ended March 31, 2007 subscription revenue accounted for approximately 92% of our total revenue as compared to 86% for the three months ended March 31, 2006. The number of paying subscribers to our Web services and lead generation products drives subscription revenue as well as the subscription price that we charge for these services. The number of paying subscribers is affected both by the number of new customers we acquire in a given period and by the number of existing customers we retain during that period. We expect other sources of revenue to decline as a percentage of total revenue over time.

License Revenue

We generate license revenue from the sale of perpetual licenses to use our software products. Our software products enable customers to build Websites either for themselves or for others. License revenue consists of all fees earned from granting customers licenses to use our software products. Software may be delivered indirectly by a channel distributor, through download from our Website, or directly to end users by us. We recognize license revenue from packaged products upon shipment to end-users. We consider delivery of licenses under electronic licensing agreements to have occurred when the related products are shipped and the end user has been electronically provided with the licenses and software activation keys that allow the end user to take immediate possession of the software. In periods during which we release new versions of our software, our license revenue is likely to be higher than in periods during which no new releases occur.

Professional Services Revenue

We also generate professional services revenue from custom Website design and outsourced customer service and sales support. Our custom Website design work is typically billed on a fixed price basis and over very short periods. Our outsourced customer service and sales support services are typically billed on an hourly basis.

Cost of Revenue

Cost of Subscription Revenue

Cost of subscription revenue primarily consists of expenses related to marketing fees we pay to companies with which we have strategic marketing relationships as well as compensation expenses related to our Web page development staff, directory listing fees, customer support costs, domain name and search engine registration fees, allocated overhead costs, billing costs, and hosting expenses. We allocate overhead costs such as rent and utilities to all departments based on headcount. Accordingly, general overhead expenses are reflected in each cost of revenue and operating expense category. As our customer base and Web services usage grows, we intend to continue to invest additional resources in our Website development and support staff.

Cost of License Revenue

Cost of license revenue consists of costs attributable to the manufacture and distribution of the software, compensation expenses related to our quality assurance staff, as well as allocated overhead costs.

Cost of Professional Services Revenue

Cost of professional services revenue primarily consists of compensation expenses related to our Web page development staff and allocated overhead costs. We plan to add additional resources in this area to support the expected growth in our professional services and custom design functions.

Operating Expenses

Sales and Marketing Expense

Sales and marketing expenses are our largest indirect cost and consist primarily of salaries and related expenses for our sales and marketing staff. Sales and marketing expenses also include commissions, marketing programs, including advertising, events, corporate communications, other brand building and product marketing expenses, and allocated overhead costs.

We plan to continue to invest heavily in sales and marketing by increasing the number of direct sales personnel in order to add new subscription customers as well as increase sales of additional and new services and products to our existing customer base. Our investment in this area will also help us to expand our strategic marketing relationships, to build brand awareness, and to sponsor additional marketing events. We expect that, in the future, sales and marketing expenses will increase in absolute dollars and continue to be our largest indirect cost.

Research and Development Expense

Research and development expenses consist primarily of salaries and related expenses for our research and development staff, outsourced software development expenses, and allocated overhead costs. We have historically focused our research and development efforts on increasing the functionality of the technologies that enable our Web services and lead generation products. Our technology architecture enables us to provide all of our customers with a service based on a single version of the applications that serve each of our product offerings. As a result, we do not have to maintain multiple versions of our software, which enables us to have lower research and development expenses as a percentage of total revenue. We expect

that, in the future, research and development expenses will increase in absolute dollars as we continue to upgrade and extend our service offerings and develop new technologies.

General and Administrative Expense

General and administrative expenses consist of salaries and related expenses for executive, finance, administration, and management information systems personnel, as well as professional fees, other corporate expenses, and allocated overhead costs. We expect that general and administrative expenses will increase in absolute dollars as we continue to add personnel to support the growth of our business.

Depreciation and Amortization Expense

Depreciation and amortization expenses relate primarily to our computer equipment, software and other intangible assets recorded due to the acquisitions we have completed.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based on our unaudited interim consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 1 to our consolidated financial statements included in our 2006 Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 104 and other related generally accepted accounting principles.

We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the service has been provided to the customer; (3) the amount of fees to be paid by the customer is fixed or determinable; and (4) the collection of our fees is probable.

Thus, we recognize subscription revenue on a daily basis, as services are provided. Customers are billed for the subscription on a monthly, quarterly, semi-annual, or annual basis, at the customer’s option. For all of our customers, regardless of their billing method, subscription revenue is recorded as deferred revenue in the accompanying consolidated balance sheets. As services are performed, we recognize subscription revenue on a daily basis over the applicable service period. When we provide a free trial period, we do not begin to recognize subscription revenue until the trial period has ended and the customer has been billed for the services.

License revenue is derived from sales of software licenses directly to end-users as well as through value-added resellers and distributors. Software may be delivered indirectly by a distributor, through download from our Website, or directly to end-users by our company. We recognize revenue generated by the distribution of software licenses directly by us in the form of a boxed software product or a digital download upon sale and delivery to the end-user. End-users who purchase a software license online pay for the license at the time of order. We do not offer extended payment terms or make concessions for software license sales. We recognize revenue generated from distribution agreements where the distributor has a right of return as the distributor sells and delivers software license product to the end-user. We recognize revenue from distribution agreements where no right of return exists when a licensed software product is shipped to the distributor. In arrangements where distributors pay us upon shipment of software product to end-customers, we recognize revenue upon payment by the distributor. We are not obligated to provide technical support in connection with software licenses and do not provide technical support services to our software license customers. Our revenue recognition policies are in compliance with Statement of Position, or SOP, 97-2 (as amended by SOP 98-4 and SOP 98-9), Software Revenue Recognition.

