- Quarterly Report (10-Q)

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 September 30, 2010

OR

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

	For the transition period from to

Commission file number 001-33797

INTERNET BRANDS, INC.

(Exact name of Registrant as specified in its charter)

Delaware		95-4711621
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)

909 N. Sepulveda Blvd., 11 th Floor

El Segundo, California 90245

(Address of principal executive offices)

(310) 280-4000

(Registrant’s telephone number, including area code)

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.

Yes x No 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

Yes  No 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.

Yes o No x

The number of shares outstanding of the Registrant’s Class A common stock and Class B common stock as of October 31, 2010 was 43,371,442 and 3,025,000 respectively.

TABLE OF CONTENTS

	Page
PART I — FINANCIAL INFORMATION

Item 1. Financial Statements:

Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009	1

Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009 (unaudited)	2

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (unaudited)	3

Notes to Consolidated Financial Statements (unaudited)	4

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3. Quantitative and Qualitative Disclosures About Market Risk	27

Item 4. Controls and Procedures	27

PART II — OTHER INFORMATION

Item 1. Legal Proceedings	28

Item 1A. Risk Factors	28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29

Item 3. Default Upon Senior Securities	29
Item 4. Submission of Matters to a Vote of Security Holders	29

Item 5. Other Information	29
Item 6. Exhibits	29

Signatures	30
Exhibit Index

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INTERNET BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)

	September 30,			December 31,
	2010			2009
	Unaudited
ASSETS

Current assets
Cash and cash equivalents	$	43,591		$	38,408
Investments, available for sale		16,615			21,736
Accounts receivable, less allowances for doubtful accounts of $514
and $618 at September 30, 2010 and December 31, 2009, respectively		15,511			15,416
Deferred income taxes		11,732			16,184
Prepaid expenses and other current assets		1,655			1,212
Total current assets		89,104			92,956

Property and equipment, net		18,483			15,125
Goodwill		247,438			223,925
Intangible assets, net		16,069			20,080
Deferred income taxes		37,350			39,255
Other assets		594			602

Total assets	$	409,038		$	391,943

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Accounts payable and accrued expenses	$	15,028		$	13,957
Deferred revenue		5,295			6,414
Total current liabilities		20,323			20,371

Other liabilities		144			258

Stockholders’ equity

Common stock, Class A, $.001 par value; 125,000,000 shares
authorized and 43,293,067 and 42,095,325 issued and outstanding
at September 30, 2010 and December 31, 2009		43			42

Common stock, Class B, $.001 par value; 6,050,000 authorized
and 3,025,000 shares issued and outstanding at September 30, 2010
and December 31, 2009		3			3

Additional paid-in capital		620,848			612,528
Accumulated deficit		(231,107	)		(241,806	)
Accumulated other comprehensive (loss) income		(1,216	)		547
Total stockholders’ equity		388,571			371,314

Total liabilities and stockholders’ equity	$	409,038		$	391,943

See accompanying notes to unaudited consolidated financial statements.

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INTERNET BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share amounts)


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2010		2009			2010		2009
Revenues
Consumer Internet	$	20,453	$	16,648		$	56,910	$	48,624
Licensing		8,615		8,674			26,608		23,454
Total revenues		29,068		25,322			83,518		72,078

Costs and operating expenses
Cost of revenues		5,128		4,470			15,233		13,659
Sales and marketing		5,634		4,675			16,049		14,012
Technology		2,812		2,660			7,688		7,066
General and administrative		4,708		3,697			14,103		11,464
Depreciation and amortization		4,377		4,194			13,157		12,020
Transaction costs		2,207		-			2,207		-
Total costs and operating expenses		24,866		19,696			68,437		58,221

Income from operations		4,202		5,626			15,081		13,857
Investment and other (expense) income		1,311		(8	)		3,299		(85	)
Income before income taxes		5,513		5,618			18,380		13,772
Provision for income taxes		2,455		2,323			7,681		5,669
Net income	$	3,058	$	3,295		$	10,699	$	8,103

