Web.com (WEB) 10-Q 2006 Q2 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 June 30, 2006

or

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

For the transition period from            to            

Commission File Number: 000-51595

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    ¨  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):    ¨  Large accelerated filer    ¨  Accelerated filer    x  Non-accelerated filer

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

Common Stock, par value $0.001 per share, outstanding as of August 2, 2006: 16,893,376

Website Pros, Inc.

Quarterly Report on Form 10Q

For the Quarterly Period ended June 30, 2006

Index

Part I	Financial Information
Item 1.	Financial Statements (unaudited)
	Condensed consolidated statements of operations	3
	Condensed consolidated balance sheets	4
	Condensed consolidated statements of cash flows	5
	Notes to condensed consolidated financial statements	6
Item 2.	Management’s Discussion and Analysis of Financial Conditions and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	20
Item 4.	Controls and Procedures	20
Part II	Other Information
Item 1.	Legal Proceedings	21
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3.	Defaults Upon Senior Securities	29
Item 4.	Submission of Matters to a Vote of Security Holders	29
Item 5.	Other Information	29
Item 6.	Exhibits	30
Signatures		31

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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					Six months ended
	June 30, 2006		June 30, 2005			June 30, 2006		June 30, 2005
Revenue:
Subscription	$	10,650	$	8,107		$	20,609	$	14,150
License		884		701			2,089		1,673
Professional services		503		319			952		622
Total revenue		12,037		9,127			23,650		16,445
Cost of revenue (excluding depreciation and amortization shown separately below):
Subscription (a)		4,669		3,785			9,087		6,708
License		191		172			482		369
Professional services		330		299			710		515
Total cost of revenue		5,190		4,256			10,279		7,592
Gross profit		6,847		4,871			13,371		8,853
Operating expenses:
Sales and marketing (a)		2,971		2,457			5,810		4,441
Research and development (a)		441		429			989		791
General and administrative (a)		2,373		1,678			4,668		2,965
Depreciation and amortization		331		455			703		554
Total operating expenses		6,116		5,019			12,170		8,751
Income (loss) from operations		731		(148	)		1,201		102
Interest, net		626		36			1,177		62
Net income (loss)		1,357		(112	)		2,378		164
Preferred stock dividends		—		(340	)		—		(680	)
Net income (loss) attributable to common stockholders	$	1,357	$	(452	)	$	2,378	$	(516	)
Basic net income (loss) attributable per common share	$	0.08	$	(0.10	)	$	0.14	$	(0.14	)
Diluted net income (loss) attributable per common share	$	0.07	$	(0.10	)	$	0.12	$	(0.14	)
Basic weighted average common shares outstanding		16,613		4,714			16,570		3,758
Diluted weighted average common shares outstanding		19,332		4,714			19,339		3,758
(a)    Stock-based compensation included above:
Subscription (cost of revenue)	$	32	$	22		$	57	$	28
Sales and marketing	$	74	$	63		$	146	$	76
Research and development		33		20			88		33
General and administrative		273		47			516		57
	$	380	$	130		$	750	$	166

See accompanying notes to consolidated financial statements

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Website, Pros, Inc.

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	June 30, 2006			December 31, 2005
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	57,002		$	55,746
Accounts receivable, net of allowance of $270 and $383, respectively		2,088			1,941
Inventories, net of reserves of $8 and $51, respectively		120			138
Prepaid expenses		534			506
Prepaid marketing fees and other current assets		733			770
Total current assets		60,477			59,101
Property and equipment, net		1,648			1,068
Goodwill and other intangible assets		15,756			16,105
Other assets		482			96
Total assets	$	78,363		$	76,370
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	260		$	1,280
Accrued expenses		2,143			2,391
Deferred revenue		3,220			3,193
Accrued marketing fees		334			297
Note payable, current		67			65
Other liabilities		235			340
Total current liabilities		6,259			7,566
Accrued rent expense		176			177
Note payable, long-term		207			241
Other long-term liabilities		31			31
Total liabilities	$	6,673		$	8,015
Stockholders’ equity:
Common stock, $0.001 par value; 150,000,000 shares authorized; 16,687,466 and 16,509,602 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively		17			17
Additional paid-in capital		137,054			136,097
Accumulated deficit		(65,381	)		(67,759	)
Total stockholders’ equity		71,690			68,355
Total liabilities and stockholders’ equity	$	78,363		$	76,370

See accompanying notes to consolidated financial statements

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Website, Pros, Inc.

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

	Six months ended June 30,
	2006			2005
Cash flows from operating activities
Net income	$	2,378		$	164
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		703			554
Stock-based compensation expense		807			194
Changes in operating assets and liabilities:
Accounts receivable		(147	)		(350	)
Inventories		18			26
Prepaid expenses and other assets		(98	)		(71	)
Accounts payable, accrued expenses and other liabilities		(754	)		(36	)
Deferred revenue		27			342
Net cash provided by operating activities		2,934			823
Cash flows from investing activities
Business acquisition, net of cash received		—			382
Purchase of property and equipment		(922	)		(166	)
Net cash (used in) provided by investing activities		(922	)		216
Cash flows from financing activities
Payment of stock issuance costs		(877	)		(1,094	)
Payment of debt obligations		(32	)		—
Proceeds from issuance of preferred stock, net		—			2,990
Proceeds from exercise of stock options		153			1
Net cash (used in) provided by financing activities		(756	)		1,897
Net increase in cash and cash equivalents		1,256			2,936
Cash and cash equivalents, beginning of period		55,746			6,621
Cash and cash equivalents, end of period	$	57,002		$	9,557

See accompanying notes to consolidated financial statements

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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 Web services and products that enable small and medium-sized businesses to establish, maintain, promote, and optimize their Internet presence. The Company’s primary service offering is a comprehensive package that includes Website design and publishing, Internet marketing and advertising, search engine optimization, search engine submission, and lead generation. In addition to the Company’s primary service offering, the Company provides a variety of premium services to customers who desire more advanced capabilities such as e-commerce solutions and more sophisticated Internet marketing services.