Professional services revenue is generated from custom Website design and outsourced customer service and sales support services. Our professional services revenue from contracts for custom Website design is recorded using a proportional performance model based on labor hours incurred. The extent of progress toward completion is measured by the labor hours incurred as a percentage of total estimated labor hours to complete. Labor hours are the most appropriate measure to allocate revenue among reporting periods, as they are the primary input to the provision of our professional services.

We account for our multi-element arrangements, such as in the instances where we design a custom Website and separately offer other services such as hosting and marketing, in accordance with Emerging Issues Task Force Issue 00-21, Revenue Arrangements with Multiple Deliverables. We identify each element in an arrangement and assign the relative fair value to each element. The additional services provided with a custom Website are recognized separately over the period for which services are performed.

Allowance for Doubtful Accounts

In accordance with our revenue recognition policy, our accounts receivable are based on customers whose payment is reasonably assured. We monitor collections from our customers and maintain an allowance for estimated credit losses based on historical experience and specific customer collection issues. While credit losses have historically been within our expectations and the provisions established in our financial statements, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Because we have a large number of customers, we do not believe a change in liquidity of any one customer or our inability to collect from any one customer would have a material adverse impact on our consolidated financial position.

We also monitor failed direct debit billing transactions and customer refunds and maintain an allowance for estimated losses based upon historical experience. These provisions to our allowance are recorded as an adjustment to revenue. While losses from these items have historically been minimal, we cannot guarantee that we will continue to experience the same loss rates that we have in the past.

Accounting for Stock-Based Compensation

We record compensation expenses for our employee and director stock-based compensation plans based upon the fair value of the award in accordance with SFAS No. 123(R), Share Based Payment, which we adopted on January 1, 2006. Because we previously adopted the expense recognition provisions of SFAS No.123, Accounting for Stock-Based Compensation, the adoption of SFAS No.123(R) had no material impact on our financial statements. Stock-based compensation is amortized over the related vesting periods.

Goodwill and Intangible Assets

In accordance with Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets, we periodically evaluate goodwill and indefinite lived intangible assets for potential impairment. We test for the impairment of goodwill and indefinite lived intangible assets annually, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of goodwill or indefinite lived intangible assets below its carrying amount. Other intangible assets include, among other items, customer relationships and non-compete agreements, and they are amortized using the straight-line method over the periods benefited, which is up to eight years. Other intangible assets represent long-lived assets and are assessed for potential impairment whenever significant events or changes occur that might impact recovery of recorded costs. While we believe it is unlikely that any significant changes to the useful lives of our tangible and intangible assets will occur in the near term, rapid changes in technology or changes in market conditions could result in revisions to such estimates that could materially affect the carrying value of these assets and our future operating results.

Accounting for Purchase Business Combinations

All of our acquisitions were accounted for as purchase transactions, and the purchase price was allocated to the assets acquired and liabilities assumed based on the fair value of the assets acquired and liabilities assumed. The excess of the purchase price over the fair value of net assets acquired or net liabilities assumed, was allocated to goodwill. The fair value of amortizable intangibles, primarily consisting of customer relationships, non-compete agreements, trade/domain names, and technical know-how, was determined using valuation studies performed by an independent third-party valuation expert.

Provision for Income Taxes

We recognize deferred tax assets and liabilities on differences between the book and tax basis of assets and liabilities using currently effective tax rates. Further, deferred tax assets are recognized for the expected realization of available net operating loss carry forwards. A valuation allowance is recorded to reduce a deferred tax asset to an amount that we expect to realize in the future. We review the adequacy of the valuation allowance on an ongoing basis and recognize these benefits if a reassessment indicates that it is more likely than not that these benefits will be realized. In addition, we evaluate our tax contingencies on an ongoing basis and recognize tax benefits from uncertain tax positions only if it is more likely than not

that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized from such positions are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

Comparison of the Results for the Three Months Ended March 31, 2007 to the Results for the Three Months Ended March 31, 2006

Revenue

	Three months ended March 31,
	2007		2006
	(unaudited)
Revenue:
Subscription	$	15,138	$	9,959
License	1,028		1,205
Professional services	258		449
Total revenue	$	16,424	$	11,613

Total revenue for the three months ended March 31, 2007 increased $4.8 million, or 41%, over the three months ended March 31, 2006.

Subscription Revenue. Subscription revenue increased 52% to $15.1 million in the three months ended March 31, 2007 from $10.0 million in the three months ended March 31, 2006. The majority of the increase in subscription revenue over the prior year was due to an increase in customer base, an increase in average revenue per customer, and increases in revenue due to our most recent acquisitions. Subscription revenue increased approximately $4.6 million due to an increase in our customer base from approximately 58,100 as of March 31, 2006 to approximately 76,600 as of March 31, 2007, of which approximately 14,000 subscribers were acquired in our most recent acquisitions. The increase in our average revenue per customer over the prior quarter ended March 31, 2006 resulted in additional revenues of approximately $1.2 million and was due to increased sales of our premium products, including Smartclicks and lead generation products. In addition, we introduced a price increase for our eWorks! XL and Visibility Online products during the quarter ended September 30, 2006.