Basic net income per share - Class A	$	0.07	$	0.08		$	0.24	$	0.19
Diluted net income per share - Class A	$	0.06	$	0.07		$	0.22	$	0.18

Basic net income per share - Class B	$	0.07	$	0.08		$	0.24	$	0.19
Diluted net income per share - Class B	$	0.06	$	0.07		$	0.22	$	0.18

Class A weighted average number of shares - Basic		41,742,237		40,598,449			41,472,500		40,409,920
Class A weighted average number of shares - Diluted		48,346,678		46,498,811			47,881,373		45,846,679

Class B weighted average number of shares - Basic		3,025,000		3,025,000			3,025,000		3,025,000

Stock-based compensation expense by function
Sales and marketing	$	210	$	108		$	572	$	301
Technology		135		50			343		144
General and administrative		1,149		716			3,118		1,973

See accompanying notes to unaudited consolidated financial statements.

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INTERNET BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)

	Nine Months Ended
	September 30,
	2010	2009
Cash flows from operating activities
Net income	$ 10,699	$ 8,103
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	13,157	12,020
Provision for bad debt reserve	235	40
Stock-based compensation	4,033	2,418
Deferred income taxes	6,566	4,931
Realized gain on sale of investments	(624)	(30)
(Gain)/loss on disposal of fixed assets	(23)	26
Amortization of premium/(discount) on investments	152	(117)
Changes in operating assets and liabilities, net of the effect of acquisitions:
Accounts receivable	(748)	3,270
Prepaid expenses and other current assets	(385)	358
Other assets	139	289
Liabilities associated with stock guarantees	(531)	-
Accounts payable and accrued expenses	1,505	(2,533)
Deferred revenue	(1,343)	(1,685)
Net cash provided by operating activities	32,832	27,090

Cash flows from investing activities
Purchases of property and equipment	(1,632)	(1,549)
Capitalized internal use software costs	(8,103)	(5,473)
Sales of property and equipment	75	-
Purchases of investments	(20,033)	(32,872)
Proceeds from sales and maturities of investments	25,563	28,050
Acquisitions, net of cash acquired and earnouts	(22,345)	(15,265)
Net cash used in investing activities	(26,475)	(27,109)

Cash flows from financing activities
Net proceeds from issuance of common stock and exercise of stock options	525	222
Payment of capital lease obligations	(103)	(13)
Net cash provided by financing activities	422	209
Effect of exchange rate changes on cash and cash equivalents	(1,596)	678
Net increase in cash and cash equivalents	5,183	868

Cash and cash equivalents
Beginning of period	38,408	43,648
End of period	43,591	44,516

Supplemental schedule of non-cash consolidated cash flow information:
Tax payments	$ 707	$ 2,775

See accompanying notes to unaudited consolidated financial statements.

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INTERNET BRANDS, INC.

NOTES TO UNAUDITED CONSOLI DATED FINANCIAL STATEMENTS

NOTE 1. PLANNED MERGER WITH AN AFFILIATE OF HELLMAN & FRIEDMAN

On September 17, 2010, Internet Brands, Inc. ("the Company") entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Micro Holding Corp., a Delaware corporation (“Parent”), and Micro Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Micro Holding Corp. (“Merger Sub”). Parent and Merger Sub were formed by Hellman & Friedman Capital Partners VI, L.P. (“Hellman & Friedman”). Under the terms of the Merger Agreement, Merger Sub will be merged with and into the Company, which we refer to as the “merger,” with the Company continuing as the surviving corporation. Idealab, which beneficially owns approximately 19% of Internet Brands’ outstanding common stock and approximately 64% of the voting power of the Company, has entered into a voting agreement with an affiliate of Hellman & Friedman relating to the Merger Agreement.