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’s business consists of a single reporting segment, Web services and products.

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

Basis of Presentation

The accompanying consolidated balance sheet as of June 30, 2006, the consolidated statements of operations for the three and six months ended June 30, 2006 and 2005, the consolidated statements of cash flows for the six months ended June 30, 2006 and 2005 and the related notes to the consolidated financial statements are unaudited. These consolidated statements and the related condensed notes should be read in conjunction with the audited consolidated financial statements and related notes, together with management’s discussion and analysis of financial position and results of operations, contained in the Company’s annual report on Form 10-K for the year ended December 31, 2005.

In the opinion of the Company’s management, the unaudited consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements included in the Company’s 2005 annual report on Form 10-K and include all adjustments necessary for the fair presentation of the Company’s financial position as of June 30, 2006, its results of operations for the three and six months ended June 30, 2006 and 2005 and cash flows for the six months ended June 30, 2006 and 2005. The Company’s consolidated financial statements include the assets, liabilities and the operating results of its wholly owned subsidiary LEADS.com, Inc. commencing on April 22, 2005. All significant intercompany balances and transactions have been eliminated. The financial statement results for the three and six months ended June 30, 2006 are not necessarily indicative of the results to be expected for the year ending December 31, 2006.

Use of Estimates

The Company prepared the consolidated financial statements in conformity with accounting principles accepted in the United States. These principles require that management make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and reported amounts of revenues and expenses. Actual results could differ from those estimates.

Net Income (Loss) Attributable Per Common Share

The Company computes net income (loss) attributable per common share in accordance with SFAS No. 128, Earnings Per Share. Basic net income (loss) attributable per common share includes no dilution and is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income (loss) 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 December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. This statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, which was adopted retroactively by the Company effective April 1, 2005, and supersedes APB Opinion No. 25, Accounting for Stock Issued for Employees. SFAS No.123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. Effective January 1, 2006, the Company adopted the provisions of SFAS No.123(R). Since the Company previously adopted the expense recognition provisions of SFAS No.123, the adoption of SFAS No.123(R) had no impact on its financial statements.

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2. Acquisitions

Acquisition of Assets from E.B.O.Z., Inc.

On April 19, 2005, the Company acquired the assets of, and assumed certain liabilities from, E.B.O.Z., Inc. (“EBOZ”). The Company believes the EBOZ asset acquisition improves its ability to cost-effectively provide Web traffic generation solutions to its customers through the use of Internet banner advertisements, pay-per-click campaign management, and search engine optimization. The Company issued 185,524 shares of its common stock to EBOZ as consideration for the acquired assets (“Closing Shares”) and, under the agreement as originally executed, would have been obligated to issue as contingent consideration up to an additional 185,524 shares (“Contingent Shares”) in the event the EBOZ assets acquired achieved certain revenue targets during the three months ending July 31, 2006 and certain EBOZ shareholder employees of the Company had not resigned their positions with the Company.

On August 12, 2005, the Company and EBOZ amended the asset purchase agreement to eliminate the Company’s obligation to issue the Contingent Shares. As consideration for the amendment, the Company issued an additional 20,000 shares of the Company’s common stock to EBOZ. The Company recorded $178,000 as stock-based compensation during the quarter ending September 30, 2005, based upon the fair value of these shares at the time of issuance.

The financial information in the table below summarizes the combined results of operations of the Company and the assets of EBOZ on a pro forma basis, as though the acquisition had occurred at the beginning of the six month period set forth below. 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 six month period set forth below.

	Six Months Ended June 30, 2005
Revenue	$	16,717
Net loss attributable to common stockholders		(621	)
Basic and diluted net loss attributable per common share		(0.16	)

Acquisition of LEADS.com

On April 22, 2005, the Company consummated a transaction whereby a wholly owned subsidiary of the Company merged with LEADS.com, Inc. (“LEADS.com”) and LEADS.com became a wholly-owned subsidiary as contemplated by an agreement and plan of merger and reorganization dated April 22, 2005. The Company believes the LEADS.com acquisition enhances its ability to provide customer leads to locally and regionally focused businesses. Under the terms of the LEADS.com merger agreement, the Company issued 2,320,518 shares of its common stock in exchange for 2,217,769 shares of the common stock of LEADS.com, constituting 100% of the outstanding shares of LEADS.com, and assumed options to purchase 73,241 shares of common stock of the Company. In April 2005, the Company valued the shares issued by determining the enterprise value of LEADS.com based upon a discounted cash flow approach. The cash flow model included an 11-year forecast of income and cash flows and assumed a discount rate of 32.5% and a growth rate implicit in the terminal value of 6.0%. The fair value of the LEADS.com options assumed was valued based upon the following assumptions: fair value of common stock of $7.10; risk-free rate of 4.29%; dividend yield of 0%; and an expected life of 7 years. The resulting fair value was allocated between deferred compensation and the purchase price based upon the intrinsic value and the remaining vesting period in accordance with FIN 44,Accounting for Certain Transactions Involving Stock Compensation.

The financial information in the table below summarizes the combined results of operations of the Company and LEADS.com on a pro forma basis, as though the merger had occurred at the beginning of the six month period set forth below. 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 six month period set forth below.