The average monthly turnover decreased to 5.3% in the three months ended March 31, 2007 from 5.6% in the three months ended March 31, 2006. The average monthly turnover for the three months ended March 31, 2007 included turnover associated with our recent acquisitions.

License Revenue. License revenue decreased 15% to $1.0 million in the three months ended March 31, 2007 from $1.2 million in the three months ended March 31, 2006. While the number of Fusion downloaded sales remained constant between the three-months ended March 31, 2007 and 2006, the decrease in revenue was primarily due to lower sales of physical units of our Fusion product during the three-month period ended March 31, 2007 due to the timing of the release and the natural life-cycle of the product.

Professional Services Revenue. Professional services revenue decreased 43% to $258 thousand in the three months ended March 31, 2007 from $449 thousand in the three months ended March 31, 2006. Professional services revenue decreased approximately $273 thousand due to the attrition of two of our channel partners who previously supplied us with leads for potential customers. In addition, the service revenue from our outsourced call center (which was acquired in connection with our September 2006 acquisition of Renex) increased professional services revenue by approximately $82 thousand.

Cost of Revenue

	Three months ended March 31,
	2007		2006
	(unaudited)
Cost of revenue
Subscription	$	6,815	$	4,418
License	298		291
Professional services	301		380
Total cost of revenue	$	7,414	$	5,089

Cost of Subscription Revenue. Cost of subscription revenue increased 54% to $6.8 million in the three months ended March 31, 2007 from $4.4 million in the three months ended March 31, 2006. The increase in the cost of subscription revenue of approximately $2.4 million was primarily the result of the costs associated with the increase in our subscriber base since March 31, 2006. More specifically, during the three months ended March 31, 2007, we incurred additional costs of approximately $1.5 million related to the additional subscription revenue from our acquisitions in September 2006. In addition, due to our increasing headcount since March 31, 2006, our employee compensation expenses increased approximately $246 thousand. Further, gross margin decreased slightly on subscription revenue to 55% for the three months ended March 31, 2007 from 56% for the three months ended March 31, 2006, due to the increase in marketing-related expenses associated with our premium products.

Cost of License Revenue. Cost of license revenue increased 2% to $298 thousand in the three months ended March 31, 2007 from $291 thousand in the three months ended March 31, 2006.

Cost of Professional Services Revenue. Cost of professional services revenue decreased 21% to $301 thousand in the three months ended March 31, 2007 from $380 thousand in the three months ended March 31, 2006. The decrease in the cost of professional services revenue was due to a decrease in costs associated with the related decrease in revenue, which was partially offset by additional costs associated with the outsourced call center acquired through our recent acquisitions.

Operating Expenses

	Three months ended March 31,
	2007		2006
	(unaudited)
Operating expenses:
Sales and marketing	$	3,947	$	2,837
Research and development	778		549
General and administrative	2,908		2,296
Depreciation and amortization	681		372
Total operating expenses	$	8,314	$	6,054

Operating Expenses

Sales and Marketing Expenses. Sales and marketing expenses increased 39% to $3.9 million, or 24% of total revenue, during the three months ended March 31, 2007 from $2.8 million, or 24% of total revenue, during the three months ended March 31, 2006. An increase of sales and marketing expenses of $591 thousand was due to increased employee compensation and benefits expense related to the increase in headcount. In addition, increases of $363 thousand in sales and marketing expense were attributable to the addition of sales and marketing resources in connection with our September 2006 acquisitions.

Research and Development Expenses. Research and development expenses increased 42% to $778 thousand, or 5% of total revenue, during the three months ended March 31, 2007 from $549 thousand, or 5% of total revenue, during the three months ended March 31, 2006. The increase was primarily due to an increase of $234 thousand in additional research and development resources associated with our September 2006 acquisitions.

General and Administrative Expenses. General and administrative expenses increased 27% to $2.9 million, or 18% of total revenue, during the three months ended March 31, 2007 from $2.3 million, or 20% of total revenue, during the three months ended March 31, 2006. Due to our recent acquisitions, there was an increase of approximately $611 thousand of additional general and administrative expenses over the prior period.

Depreciation and Amortization Expense. Depreciation and amortization expense increased 83% to $681 thousand, or 4% of total revenue, during the three months ended March 31, 2007 from $372 thousand, or 3% of total revenue, during the three months ended March 31, 2006. Amortization expense and depreciation expense increased $177 thousand and $132 thousand, respectively, due to an increase in definite-lived intangible assets and fixed assets being purchased.

Income tax expense. Income tax expense increased to $566 thousand during the three-months ended March 31, 2007. Prior to the fourth quarter of 2006, all deferred tax assets were fully reserved. In the fourth quarter of 2006, the Company reversed a portion of its valuation allowance related to deferred tax assets based upon its estimate of the amount that is more likely than not to be realized. Therefore, the Company recognized income tax expense in the three months ended March 31, 2007 based upon its estimated annual effective rate. The Company’s effective rate exceeds the statutory rate primarily due to non-deductible expenses associated with incentive stock options.

Net Interest Income. Net interest income decreased 9% to $502 thousand, or 3% of total revenue, during the three months ended March 31, 2007 from $551 thousand, or 5% of total revenue, during the three months ended March 31, 2006. The decrease in interest income was due to use of cash in our recent acquisitions, therefore reducing the average cash balance available to invest in money market funds during the quarter ended March 31, 2007.