If the merger is completed, each outstanding share of the Company’s common stock (other than treasury shares, shares held by any of our wholly owned subsidiaries, shares held by Parent or any of its subsidiaries, and shares held by any of our stockholders who are entitled to and who properly exercise appraisal rights under Delaware law) will be converted into the right to receive $13.35 in cash. At the effective time of the merger, each outstanding option, whether or not then vested or exercisable, will be cancelled and terminated and converted into the right to receive a cash payment equal to the excess of $13.35 over the exercise price per share for each share subject to such option. At the effective time of the merger, each outstanding share of restricted stock awarded under the Company’s equity incentive plans will vest in full and be converted into the right to receive $13.35 in cash per share. To the extent any share of restricted stock would not, by the express terms of the relevant grant, have automatically vested at the effective time of the merger, the Company may set aside the consideration attributable to such share of restricted stock, and the Company will release such consideration to the former holder of restricted stock upon the satisfaction, if ever, of the original vesting criteria following the effective time of the merger. Completion of the merger is subject to:

·	Stockholder approval, including approval by holders of a majority of the outstanding common stock not owned by Idealab and certain other excluded parties, and

·	Other customary closing conditions.

For further information related to the merger, see the Company’s Preliminary Proxy Statement on Schedule 14A as filed with the SEC on September 30, 2010. The foregoing description of the Merger Agreement does not purport to be complete, and is qualified in its entirety by reference to the Merger Agreement, which is incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K as filed with the SEC on September 22, 2010.

NOTE 2. ORGANIZATION AND BASIS OF PRESENTATION

The Company —The Company is an Internet media company that owns, operates and grows branded websites in categories marked by high consumer involvement and strong advertising spending. The Company’s websites provide knowledge that is accessible and valuable to their audiences and the advertisers that want to market to them.

In addition, the Company licenses its content and Internet technology products and services to major companies and individual website owners around the world.

Principles of Consolidation —The consolidated financial statements include the accounts of Internet Brands, Inc. and its wholly-owned subsidiaries, from the dates of their respective acquisitions. All significant inter-company accounts, transactions and balances have been eliminated in consolidation.

Interim Financial Information —The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Certain information and note disclosures normally included in the consolidated annual financial statements prepared in accordance with generally accepted accounting principles in the United States have been omitted from this interim report. In the opinion of the Company’s management, the unaudited interim consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the Company’s financial position, results of operations and cash flows as of and for the periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future period.

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These interim financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the SEC on March 3, 2010.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Revenue Recognition —The Company recognizes revenue in accordance with Accounting Standard Codification (ASC) 605-10 (previously Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition) . Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured. The Company's revenues are derived from:

Consumer Internet —Consumer Internet segment revenue is earned from online advertising sales and on a cost per thousand impressions (CPM), cost per click (CPC), cost per lead (CPL), cost per action (CPA) and flat-fee basis.

· The Company earns CPM revenue from the display of graphical advertisements. An impression is delivered when an advertisement appears in pages viewed by users. Revenue from graphical advertisement impressions is recognized based on the actual impressions delivered in the period.

· Revenue from the display of text-based links to the websites of the Company's advertisers is recognized on a CPC basis, and search advertising is recognized as "click-throughs" occur. A "click-through" occurs when a user clicks on an advertiser's link.

· Revenue from advertisers on a CPL basis is recognized in the period the leads are accepted by the advertiser, following the execution of a service agreement and commencement of the services.

· Under the CPA format, the Company earns revenue based on a percentage or negotiated amount of a consumer transaction undertaken or initiated through its websites. Revenue is recognized at the time of the transaction.

· Revenue from flat-fee, listings-based services is based on a customer’s subscription to the service for up to twelve months and are recognized on a straight-line basis over the term of the subscription.

Licensing —The Company enters into contractual arrangements with customers to develop customized software and content products; revenue is earned from software licenses, content syndication, maintenance fees and consulting services. Agreements with these customers are typically for multi-year periods. For each arrangement, revenue is recognized when both parties have signed an agreement, the fees to be paid by the customer are fixed or determinable, collection of the fees is probable, delivery of the product has occurred, and no other significant obligations on the part of the Company remain. The Company does not offer a right of return on these products.