	Six Months Ended June 30, 2005
Revenue	$	18,162
Net loss attributable to common stockholders		(1,345	)
Basic and diluted net loss attributable per common share		(0.26	)

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3. Net Income (Loss) Attributable Per Common Share

Basic net income (loss) 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 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 (loss) attributable per common share for the three and six months ended June 30, 2006 and 2005 (in thousands except per share amounts):

	Three Months Ended June 30,					Six Months Ended June 30,
	2006		2005			2006		2005
Net income (loss) attributable to common stockholders	$	1,357	$	(452	)	$	2,378	$	(516	)
Weighted average outstanding shares of common stock		16,613		4,714			16,570		3,758
Dilutive effect of stock options		2,469		0			2,503		0
Dilutive effect of warrants		250		0			266		0
Common stock and common stock equivalents		19,332		4,714			19,339		3,758
Net income (loss) attributable per common share:
Basic	$	0.08	$	(0.10	)	$	0.14	$	(0.14	)
Diluted	$	0.07	$	(0.10	)	$	0.12	$	(0.14	)

Due to the anti-dilutive nature of the Company’s stock options and warrants, for the three and six months ended June 30, 2005, 2,447,366 and 2,461,812, respectively and for three and six months ended June 30, 2006, 201,978 and 32,039, respectively, dilutive securities have been excluded from the calculation of the weighted average shares for diluted net loss attributable per common share.

4. Stock Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment. Previously, the Company expensed share-based payments as permitted under SFAS No. 123, Accounting for Stock-Based Compensation. Since the Company previously adopted the expense recognition provisions of SFAS No. 123 and the Company’s options vest on a monthly basis, the adoption of SFAS No. 123(R) had no material impact on its financial statements. The Company has elected to use the with or without methodology for recognition of income taxes related to stock compensation.

Compensation costs related to the Company’s share-based plans were $807 thousand and $194 thousand for the first six months of 2006 and 2005, respectively, and $412 thousand and $152 thousand for the three months ended June 30, 2006 and 2005, respectively. Compensation expense is generally recognized on a straight-line basis over the vesting period of grants. As of June 30, 2006, the Company had $4.2 million of unrecognized compensation costs related to share-based payments, which the Company expects to recognize through March 2010.

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Stock Option Plans

The Company’s Board of Directors adopted, and its stockholders approved, the 2005 Equity Incentive Plan that became effective November 2005. As of June 30, 2006, the Company had reserved 1,789,963 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 three or four years, are contingent upon continued employment, and generally expire ten years from the grant date. As of June 30, 2006, 1,568,929 shares were reserved for future issuance under the plan.

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 non-statutory stock options to purchase shares of common stock to non-employee directors. The aggregate number of shares of common stock that was authorized pursuant to options granted under this plan is 610,000 shares. Of the total reserved as of June 30, 2006, options to purchase a total of 310,000 shares of the Company’s common stock were held by participants under the plan, no options have been exercised and 300,000 shares of common stock were currently available for future issuance.

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 491,274 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 June 30, 2006, no shares have been issued under the ESPP.

The Board of Directors 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 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.

	Six months ended June 30,
	2006		2005
Risk-free interest rate	4.27-5.01	%	3.86-4.26	%
Dividend yield	0	%	0	%
Expected life (in years)	5		5-7
Volatility	66-70	%	0-83	%

Changes in options outstanding for the six months ended June 30, 2006 were as follows:

	Shares Covered by Options		Exercise Price per Share		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value ($000)
Balance, December 31, 2005	4,074,790		$	0.50 to 10.65	$	3.95
Granted	410,000			10.38 to 14.05		11.25
Exercised	(107,119	)		0.50 to 10.01		1.43
Canceled and expired	(151,268	)		2.00 to 14.05		9.74
Balance, June 30, 2006	4,226,403			0.50 to 14.05		4.53	7.7	$	24,794
Exercisable at June 30, 2006	2,872,996			0.50 to 14.05		2.42	7.0		22,648

The intrinsic value of options exercised during the six months ended June 30, 2006 and 2005, was $1.1 million and $1 thousand, respectively.

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The following activity occurred under the Company’s equity incentive plans during the six months ended June 30, 2006:

Unvested Shares	Shares		Weighted Average Grant –Date Fair Value
Unvested at January 1, 2006	1,448,694		$	2.25
Granted	410,000			6.86
Vested	(360,398	)		2.44
Forfeited	(144,889	)		6.07
Unvested at June 30, 2006	1,353,407			3.19

5. Related Party Transactions

An investment fund affiliated with a law firm that provides legal services to the Company is a shareholder of the Company. The law firm received $246 thousand and $343 thousand for professional services provided to the Company during the six months ended June 30, 2006 and 2005, respectively. The Company had a payable of $83 thousand and $134 thousand to this law firm at June 30, 2006 and December 31, 2005, respectively.

Two of the Company’s directors are affiliated with certain of the Company’s major stockholders and share voting and investment power with respect to the shares owned by these entities.

A company affiliated with one of our Company’s directors, who is also an executive officer, exercised its common warrants on May 23, 2006 at an exercise price of $0.05, at a deemed fair market value of $11.77 per share calculated according to the term of the warrant, resulting in 71,124 common shares being issued.

6. Subsequent Event

On August 2, 2006, the Company completed its secondary offering in which it sold 200,000 common shares at a price to the public of $9.25 per share. The net proceeds of the offering to the Company were approximately $1.3 million after deducting underwriting discounts and other costs.

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

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.