Liquidity and Capital Resources

As of March 31, 2007, we had $41.5 million of cash and cash equivalents and $38.9 million in working capital, as compared to $55.8 million of cash and cash equivalents and $52.8 million in working capital as of March 31, 2006. This decrease was principally due to our recent acquisitions in September 2006 and March 2007.

Net cash provided by operations for the three months ended March 31, 2007 increased 111%, or $1.2 million, to $2.2 million from $1.0 million for the three months ended March 31, 2006. This increase was principally due to improved operating performance reflected in a 41% increase in revenue and a resulting $1.2 million net income before income taxes.

Net cash used in investing activities in the three months ended March 31, 2007 was $2.9 million as compared to $364 thousand in the three months ended March 31, 2006. On March 31, 2007, we made a cash payment to acquire substantially all of the assets and select liabilities of Submitawebsite, Inc. totaling approximately $2.1 million, including acquisition expenses.

Net cash provided by (used in) financing activities in the three months ended March 31, 2007 was $8 thousand as compared to $(613) million for the three months ended March 31, 2006. During the quarter ended March 31, 2006, we made payments for IPO-related expenses, while we did not have those expenses during the quarter ended March 31, 2007.

Summary

Our future capital uses and requirements depend on numerous forward-looking factors. These factors include but are not limited to the following:

· the costs involved in the expansion of our customer base;

· the costs involved with investment in our servers, storage and network capacity;

· the costs associated with the expansion of our domestic and international activities;

· the costs involved with our research and development activities to upgrade and expand our service offerings; and

· the extent to which we acquire or invest in other technologies and businesses.

We believe that our existing cash and cash equivalents will be sufficient to meet our projected operating requirements for at least the next 12 months, including our sales and marketing expenses, research and development expenses, capital expenditures, and any acquisitions or investments in complementary businesses, services, products or technologies. As of

March 31, 2007 and December 31, 2006, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Foreign Currency Exchange Risk

Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro and the Canadian Dollar. We will analyze our exposure to currency fluctuations and may engage in financial hedging techniques in the future to reduce the effect of these potential fluctuations. We have not entered into any hedging contracts since exchange rate fluctuations have had little impact on our operating results and cash flows. The majority of our subscription agreements are denominated in U.S. dollars. To date, our foreign sales have been primarily in Euros. Sales to customers domiciled outside the United States were approximately 4% and 6% of our total revenue in the three months ended March 31, 2007 and 2006. Sales in Germany represented approximately 59% and 64% of our international revenue in the three months ended March 31, 2007 and 2006, respectively.

Interest Rate Sensitivity

We had unrestricted cash and cash equivalents totaling $41.5 million and $42.2 million at March 31, 2007 and December 31, 2006, respectively. These amounts were invested primarily in money market funds. The unrestricted cash, cash equivalents and short-term marketable securities are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, will reduce future investment income.

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures.

Based on their evaluation as of March 31, 2007, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were sufficiently effective to ensure that the information required to be disclosed by us in this quarterly report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives. 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 error 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 our Company have been detected.

Changes in internal controls.

There were no changes in our internal controls over financial reporting during the three months ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time we may be involved in litigation relating to claims arising out of our operations. We are not currently involved in any material legal proceedings.

Item 1A. Risk Factors.

Factors That May Affect Future Operating Results

In addition to the risks discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our business is subject to the risks set forth below.

We depend primarily on a small number of strategic marketing relationships—and one key strategic marketing relationship in particular—to identify prospective customers. The loss of one or more of our strategic marketing relationships, or a reduction in the referrals and leads they generate, would significantly reduce our future revenue and increase our expenses.

As a key part of our strategy, we have entered into agreements with a number of companies pursuant to which these parties provide us with access to their customer lists and allow us to use their names in marketing our Web services and products. Approximately 90% of our new customers, excluding new customers from acquisitions, in the year ended December 31, 2006, and approximately 88% in the three months ended March 31, 2007, were identified through our strategic marketing relationships. However, when we include the new customers obtained in the three months ended March 31, 2007 from our previous acquisitions, approximately 75% of new customers were identified through strategic marketing relationships. We believe these strategic marketing relationships are critical to our business because they enable us to penetrate our target market with a minimum expenditure of resources. If these strategic marketing relationships are terminated or otherwise fail, our revenue would likely decline significantly and we could be required to devote additional resources to the sale and marketing of our Web services and products. We have no long-term contracts with these organizations, and these organizations are generally not restricted from working with our competitors. Accordingly, our success will depend upon the willingness of these organizations to continue these strategic marketing relationships.

Our strategic marketing relationship with Discover is particularly important to us and accounted for approximately 69% of our new customers in the year ended December 31, 2006 and 39% in the three months ended March 31, 2007. Customers attributable to our relationship with Discover represented approximately 53% of our total revenue during the year ended December 31, 2006 and approximately 42% of our total revenue for the three months ended March 31, 2007. We expect that customer relationships enabled by our strategic marketing relationship with Discover will continue to account for a significant portion of our new customers and our revenue in the future. Discover is under no obligation to continue to contract with us or continue this strategic marketing relationship, and either Discover or we can terminate our agreement with short notice and no penalty. Additionally, this agreement expires pursuant to its terms in November 2007, and we cannot ensure that the agreement will be extended or renewed. We therefore cannot ensure that we will continue to have a relationship with Discover. If our strategic marketing relationship with Discover ends, we will need to take remedial measures to generate customer leads, which could be expensive, and if such efforts fail, our business would be materially harmed.