Software-related revenue is accounted for in accordance with ASC 985-605 (previously American Institute of Certified Public Accountants' (AICPA) Statement of Position (SOP) No. 97-2, Software Revenue Recognition ) and related interpretations. Post-implementation development and enhancement services are not sold separately; the revenue and all related costs of these arrangements are deferred until the commencement of the applicable license period. Revenue is recognized ratably over the term of the license; deferred costs are amortized over the same period as the revenue is recognized.

Fees for stand-alone projects are fixed-bid and determined based on estimated effort and client billing rates since the Company can reasonably estimate the required effort to complete each project or each milestone within the project. Recognition of the revenue and all related costs of these arrangements are deferred until delivery and acceptance of the projects in accordance with the terms of the contract.

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During the fourth quarter of 2009, the Company began selling and electronically delivering the vBulletin 4.0 Publishing Suite and Forum products. The Company recognizes revenue from the sale of the perpetual license of this product as legal title transfers when the customers download the product from the Internet. In connection with the sale of vBulletin 4.0 Publishing Suite, the Company provides the customer with free email technical support. The Company does not defer the recognition of any vBulletin 4.0 revenue as (a) historically, the majority of customers utilize their free email support within the first month of owning the product, and (b) the cost of providing this free email support is insignificant. The Company accrues the estimated cost of providing this free email support upon delivery of the product.

Cash and Cash Equivalents —Cash and cash equivalents consist of cash on hand and highly-liquid investments with original maturities of three months or less.

Investments, Available for Sale —The Company invests excess cash in marketable securities, including highly-liquid debt instruments of the United States Government and its agencies, money market instruments, and high-quality corporate debt instruments. All highly-liquid investments with an original maturity of more than three months at original purchase are considered investments available for sale.

The Company evaluates its marketable securities periodically for possible other-than-temporary impairment and reviews factors such as length of time to maturity, the extent to which fair value has been below cost basis and the Company’s intent and ability to hold the marketable security for a period of time which may be sufficient for anticipated recovery in market value. The Company records impairment charges equal to the amount that the carrying value of its available-for-sale securities exceeds the estimated fair market value of the securities as of the evaluation date, if appropriate. The fair value for all securities is determined based on quoted market prices as of the valuation date as available.

Effective January 1, 2008, the Company adopted ASC 820-10 (previously Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value Measurements ). ASC 820-10 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under ASC 820-10 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820-10 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs -- of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

·	Level 1 - Quoted prices in active markets for identical assets or liabilities

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

·	Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

The adoption of this statement with respect to the Company’s financial assets and liabilities did not impact our consolidated results of operations and financial condition, but required additional disclosure for assets and liabilities measured at fair value. In accordance with ASC 820-10, the following table represents the fair value hierarchy for the Company’s financial assets (cash, cash equivalents and investments) measured at fair value on a recurring basis as of September 30, 2010 (in thousands):

Description	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	43,591		-		-	$	43,591
Short term available-for-sale investments		15,098		1,517		-	$	16,615

Total	$	58,689	$	1,517	$	-	$	60,206

The following table represents the fair value hierarchy for the Company’s financial assets (cash, cash equivalents and investments) measured at fair value on a recurring basis as of December 31, 2009 (in thousands):

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Description	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	38,408		-		-	$	38,408
Short term available-for-sale investments		19,990		1,480		266	$	21,736

Total	$	58,398	$	1,480	$	266	$	60,144

During the third quarter of 2010, the Company received $0.8 million from the foreclosure sale of a Level 3 investment. The Company recognized a gain of $0.6 million as a result of this sale. The Company does not currently hold any Level 3 investments.

Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in its existing accounts receivable. The Company determines the allowance based on historical write-off experience and customer economic data. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days are reviewed individually for collectibility. Account balances are charged off against the allowance when the Company believes that it is probable the receivable will not be recovered.