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, 2005, contained in our Annual Report on Form 10-K for the year ended December 31, 2005 filed with the Securities and Exchange Commission, or SEC, on March 8, 2006.

Overview

We believe we are a leading provider, based on our number of subscribers, of Web services and 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 packages that include Website design and publishing, Internet marketing and advertising, search engine optimization, search engine submission, and lead generation. 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 more sophisticated Internet marketing services.

Since our incorporation in 1999, we have developed proprietary Internet publishing and management software, automated workflow processes, and specialized workforce development and management techniques that facilitate production efficiencies that we believe enable us to offer sophisticated Web services at affordable rates. Our revenue has increased from $16.4 million in the six months ended June 30, 2005 to $23.7 million in the six months ended June 30, 2006.

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We primarily sell our Web services and products to customers identified 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 and IBM. As an application service provider, we offer our customers a full range of Web services and products on an affordable subscription basis. As of June 30, 2006, we had approximately 58,000 subscribers to our eWorks! XL, SmartClicks and premium subscription-based services, an increase from approximately 47,000 subscribers to these services at June 30, 2005.

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 offering 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. Alternatively, 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 plans. 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. Decreased monthly turnover signals increased 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 54% and 63% of our revenue in the six months ended June 30, 2006 and June 30, 2005, respectively and 56% and 62% of our revenue in the three months ended June 30, 2006 and June 30, 2005, respectively.

Subscription Revenue

We currently derive a substantial majority of our revenue from fees associated with our subscription services, which are generally sold through our eWorks! XL, SmartClicks or Visibility Online 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

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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 six months ended June 30, 2006 subscription revenue accounted for approximately 87% of our total revenue as compared to 86% for the six months ended June 30, 2005. For the three months ended June 30, 2006 and 2005, subscription revenue accounted for approximately 89% of our total revenue. Primarily the number of paying subscribers to our Web services 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 receive professional services revenue from custom Website design. Our custom Website design work is typically billed on a fixed price basis and over very short periods.

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 a strategic marketing relationship 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

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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 products. Our technology architecture enables us to provide all of our customers with a service based on a single version of our application. 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 as we 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 as we continue to add personnel to support the growth of our business. We anticipate that we will also incur additional employee salaries and related expenses, professional service fees, and insurance costs necessary to meet the regulatory requirements of being a public company.

Depreciation and Amortization Expense

Depreciation and amortization relate primarily to our computer equipment and software and other intangible assets recorded in purchase accounting for 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 2005 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

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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 designs. 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 upon 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 couldn’t 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. Since we previously adopted the expense recognition provisions of SFAS No.123 and options vest on a monthly basis, 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.

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Comparison of the Results for the Three Months Ended June 30, 2006 to the Results for the Three Months ended June 30, 2005

Revenue

	Three Months Ended June 30,
	2006		2005
	(unaudited)
Revenue:
Subscription	$	10,650	$	8,107
License		884		701
Professional services		503		319
Total revenue	$	12,037	$	9,127

Total revenue for the three months ended June 30, 2006 increased $2.9 million, or 32%, over the three months ended June 30, 2005.

Subscription Revenue. For the three months ended June 30, 2006 subscription revenue increased $2.5 million, or 31%, over the three months ended June 30, 2005. An increase of $1.6 million was attributable to a 24% increase in subscribers and an increase of $97 thousand was due to an increase of 1% in average monthly revenue per customer. Approximately $819 thousand of the increase in subscription revenue was attributable to LEADS.com. Approximately $11 thousand of the increase in the subscription revenue was generated from customer relationships attributable to EBOZ.

Monthly turnover decreased to 5.6% in the three months ended June 30, 2006 from 6.4% in the three months ended June 30, 2005, which also had a positive impact on our total subscriber base and our net subscriber additions. We believe that this improvement in monthly turnover was the result of better customer service and the increased effectiveness and breadth of our services. Monthly turnover excludes LEADS.com and EBOZ customer turnover.

License Revenue. For the three months ended June 30, 2006 license revenue increased $183 thousand, or 26%, over the three months ended June 30, 2005. The increase was due to continued strong sales from the release of Fusion 9.0 in November 2005.

Professional Services Revenue. For the three months ended June 30, 2006 professional services increased $184 thousand, or 58%, over the three months ended June 30, 2005. This increase was primarily due to revenue growth of $158 thousand during the three months ended June 30, 2006 from existing strategic marketing relationships. Additionally, the remaining increase was primarily due to the implementation of a custom Website development program with two additional strategic marketing relationships that generated $26 thousand in additional professional services revenue in the three months ended June 30, 2006.

Cost of Revenue

	Three months Ended June 30,
	2006		2005
	(unaudited)
Cost of revenue
Subscription	$	4,669	$	3,785
License		191		172
Professional services		330		299
Total cost of revenue	$	5,190	$	4,256

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Cost of Subscription Revenue. For the three months ended June 30, 2006, cost of subscription revenue increased $884 thousand, or 23%, from the three months ended June 30, 2005. The increase in costs was primarily the result of the growth in the number of subscribers to our eWorks! XL, SmartClicks and premium subscription-based services from the three months ended June 30, 2005 compared to the three months ended June 30, 2006. This subscriber growth resulted in an increase of $137 thousand, the absolute amount of marketing fees that we pay to companies with which we have strategic marketing relationships. Additionally, the growth in our subscriber base resulted in an increase of $337 thousand in payroll related costs, billing costs and servicing expenses. Offsetting the increase, internet marketing costs were reduced by $154 thousand from the expiration of a contractual agreement. In addition, during the three months ended June 30, 2006, cost of subscription revenue increased by $499 thousand related to subscription revenue generated from our LEADS.com subsidiary acquired on April 22, 2005. An additional $24 thousand of cost of subscription revenue was related to subscription revenue generated from customer relationships acquired through our EBOZ acquisition on April 19, 2005. Although our cost of subscription revenue increased from 2005 to 2006, the gross margin on subscription revenue increased from 53% during the three months ended June 30, 2005 to 56% during the three months ended June 30, 2006.