To successfully execute our business plan, we must also establish new strategic marketing relationships with additional organizations that have strong relationships with small and medium-sized businesses that would enable us to identify additional prospective customers. If we are unable to diversify and extend our strategic marketing relationships, our ability to grow our business may be compromised.

Most of our Web services are sold on a month-to-month basis, and if our customers either are unable or choose not to subscribe to our Web services, our revenue may decrease.

Typically, our Web service offerings are sold pursuant to month-to-month subscription agreements, and our customers can generally cancel their subscriptions to our Web services at any time with little or no penalty.

Historically, we have experienced a high turnover rate in our customer base. For the years ended December 31, 2006 and 2005, 47% and 52%, respectively, of our subscribers who were customers at the beginning of the respective year were no longer subscribers at the end of the respective year. For the three months ended March 31, 2007 and 2006, respectively, 19% and 19%, respectively, of our subscribers who were customers at the beginning of the respective period were no longer subscribers at the end of the period. The turnover rate calculations do not include any acquisition related customer activity.

While we cannot determine with certainty why our subscription renewal rates are not higher, we believe there are a variety of factors, which have in the past led, and may in the future lead, to a decline in our subscription renewal rates. These factors include the cessation of our customers’ businesses, the overall economic environment in the United States and its impact on small and medium-sized businesses, the services and prices offered by us and our competitors, and the evolving use of the Internet by small and medium-sized businesses. If our renewal rates are low or decline for any reason, or if customers demand renewal terms less favorable to us, our revenue may decrease, which could adversely affect our stock price.

If economic or other factors negatively affect the small and medium-sized business sector, our customers may become unwilling or unable to purchase our Web services and products, which could cause our revenue to decline and impair our ability to operate profitably.

Our existing and target customers are small and medium-sized businesses. These businesses are more likely to be significantly affected by economic downturns than larger, more established businesses. Additionally, these customers often have limited discretionary funds, which they may choose to spend on items other than our Web services and products. If small and medium-sized businesses experience economic hardship, they may be unwilling or unable to expend resources to develop their Internet presences, which would negatively affect the overall demand for our services and products and could cause our revenue to decline.

Our growth will be adversely affected if we cannot continue to successfully retain, hire, train, and manage our key employees, particularly in the telesales and customer service areas.

Our ability to successfully pursue our growth strategy will depend on our ability to attract, retain, and motivate key employees across our business. We have many key employees throughout our organization that do not have non-competition agreements and may leave to work for a competitor at any time. In particular, we are substantially dependent on our telesales and customer service employees to obtain and service new customers. Competition for such personnel and others can be intense, and there can be no assurance that we will be able to attract, integrate, or retain additional highly qualified personnel in the future. In addition, our ability to achieve significant growth in revenue will depend, in large part, on our success in effectively training sufficient personnel in these two areas. New hires require significant training and in some cases may take several months before they achieve full productivity if they ever do. Our recent hires and planned hires may not become as productive as we would like, and we may be unable to hire sufficient numbers of qualified individuals in the future in the markets where we have our facilities. If we are not successful in retaining our existing employees, or hiring, training and integrating new employees, or if our current or future employees perform poorly, growth in the sales of our services and products may not materialize and our business will suffer.

We may expand through acquisitions of, or investments in, other companies or technologies, which may result in additional dilution to our stockholders and consume resources that may be necessary to sustain our business.

One of our business strategies is to acquire complementary services, technologies or businesses. In connection with one or more of those transactions, we may:

· issue additional equity securities that would dilute our stockholders;

· use cash that we may need in the future to operate our business; and

· incur debt that could have terms unfavorable to us or that we might be unable to repay.

Business acquisitions also involve the risk of unknown liabilities associated with the acquired business. In addition, we may not realize the anticipated benefits of any acquisition, including securing the services of key employees. Incurring unknown liabilities or the failure to realize the anticipated benefits of an acquisition could seriously harm our business.

We may find it difficult to integrate recent and potential future business combinations, which could disrupt our business, dilute stockholder value, and adversely affect our operating results.

During the course of our history, we have completed several acquisitions of other businesses, and a key element of our strategy is to continue to acquire other businesses in the future. In particular, we completed the 1ShoppingCart.com and Renex acquisitions in September 2006 and the Submitawebsite, Inc acquisition in March 2007. Integrating these recently acquired businesses and assets and any businesses or assets we may acquire in the future could add significant complexity to our business and additional burdens to the substantial tasks already performed by our management team. In the future, we may not be able to identify suitable acquisition candidates, and if we do, we may not be able to complete these acquisitions on acceptable terms or at all. In connection with our recent and possible future acquisitions, we may need to integrate operations that have different and unfamiliar corporate cultures. Likewise, we may need to integrate disparate technologies and Web service and product offerings, as well as multiple direct and indirect sales channels. The key personnel of the

acquired company may decide not to continue to work for us. These integration efforts may not succeed or may distract our management’s attention from existing business operations. Our failure to successfully manage and integrate 1ShoppingCart.com and Renex, or any future acquisitions could seriously harm our business.

Accounting for acquisitions under generally accepted accounting principles could adversely affect our reported financial results.

Under generally accepted accounting principles in the United States, we could be required to record charges for in-process research and development or other charges in connection with future acquisitions, which would reduce any future reported earnings or increase any future reported loss. Acquisitions could also require us to record substantial amounts of goodwill and other intangible assets. For example, in connection with our recent acquisitions of Submitawebsite, Inc., we recorded $2.1 million of goodwill. Any future impairment of this goodwill, and the ongoing amortization of other intangible assets, could adversely affect our reported financial results.