Internal Use Software Development Costs — The Company has adopted the provisions of ASC 350-40 (previously SOP No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use ), which requires the capitalization of certain external and internal computer software costs incurred during the application development stage. The application development stage is characterized by software design and configuration activities, coding, testing and installation. Training costs and maintenance are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality.

The Company has adopted the provisions of ASC 350-50 (previously Emerging Issue Task Force (EITF) No. 00-2, Accounting for Web Site Development Costs ) in accounting for internal use website software development costs. ASC 350-50 provides that certain planning and training costs incurred in the development of website software be expensed as incurred, while application development stage costs are to be capitalized pursuant to ASC 350-40.

Proprietary Software Development Costs — In accordance with ASC 985-20 (previously SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed (as amended)) , the Company has capitalized certain computer software development costs upon the establishment of technological feasibility. Technological feasibility is considered to have occurred upon completion of a detailed program design that has been confirmed by documenting the product specifications.

Business Combinations — The Company accounts for business combinations using the purchase method of accounting and accordingly, the assets and liabilities of the acquired businesses are recorded at their estimated fair values at the date of acquisition. Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. The Company does not amortize the goodwill balance. The primary drivers that generate goodwill are the value of synergies between the acquired businesses and the Company and the acquired intellectual property. Identifiable intangible assets with finite lives are amortized over their useful lives. The results of operations of the acquired businesses were included in the Company’s Consolidated Financial Statements from the respective dates of acquisition.

The Company has adopted ASC 805 (previously SFAS 141R, Business Combinations ), as of January 1, 2009 which establishes the principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired business; how it recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and how it determines what information to disclose to enable users of its financial statements to evaluate the nature and financial effects of the business combination. ASC 805 applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. ASC 805 requires the Company to record the present value of the most probable earnouts for all future years at the time of acquisition as an addition to goodwill. Subsequent changes to the earnout estimates will be recorded as expense or income in the statement of operations in the period of change. Additionally, the Company is required to review its estimates on at least a quarterly basis. For the nine months ended September 30, 2010, the Company entered into one agreement with an earnout clause and estimated the probable future earnout as an addition to goodwill in accordance with ASC 805.

Goodwill — Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in an acquisition accounted for as a purchase. Goodwill is carried at cost. In accordance with ASC 350-20 (previously SFAS No. 142, Goodwill and Other Intangible Assets ), the Company is required to test goodwill for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. The Company’s impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value. The Company has determined that its reporting units are equivalent to its Consumer Internet and Licensing operating segments for the purposes of completing its ASC 350-20 analysis. Goodwill is assigned to the reporting unit that is expected to benefit from the anticipated revenue and cash flows of the business combination.

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The Company utilizes a two-step approach for testing goodwill for impairment. The first step is to determine the fair value of the Company’s reporting units using both the Income Approach and the Market Approach. Under the Income Approach, the fair value of a business unit is based on the cash flows it can be expected to generate over its remaining life. The estimated cash flows are converted to their present value equivalent using an appropriate rate of return. The Market Approach utilizes a market comparable method whereby similar publicly-traded companies are valued using Market Values of Invested Capital (“MVIC”) multiples (i.e., MVIC to Enterprise Value/EBITDA and MVIC to Price/Earnings ratio) and then these MVIC multiples are applied to the Company’s operating results to arrive at an estimate of value. If the fair values exceed the carrying values, goodwill is not impaired. The second step, if necessary, measures the amount of any impairment by applying fair value-based tests to individual assets and liabilities. If the reporting unit's carrying value exceeds its fair value, the Company compares the fair value of the goodwill with the carrying value of the goodwill. If the carrying value of goodwill for the Company exceeds the fair value of that goodwill, an impairment loss is recognized in the amount equal to that excess. The Company performs this analysis during December of each fiscal year. No impairment loss was recorded for the nine months ended September 30, 2010 and for the years ended December 31, 2009, 2008 and 2007.