Cost of License Revenue. For the three months ended June 30, 2006 cost of license revenue increased $19 thousand, or 11%, from the three months ended June 30, 2005. The increase was primarily due to an increase in manufacturing costs and in marketing fees and services.

Cost of Professional Services Revenue. For the three months ended June 30, 2006 cost of professional services revenue increased $31 thousand, or 10%, from the three months ended June 30, 2005. The increase resulted primarily from the addition of personnel to professional services during 2005 and 2006 to improve our capabilities and drive revenue growth in this area..

Operating Expenses

	Three months Ended June 30,
	2006		2005
	(unaudited)
Operating expenses:
Sales and marketing	$	2,971	$	2,457
Research and development		441		429
General and administrative		2,373		1,678
Depreciation and amortization		331		455
Total operating expenses	$	6,116	$	5,019

Sales and Marketing Expenses. Sales and marketing expenses increased 21% from $2.5 million, or 27% of total revenue, during the three months ended June 30, 2005 to $3.0 million, or 25% of total revenue, during the three months ended June 30, 2006. The increase was primarily due to increases of $318 thousand in employee compensation costs and $40 thousand in corporate insurance cost offset by a decrease of $20 thousand in bad debt expense. In addition, an increase of $174 thousand and a decrease of $7 thousand in sales and marketing expense were attributable to the addition of sales and marketing resources in connection with LEADS.com and EBOZ, respectively.

Research and Development Expenses. Research and development expenses increased 3% from $429 thousand, or 5% of total revenue, during the three months ended June 30, 2005 to $441 thousand, or 4% of total revenue, during the three months ended June 30, 2006. The increase was primarily due to stock based compensation.

General and Administrative Expenses. General and administrative expenses increased 41% from $1.7 million, or 18% of total revenue, during the three months ended June 30, 2005 to $2.4 million, or 20% of total revenue, during the three months ended June 30, 2006. The increase was primarily comprised of employee compensation costs of $281 thousand, franchise taxes of $37 thousand, professional and outside services costs of $23 thousand and filing fees and investor relation costs of $89 thousand. New stock options granted increased stock compensation expense by $226 thousand. Additional resource and facility costs associated with LEADS.com and EBOZ resulted in an increase of $86 thousand during the three months ended June 30, 2006.

Depreciation and Amortization Expense. Depreciation and amortization expense decreased 27% from $455 thousand, or 5% of total revenue, during the three months ended June 30, 2005 to $331 thousand or 3% of total revenue, during the three months ended June 30, 2006. The decrease was due to the complete amortization of LEADS.com customer relationships during the three months ended March 31, 2006 offset by depreciation related to new purchases.

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Interest income. Interest income increased $590 thousand from $36 thousand, or 0% of total revenue, during the three months ended June 30, 2005 to $626 thousand or 5% of total revenue, during the three months ended June 30, 2006. The increase was due to the net proceeds of our initial public offering, $41.6 million, all of which were invested in money market funds as of June 30, 2006.

Comparison of the Results for the Six Months Ended June 30, 2006 to the Results for the Six Months ended June 30, 2005

Revenue

	Six Months Ended June 30,
	2006		2005
	(unaudited)
Revenue:
Subscription	$	20,609	$	14,150
License		2,089		1,673
Professional services		952		622
Total revenue	$	23,650	$	16,445

Total revenue for the six months ended June 30, 2006 increased $7.2 million, or 44%, over the six months ended June 30, 2005.

Subscription Revenue. For the six months ended June 30, 2006 subscription revenue increased $6.5 million, or 46%, over the six months ended June 30, 2005. An increase of $3.2 million was attributable to a 24% increase in subscribers and an increase of $252 thousand was due to an increase of 2% in average monthly revenue per customer. Approximately $2.8 million of the increase in subscription revenue was attributable to LEADS.com. Approximately $200 thousand of the increase in the subscription revenue was generated from customer relationships attributable to the assets from EBOZ.

The average monthly turnover for the last two quarters decreased from 6.2% in the six months ended June 30, 2005 to 5.6% in the six months ended June 30, 2006 which also had a positive impact on our total subscriber base and our net subscriber additions. We believe that this improvement in monthly turnover was the result of better customer service and the increased effectiveness and breadth of our services. Monthly turnover excludes LEADS.com and EBOZ customer turnover.

License Revenue. For the six months ended June 30, 2006 license revenue increased $416 thousand, or 25%, over the six months ended June 30, 2005. The increase was due to continued strong sales from the release of Fusion 9.0 in November 2005.

Professional Services Revenue. For the six months ended June 30, 2006 professional services increased $330 thousand, or 53%, over the six months ended June 30, 2005. This increase was primarily due to revenue growth of $274 thousand during the six months ended June 30, 2006 from existing strategic marketing relationships. Additionally, the remaining increase was primarily due to the implementation of a custom Website development program with two additional strategic marketing relationships that generated $56 thousand in additional professional services revenue in the six months ended June 30, 2006.