We have only recently become profitable and may not maintain our level of profitability.

Although we generated net income since the year ended December 31, 2004, we have not historically been profitable and may not be profitable in future periods. As of March 31, 2007, we had an accumulated deficit of approximately $58.5 million. We expect that our expenses relating to the sale and marketing of our Web services, technology improvements and general and administrative functions, as well as the costs of operating and maintaining our technology infrastructure, will increase in the future. Accordingly, we will need to increase our revenue to be able to maintain our profitability. We may not be able to reduce in a timely manner or maintain our expenses in response to any decrease in our revenue, and our failure to do so would adversely affect our operating results and our level of profitability.

Our operating results are difficult to predict and fluctuations in our performance may result in volatility in the market price of our common stock.

Due to our limited operating history, our evolving business model, and the unpredictability of our emerging industry, our operating results are difficult to predict. We expect to experience fluctuations in our operating and financial results due to a number of factors, such as:

· our ability to retain and increase sales to existing customers, attract new customers, and satisfy our customers’ requirements;

· the renewal rates for our services;

· changes in our pricing policies;

· the introduction of new services and products by us or our competitors;

· our ability to hire, train and retain members of our sales force;

· the rate of expansion and effectiveness of our sales force;

· technical difficulties or interruptions in our services;

· general economic conditions;

· additional investment in our services or operations;

· bulk licenses of our software; and

· our success in maintaining and adding strategic marketing relationships.

These factors and others all tend to make the timing and amount of our revenue unpredictable and may lead to greater period-to-period fluctuations in revenue than we have experienced historically.

As a result of these factors, we believe that our quarterly revenue and results of operations are likely to vary significantly in the future and that period-to-period comparisons of our operating results may not be meaningful. The results of one quarter may not be relied on as an indication of future performance. If our quarterly revenue or results of operations fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially.

Our business depends in part on our ability to continue to provide value-added Web services and products, many of which we provide through agreements with third parties, and our business will be harmed if we are unable to provide these Web services and products in a cost-effective manner.

A key element of our strategy is to combine a variety of functionalities in our Web service offerings to provide our customers with comprehensive solutions to their Internet presence needs, such as Internet search optimization, local yellow pages listings, and e-commerce capability. We provide many of these services through arrangements with third parties, and our continued ability to obtain and provide these services at a low cost is central to the success of our business. For example, we currently have agreements with several service providers that enable us to provide, at a low cost, Internet yellow pages advertising. However, these agreements may be terminated on short notice, typically 60 to 90 days, and without penalty. If any of these third parties were to terminate their relationships with us, or to modify the economic terms of these arrangements, we could lose our ability to provide these services at a cost-effective price to our customers, which could cause our revenue to decline or our costs to increase.

Our systems, and those of our co-location provider, are vulnerable to natural disasters and other unexpected problems that could lead to interruptions, delays, loss of data, or the inability to accept and fulfill customer subscriptions.

Our network operating center, containing substantially all of our communications hardware, nearly all of our non-sales staff, and much of our other computer hardware operations is located in Jacksonville, Florida. Likewise, the facilities of our third-party co-location provider are located in Jacksonville, Florida. Additionally, one of our sales centers, from which the majority of our sales are made, is located in Spokane, Washington. Hurricanes, fire, floods, earthquakes, power loss, telecommunications failures, break-ins, computer sabotage, and similar events could damage or destroy these systems and facilities and temporarily stop a majority of our business activities in fulfilling customer orders and in securing new customers. Our business could be seriously harmed, our revenues could decline and we could be required to make significant expenditures if our systems were damaged or destroyed, or if our customer fulfillment were delayed or stopped, by any of these occurrences.

We rely heavily on the reliability, security, and performance of our internally developed systems and operations, and any difficulties in maintaining these systems may result in service interruptions, decreased customer service, or increased expenditures.

The software and workflow processes that underlie our ability to deliver our Web services and products have been developed primarily by our own employees. The reliability and continuous availability of these internal systems are critical to our business, and any interruptions that result in our inability to timely deliver our Web services or products, or that materially impact the efficiency or cost with which we provide these Web services and products, would harm our reputation, profitability, and ability to conduct business. In addition, many of the software systems we currently use will need to be enhanced over time or replaced with equivalent commercial products, either of which could entail considerable effort and expense. If we fail to develop and execute reliable policies, procedures, and tools to operate our infrastructure, we could face a substantial decrease in workflow efficiency and increased costs, as well as a decline in our revenue.

We face intense and growing competition. If we are unable to compete successfully, our business will be seriously harmed.

The market for our Web services and products is competitive and has relatively low barriers to entry. Our competitors vary in size and in the variety of services they offer. We encounter competition from a wide variety of company types, including:

· Website design and development service and software companies;

· Internet service providers and application service providers;

· Internet search engine providers;

· Local business directory providers; and

· Website domain name providers and hosting companies.

In addition, due to relatively low barriers to entry in our industry, we expect the intensity of competition to increase in the future from other established and emerging companies. Increased competition may result in price reductions, reduced gross margins, and loss of market share, any one of which could seriously harm our business. We also expect that competition will increase as a result of industry consolidations and formations of alliances among industry participants.

Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, marketing and other resources, greater brand recognition and, we believe, a larger installed base of customers. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the promotion and sale of their services and products than we can. If we fail to compete successfully against current or future competitors, our revenue could increase less than anticipated or decline, and our business could be harmed.