Cost of Revenue

	Six Months Ended June 30,
	2006		2005
	(unaudited)
Cost of revenue
Subscription	$	9,087	$	6,708
License		482		369
Professional services		710		515
Total cost of revenue	$	10,279	$	7,592

Cost of Subscription Revenue. For the six months ended June 30, 2006, cost of subscription revenue increased $2.4 million, or 35%, from the six months ended June 30, 2005. The increase in costs was primarily the result of the growth in the number of subscribers to our eWorks! XL, SmartClicks and premium subscription-based services from the six months ended June 30, 2005 compared to the six months ended June 30, 2006. This subscriber growth resulted in an increase of $300 thousand, the

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absolute amount of marketing fees that we pay to companies with which we have strategic marketing relationships. Additionally, the growth in our subscriber base resulted in an increase of $533 thousand in operating expenses associated with payroll related costs, billing costs and servicing expenses. Offsetting the increase, marketing expenses were reduced by $310 thousand from the expiration of a contractual agreement. In addition, during the six months ended June 30, 2006, cost of subscription revenue increased by $1.6 million related to subscription revenue generated from our LEADS.com subsidiary acquired on April 22, 2005. An additional $144 thousand of cost of subscription revenue was related to subscription revenue generated from customer relationships acquired through our EBOZ acquisition on April 19, 2005. Although our cost of subscription revenue increased from 2005 to 2006, the gross margin on subscription revenue increased from 53% during the six months ended June 30, 2005 to 56% during the six months ended June 30, 2006.

Cost of License Revenue. For the six months ended June 30, 2006 cost of license revenue increased $113 thousand, or 31%, from the six months ended June 30, 2005. The increase was primarily due to an increase in manufacturing costs and marketing fees and services.

Cost of Professional Services Revenue. For the six months ended June 30, 2006 cost of professional services revenue increased $195 thousand, or 38%, from the six months ended June 30, 2005. The increase resulted primarily from the addition of personnel to professional services during 2005 to improve our capabilities and drive revenue growth in this area. Compensation related expenses and independent contractor costs increased approximately $156 thousand in the six months ended June 30, 2006 from the six months ended June 30, 2005. Additional expense of $43 thousand was recorded in the six months ended June 30, 2006 for marketing fee expense associated with strategic marketing relationships that was offset by a decrease in overhead costs of $16 thousand.

Operating Expenses

	Six Months Ended June 30,
	2006		2005
	(unaudited)
Operating expenses:
Sales and marketing	$	5,810	$	4,441
Research and development		989		791
General and administrative		4,668		2,965
Depreciation and amortization		703		554
Total operating expenses	$	12,170	$	8,751

Sales and Marketing Expenses. Sales and marketing expenses increased 31% from $4.4 million, or 27% of total revenue, during the six months ended June 30, 2005 to $5.8 million, or 25% of total revenue, during the six months ended June 30, 2006. The increase was primarily due to increases of $618 thousand in employee compensation costs and $75 thousand in corporate insurance cost offset by a decrease of $52 thousand in bad debt expense caused by a reserve reversal. New stock options granted increased stock compensation expense by $70 thousand. In addition, increases of $636 thousand and $4 thousand in sales and marketing expense were attributable to the addition of sales and marketing resources in connection with LEADS.com and EBOZ, respectively.

Research and Development Expenses. Research and development expenses increased 25% from $791 thousand, or 5% of total revenue, during the six months ended June 30, 2005 to $989 thousand, or 4% of total revenue, during the six months ended June 30, 2006. The increase of $198 thousand included $134 thousand associated with research and development resources associated with LEADS.com and EBOZ. New stock options granted increased stock compensation expense by $55 thousand.

General and Administrative Expenses. General and administrative expenses increased 57% from $3.0 million, or 18% of total revenue, during the six months ended June 30, 2005 to $4.7 million, or 20% of total revenue, during the six months ended June 30, 2006. The increase was primarily comprised of employee compensation costs of $727 thousand, franchise taxes of $81 thousand and travel expense of $32 thousand offset by decreases in professional and outside services costs of $54 thousand. New stock options granted increased stock compensation expense by $459 thousand. Additional resource and facility costs associated with LEADS.com and EBOZ resulted in an increase of $528 thousand during the six months ended June 30, 2006.

Depreciation and Amortization Expense. Depreciation and amortization expense increased 27% from $554 thousand, or 3% of total revenue, during the six months ended June 30, 2005 to $703 thousand, or 3% of total revenue, during the six months ended June 30, 2006. The increase was due to additional depreciation and amortization expense related to the LEADS.com and EBOZ acquisitions.

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Interest income.Interest income increased $1.1 million from $62 thousand, or 0% of total revenue, during the six months ended June 30, 2005 to $1.2 million or 5% of total revenue, during the six months ended June 30, 2006. The increase was due to the net proceeds of our initial public offering, $41.6 million, all of which were invested in money market funds as of June 30, 2006.

Liquidity and Capital Resources

As of June 30, 2006, we had $57.0 million of cash and cash equivalents and $54.2 million in working capital, as compared to $55.7 million of cash and cash equivalents and $51.5 million if working capital as of December 31, 2005.

Net cash provided by operating activities for the six months ended June 30, 2006 increased $2.1 million from the first six months of 2005 to $2.9 million, due to net income of $2.4 million and non-cash add-backs of $703 thousand and $807 thousand for depreciation and amortization and stock-based compensation, respectively. Offsetting the positive non-cash items were changes in operating assets and liabilities including increases in accounts receivable of $147 thousand and prepaid expenses and other assets of $98 thousand partially offset by a decrease in inventory of $18 thousand, which collectively decreased cash provided by operations by $227 thousand. Accounts payable and accrued expenses and other liabilities decreased by $754 thousand and deferred revenue increased by $27 thousand, further increasing cash provided by operations by $727 thousand.

Net cash used in investing activities for the six months ended June 30, 2006 was $922 thousand as compared to net cash provided by investing activities of $216 thousand for the six months ended June 30, 2005. In 2006 our investing activities consisted of purchases of fixed assets, upgraded telecom infrastructure, computer equipment for employees and furniture for our expanded offices.

Net cash (used in) provided by financing activities was ($756) thousand and $1.9 million for the six months ended June 30, 2006 and 2005, respectively. Our financing activities during 2006 consisted of payments of stock issuance costs and debt totaling $909 thousand as well as proceeds from stock option exercises of $153 thousand. Our financing activities during 2005 included $3.0 million from the issuance of convertible redeemable preferred stock and stock issuance costs of $1.1 million.

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. On November 7, 2005, we completed our initial public offering with net proceeds of approximately $41.6 million after deducting underwriting discounts and other costs. On August 2, 2006, we also completed a secondary offering with net proceeds of approximately $1.3 million after deducting underwriting discounts and other costs.

As of June 30, 2005 and 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.

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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. 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 3% and 5% of our total revenue in the three months ended June 30, 2005 and June 30, 2006 and 5% and 7% of our total revenue in the six months ended June 30, 2005 and 2006, respectively. Sales in Germany represented approximately 82% and 73% of our international revenue in the three and six months ended June 30, 2005 and 2006, respectively.

Interest Rate Sensitivity

We had unrestricted cash, cash equivalents and short-term marketable securities totaling $55.7 million and $57.0 million at December 31, 2005, and June 30, 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 June 30, 2006, 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 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 and Form 10-Q and to ensure that information required to be disclosed in this Quarterly Report on Form 10-Q is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding timely disclosures.

Changes in internal controls.

There were no changes in our internal controls over financial reporting during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on the effectiveness of controls.

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. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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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 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 93% of our new customers in the year ended December 31, 2005, and approximately 92% in the six months ended June 30, 2006, were identified through our 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 Financial Services, Inc., or Discover, is particularly important to us and accounted for approximately 73% and 68% of our new customers in the year ended December 31, 2005 and in the six months ended June 30, 2006, respectively. Customers attributable to our relationship with Discover represented approximately 57% of our total revenue during the year ended December 31, 2005, and approximately 54% in the six months ended June 30, 2006. 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 2006, and we cannot assure you that the agreement will be extended or renewed. We therefore cannot assure you 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, 2004 and 2005, 56% 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 six months ended June 30, 2006 and 2005, respectively, 31% and 35%, respectively, of our subscribers who were customers at the beginning of the respective period were no longer subscribers at the end of the period. 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

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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.

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 LEADS.com and EBOZ acquisitions in April 2005. Integrating these recently acquired businesses and any businesses 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 LEADS.com, EBOZ, or any future acquisitions could potentially harm our business.

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

Although we generated net income for the six months ended June 30, 2006 and the year ended December 31, 2005 and 2004, we have not historically been profitable and may not be profitable in future periods. As of June 30, 2006, we had an accumulated deficit of approximately $65 million. We expect that our expenses relating to the sale and marketing of our Web services, to technology improvements and to 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.

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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;

• 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. You should not rely on the results of one quarter 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.

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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.

Primarily our own employees have developed the software and workflow processes that underlie our ability to deliver our Web services and products. 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 than we do, 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

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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.

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 acquisitions in 2005 of LEADS.com and assets from EBOZ, we have recorded $10.7 million of goodwill. Any future impairment of this goodwill, and the ongoing amortization of other intangible assets, could adversely affect our reported financial results.

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 391 full time employees as of June 30, 2005, 405 full time employees as of December 31, 2005, to 458 full time employees as of June 30, 2006. 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.

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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 we own 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.

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 who 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 up to three months before they achieve full productivity. 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.

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 new 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, 2006, which is the first time these new requirements will apply to us, 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 National Market, either of which would harm our stock price.

We cannot assure you what the market price of our common stock will be or that a public market for our common stock will be sustained.

Our common stock has only recently become publicly traded, and we cannot assure you that a public market for our common stock will be sustained. We cannot predict the extent to which investor interest will lead to the development of an active and liquid trading market.

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Our stock price may be volatile, and you may lose some or all of your investment.

The trading price of our common stock has fluctuated and may in the future be subject to wide fluctuations. Factors affecting the trading price of our common stock may include, among other things:

• variations in our operating results;

• announcements of technological innovations, new services or service enhancements or significant agreements by us or by our competitors;

• recruitment or departure of key personnel;

• changes in the estimates of our operating results or changes in recommendations by any securities analysts that elect to follow our common stock;

• sales of our common stock, including sales by officers, directors and funds affiliated with them; and

• market conditions in our industry, the industries of our customers and the economy as a whole.

In addition, our common stock is listed on the NASDAQ National Market. There are continuing eligibility requirements for companies listed on the NASDAQ National Market. If we are not able to continue to satisfy the eligibility requirements of the NASDAQ National Market, then our stock may be delisted. This could result in a lower price of our common stock and may limit the ability of our stockholders to sell our stock, any of which could result in your losing some or all of your investment.

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, including shares of common stock sold in this offering. 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.

There may be an adverse effect on the market price of our stock as a result of shares being available for sale in the future.