Our failure to build brand awareness quickly could compromise our ability to compete and to grow our business.

As a result of the anticipated increase in competition in our market, and the likelihood that some of this competition will come from companies with established brands, we believe brand name recognition and reputation will become increasingly important. Our strategy of relying significantly on third-party strategic marketing relationships to find new customers may impede our ability to build brand awareness, as our customers may wrongly believe our Web services and products are those of the parties with which we have strategic marketing relationships. If we do not continue to build brand awareness quickly, we could be placed at a competitive disadvantage to companies whose brands are more recognizable than ours.

If our security measures are breached, our services may be perceived as not being secure, and our business and reputation could suffer.

Our Web services involve the storage and transmission of our customers’ proprietary information. Although we employ data encryption processes, an intrusion detection system, and other internal control procedures to assure the security of our customers’ data, we cannot guarantee that these measures will be sufficient for this purpose. If our security measures are breached as a result of third-party action, employee error or otherwise, and as a result our customers’ data becomes available to unauthorized parties, we could incur liability and our reputation would be damaged, which could lead to the loss of current and potential customers. If we experience any breaches of our network security or sabotage, we might be required to expend significant capital and other resources to remedy, protect against or alleviate these and related problems, and we may not be able to remedy these problems in a timely manner, or at all. Because techniques used by outsiders to obtain unauthorized network access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures.

If we cannot adapt to technological advances, our Web services and products may become obsolete and our ability to compete would be impaired.

Changes in our industry occur very rapidly, including changes in the way the Internet operates or is used by small and medium-sized businesses and their customers. As a result, our Web services and products could become obsolete quickly. The introduction of competing products employing new technologies and the evolution of new industry standards could render our existing products or services obsolete and unmarketable. To be successful, our Web services and products must keep pace with technological developments and evolving industry standards, address the ever-changing and increasingly sophisticated needs of our customers, and achieve market acceptance. If we are unable to develop new Web services or products, or enhancements to our Web services or products, on a timely and cost-effective basis, or if new Web services or products or enhancements do not achieve market acceptance, our business would be seriously harmed.

Providing Web services and products to small and medium-sized businesses designed to allow them to Internet-enable their businesses is a new and emerging market; if this market fails to develop, we will not be able to grow our business.

Our success depends on a significant number of small and medium-sized business outsourcing Website design, hosting, and management as well as adopting other online business solutions. The market for our Web services and products is relatively new and untested. Custom Website development has been the predominant method of Internet enablement, and small and medium-sized businesses may be slow to adopt our template-based Web services and products. Further, if small or medium-sized businesses determine that having an Internet presence is not giving their businesses an advantage, they would be less likely to purchase our Web services and products. If the market for our Web services and products fails to grow or grows more slowly than we currently anticipate, or if our Web services and products fail to achieve widespread customer acceptance, our business would be seriously harmed.

We are dependent on our executive officers, and the loss of any key member of this team may compromise our ability to successfully manage our business and pursue our growth strategy.

Our future performance depends largely on the continuing service of our executive officers and senior management team, especially those of David Brown, our Chief Executive Officer. Our executives are not contractually obligated to remain employed by us. Accordingly, any of our key employees could terminate their employment with us at any time without

penalty and may go to work for one or more of our competitors after the expiration of their non-compete period. The loss of one or more of our executive officers could make it more difficult for us to pursue our business goals and could seriously harm our business.

Our growth could strain our resources and our business may suffer if we fail to implement appropriate controls and procedures to manage our growth.

We are currently experiencing a period of rapid growth in employees and operations, with our employee base increasing from 433 full-time employees as of March 31, 2006 to 654 full-time employees as of March 31, 2007. This growth has placed, and will continue to place, a strain on our management, administrative, and sales and marketing infrastructure. If we fail to successfully manage our growth, our business could be disrupted, and our ability to operate our business profitably could suffer. We anticipate that further growth in our employee base will be required to expand our customer base and to continue to develop and enhance our Web service and product offerings. To manage the growth of our operations and personnel, we will need to enhance our operational, financial, and management controls and our reporting systems and procedures. This will require additional personnel and capital investments, which will increase our cost base. The growth in our fixed cost base may make it more difficult for us to reduce expenses in the short term to offset any shortfalls in revenue.

We may be unable to protect our intellectual property adequately or cost-effectively, which may cause us to lose market share or force us to reduce our prices.

Our success depends, in part, on our ability to protect and preserve the proprietary aspects of our technology, Web services, and products. If we are unable to protect our intellectual property, our competitors could use our intellectual property to market services and products similar to those offered by us, which could decrease demand for our Web services and products. We may be unable to prevent third parties from using our proprietary assets without our authorization. We do not currently rely on patents to protect our core intellectual property, and we have not applied for patents in any jurisdictions inside or outside of the United States. To protect, control access to, and limit distribution of our intellectual property, we generally enter into confidentiality and proprietary inventions agreements with our employees, and confidentiality or license agreements with consultants, third-party developers, and customers. We also rely on copyright, trademark, and trade secret protection. However, these measures afford only limited protection and may be inadequate. Enforcing our rights to our technology could be costly, time-consuming and distracting. Additionally, others may develop non-infringing technologies that are similar or superior to ours. Any significant failure or inability to adequately protect our proprietary assets will harm our business and reduce our ability to compete.

If we fail to maintain an effective system of internal controls, we may not be able to accurately or timely report our financial results, which could cause our stock price to fall or result in our stock being delisted.

Effective internal controls are necessary for us to provide reliable and accurate financial reports. We will need to devote significant resources and time to comply with the requirements of Sarbanes-Oxley with respect to internal control over financial reporting. In addition, Section 404 under Sarbanes-Oxley requires that we assess and our auditors attest to the design and operating effectiveness of our controls over financial reporting. Our ability to comply with the annual internal control report requirement for our fiscal year ending on December 31, 2007, will depend on the effectiveness of our financial reporting and data systems and controls across our company and our operating subsidiaries. We expect these systems and controls to become increasingly complex to the extent that we integrate acquisitions and our business grows. To effectively manage this complexity, we will need to continue to improve our operational, financial, and management controls and our reporting systems and procedures. Any failure to implement required new or improved controls, or difficulties encountered in the implementation or operation of these controls, could harm our operating results or cause us to fail to meet our financial reporting obligations, which could adversely affect our business and jeopardize our listing on the NASDAQ Global Market, either of which would harm our stock price.

We might require additional capital to support business growth, and this capital might not be available on acceptable terms, or at all.

We intend to continue to make investments to support our business growth and may require additional funds to respond to business challenges, including the need to develop new services and products or enhance our existing Web services, enhance our operating infrastructure and acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at

all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly impaired.

Provisions in our amended and restated certificate of incorporation and bylaws or under Delaware law might discourage, delay, or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Our amended and restated certificate of incorporation and bylaws contain provisions that could depress the trading price of our common stock by acting to discourage, delay, or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions:

· establish a classified board of directors so that not all members of our board are elected at one time;

· provide that directors may only be removed for cause and only with the approval of 66 2/3% of our stockholders;

· require super-majority voting to amend some provisions in our amended and restated certificate of incorporation and bylaws;

· authorize the issuance of blank check preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;

· prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

· provide that the board of directors is expressly authorized to make, alter, or repeal our bylaws; and

· establish advance notice requirements for nominations for elections to our board or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Additionally, we are subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range of business combinations with any “interested” stockholder for a period of three years following the date on which the stockholder became an “interested” stockholder and which may discourage, delay, or prevent a change of control of our company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

Item 5. Other Information.

Not applicable.

Item 6. Exhibits.

Exhibit No.			Description of Document
3.1			Amended and Restated Certificate of Incorporation of Website Pros, Inc.*

3.2			Amended and Restated Bylaws of Website Pros, Inc.**

4.1			Reference is made to Exhibits 3.1 and 3.2

4.2			Specimen Stock Certificate.#

4.3			Investors’ Rights Agreement dated December 10, 2003, as amended by the Omnibus Amendment Agreement dated February 14, 2005.#

4.4			Warrant dated December 10, 2003, exercisable for 208,405 shares of common stock.***#

4.5			Warrant dated April 27, 2004, exercisable for 72,942 shares of common stock.**** #

31.1			CEO Certification required by Rule 13a-14(a) or Rule 15d-14(a).

31.2			CFO Certification required by Rule 13a-14(a) or Rule 15d-14(a).

32.1			Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).*****

32.2			Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).*****

*	Filed as Exhibit 3.3 to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.
**	Filed as Exhibit 3.4 to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.
***	Filed as Exhibit 4.6 to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.
****	Filed as Exhibit 4.7 to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.
*****	The certifications attached as Exhibits 32.1 and 32.2 accompanying this Quarterly Report on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Website Pros, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.
#	Filed as the like numbered Exhibit to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005 and as Exhibit 10.14 to the current report on Form 8-K (No. 000-51595), filed with the SEC on November 7, 2006, as amended, and incorporated herein by reference.

SIGNATURES

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.

		Website Pros, Inc.
		(Registrant)

May 4, 2007		/s/ KEVIN M. CARNEY
Date		Kevin M. Carney Chief Financial Officer (Principal Financial and Accounting Officer)

INDEX OF EXHIBITS

Exhibit No.			Description of Document
3.1			Amended and Restated Certificate of Incorporation of Website Pros, Inc.*

3.2			Amended and Restated Bylaws of Website Pros, Inc.**

4.1			Reference is made to Exhibits 3.1 and 3.2

4.2			Specimen Stock Certificate.#

4.3			Investors’ Rights Agreement dated December 10, 2003, as amended by the Omnibus Amendment Agreement dated February 14, 2005.#

4.4			Warrant dated December 10, 2003, exercisable for 208,405 shares of common stock.***#

4.5			Warrant dated April 27, 2004, exercisable for 72,942 shares of common stock.****#

31.1			CEO Certification required by Rule 13a-14(a) or Rule 15d-14(a).

31.2			CFO Certification required by Rule 13a-14(a) or Rule 15d-14(a).

32.1			Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).*****

32.2			Certification required by Rule 13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350).*****

*	Filed as Exhibit 3.3 to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.
**	Filed as Exhibit 3.4 to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.
***	Filed as Exhibit 4.6 to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.
****	Filed as Exhibit 4.7 to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005, as amended, and incorporated herein by reference.
*****	The certifications attached as Exhibits 32.1 and 32.2 accompanying this Quarterly Report on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Website Pros, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.
#	Filed as the like numbered Exhibit to the Registrant’s registration statement on Form S-1 (No. 333-124349), filed with the SEC on April 27, 2005 and as Exhibit 10.14 to the current report on Form 8-K (No. 000-51595), filed with the SEC on November 7, 2006, as amended, and incorporated herein by reference.

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Web.com (WEB) Inactive 10-Q2007 Q1 Quarterly report

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