As of August 2, 2006, we had 16,893,376 shares of common stock outstanding. Of these shares, 12,749,476 shares were freely tradable and 4,143,900 shares were subject to volume restrictions pursuant to Rule 144 under Securities Act of 1933, as amended, of which 3,273,009 shares are not eligible for sale until October 31, 2006 following the expiration of lock-up agreements entered into in connection with our recent secondary offering. Moreover, the holders of 1,851,623 shares of common stock and the holder of outstanding warrants to purchase 281,347 shares of common stock have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file ourselves or for other stockholders. We also have registered up to 6,663,838 shares of our common stock that are subject to outstanding stock options or reserved for issuance under our equity incentive plans, and these shares can be freely sold in the public market upon issuance if not otherwise subject to lock up or other restrictions. If any of these stockholders cause a large number of securities to be sold in the public market, or the market perceives that these holders intend to sell a large number of securities, the sales or perceived sales could result in a substantial reduction in the trading price of our common stock or impede our ability to raise future capital.

Our principal stockholders have significant voting power and may take actions that may not be in the best interests of our other stockholders.

As of June 30, 2006, our executive officers, directors, and principal stockholders, in the aggregate, beneficially own approximately 47.2% of our outstanding common stock. As a result, these stockholders, acting together, have the ability to exert substantial influence over all matters requiring approval of our stockholders, including the election and removal of directors and the approval of mergers or other business combinations. This concentration of control could be disadvantageous to other stockholders whose interests are different from those of our officers, directors, and principal stockholders.

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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.

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

On November 1, 2005, our registration statement on Form S-1 (Registration No. 333-124349), registering the sale of 4,800,000 shares of our common stock, $0.001 par value, for sale by us and 2,000,000 shares of our common stock, $0.001 par value, for sale by selling stockholders, was declared effective by the Securities and Exchange Commission and we commenced our initial public offering on that date. Friedman, Billings, Ramsey & Co., Piper Jaffray & Co and RBC Capital Markets Corporation acted as the managing underwriters for the offering. On November 7, 2005, we completed the offering at $10.00 per share. The aggregate proceeds, before expenses, were $44.6 million and we incurred $3.0 million in expenses, resulting in net proceeds from the offering of $41.6 million. None of the proceeds have been used and are reported at June 30, 2006 as cash and cash equivalents. None of our directors, officers and affiliates or persons owning 10% or more of any class of our securities received direct or indirect payments in connection with our payment of the offering-related expenses.

We expect to use the net proceeds for working capital and general corporate purposes. We may also use a portion of the net proceeds to acquire businesses, services, products, or technologies complementary to our current business, although we have no specific acquisitions planned. We cannot specify with certainty all of the particular uses for the net proceeds from our initial public offering. The amounts we actually expend for these purposes many vary significantly and will depend on a number of factors including the growth of our revenue, the type of efforts we make to refine our core technology and enhance our services and competitive developments. Accordingly, our management will retain broad discretion in the allocation of the net proceeds. Pending their use the net proceeds will be invested in short-term, interest bearing, investment-grade securities.

Item 3. Defaults Upon Senior Securities

Not applicable

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

We held our Annual Meeting of Stockholders on May 9, 2006. The following is a brief description of each matter voted upon at the meeting and the number of votes cast for, withheld, or against, the number of abstentions and the number of broker non-votes with respect to each matter:

1. The election of the following two directors to hold office until the 2009 Annual Meeting of Stockholders or until their successors are duly elected and have qualified:

Director Name	Shares Voted For	Voting Authority Withheld
Hugh Durden	13,770,553	11,400
G. Harry Durity	13,768,653	13,300

2. The ratification of the selection of Ernst & Young LLP, as our independent registered public accounting firm for the fiscal year ending December 31, 2006:

Shares Voted			Broker Non-Votes
For	Against	Abstaining
13,781,953	0	0	0

Item 5. Other Information

Not applicable

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Item 6. Exhibits.

Exhibit No.	Description
3.1	Amended and Restated Certificate of Incorporation of Website Pros, Inc.(1)
3.2	Amended and Restated Bylaws of Website Pros, Inc.(1)
4.1	Reference is made to Exhibits 3.1 and 3.2
4.2	Specimen Stock Certificate.(1)
4.3	Investors’ Rights Agreement dated December 10, 2003, as amended by the Omnibus Amendment Agreement dated February 14, 2005.(1)
4.4	Warrant dated December 10, 2003, exercisable for 208,405 shares of common stock.(1)
4.5	Warrant dated April 27, 2004, exercisable for 72,942 shares of common stock.(1)
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).

* 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.

(1) Previously filed with the SEC as an Exhibit to and incorporated herein by reference from Website Pros, Inc.’s registration statement on Form S-1, filed with the SEC on April 27, 2005, as amended, File No. 333-124349.

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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)
August 8, 2006	/s/ Kevin M. Carney
Date	Kevin M. Carney
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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INDEXOF EXHIBITS

Exhibit No.	Description
3.1	Amended and Restated Certificate of Incorporation of Website Pros, Inc.(1)
3.2	Amended and Restated Bylaws of Website Pros, Inc.(1)
4.1	Reference is made to Exhibits 3.1 and 3.2
4.2	Specimen Stock Certificate (1)
4.3	Investors’ Rights Agreement dated December 10, 2003, as amended by the Omnibus Amendment Agreement dated February 14, 2005.(1)
4.4	Warrant dated December 10, 2003, exercisable for 208,405 shares of common stock.(1)
4.5	Warrant dated April 27, 2004, exercisable for 72,942 shares of common stock.(1)
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).

* 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.

(1) Previously filed with the SEC as an Exhibit to and incorporated herein by reference from Website Pros, Inc.’s registration statement on Form S-1, filed with the SEC on April 27, 2005, as amended, File No. 333-124349.

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