Intangible Assets — Intangible assets consist primarily of identifiable intangible assets purchased in connection with the Company's acquisitions. Intangible assets are carried at cost less accumulated amortization. Intangible assets are amortized on a straight-line basis over the expected useful lives of the assets, between two and nine years, with the exception of customer relationships, which are amortized using a double-declining balance method, to more accurately reflect the pattern in which the economic benefit is consumed. Other intangible assets are reviewed for impairment in accordance with ASC 360-10-35 (previously SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets ), whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Measurement of any impairment loss for long-lived assets and identifiable intangible assets that management expects to hold and use is based on the amount of the carrying value that exceeds the fair value of the asset. No impairment loss was recorded for the nine months ended September 30, 2010 and the years ended December 31, 2009, 2008 and 2007.

Cost of Revenues —Cost of revenues includes marketing expenses to fulfill specific customer advertising orders, direct development costs of licensing revenues, and costs of hosting websites and data center operational expenses.

Sales and Marketing —Sales and marketing expenses include online marketing and advertising costs, sales promotion, compensation and benefits costs related to the Company’s sales and sales support staff, and the direct expenses associated with the Company’s sales force. The Company recognizes advertising expense at the time the advertisement is first published.

Technology —Technology expenses include compensation, benefits, software licenses and other direct costs incurred by the Company to enhance, manage, support, monitor and operate the Company’s websites and related technologies and to operate the Company’s internal technology infrastructure.

General and Administrative —General and administrative expenses include compensation, benefits, office expenses, and other expenses for executive, finance, legal, business development and other corporate and support-functions personnel. General and administrative expenses also include fees for professional services, insurance, business licenses, and provisions for doubtful accounts.

Depreciation and Amortization —Depreciation and amortization includes the depreciation expense of property, plant and equipment on a straight line basis over the useful life of assets, and the amortization expense of (1) leasehold improvements over their remaining useful life or the lease period, whichever is shorter, (2) internal use and proprietary software development costs over the software’s estimated useful life and (3) intangible assets reflecting the period and pattern in which economic benefits are used.

Stock-Based Compensation and Stock-Based Charges — The Company has adopted the provisions of ASC 718 (previously SFAS No. 123(R), Share-Based Payments ), using the prospective approach and, accordingly, prior periods have not been restated to reflect the impact of ASC 718. Under ASC 718, stock-based awards granted after December 31, 2005, are recorded at fair value as of the grant date and recognized to expense over the employee's requisite service period (the vesting period, generally three or four years), which the Company has elected to amortize on a straight-line basis. The amount of recognized compensation expense is adjusted based upon an estimated forfeiture rate.

The Company was previously accounting for its stock options under the minimum value method and adopted ASC 718 prospectively. The Company began its ASC 718 accounting with a historical pool of windfall tax benefits of zero at January 1, 2006. Beginning in January 2006, the Company began tracking options on an individual basis to determine the on-going APIC pool, which is the pool that arises when the tax deduction for a share-based payment award is greater than the cumulative compensation expense computed using a fair-value-based measure reported in the financial statements. The APIC pool balance at December 31, 2009 was zero.

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The Company has a net operating loss carry-forward as of September 30, 2010, and no excess tax benefits for the tax deductions related to share-based awards were recognized in the statements of operations. Additionally, no incremental tax benefits were recognized from stock options exercised in the nine months ended September 30, 2010.

Operating Leases —The Company leases office space and data centers under operating lease agreements with original lease periods up to 4 years. Certain of the lease agreements contain rent escalation provisions which are considered in determining straight-line rent expense to be recorded over the lease term. The lease term begins on the date of initial possession of the leased property for the purposes of recognizing lease expense on a straight-line basis over the term of the lease. The Company leases certain information technology equipment under a capital lease arrangement in accordance with ASC 840 (previously SFAS No. 13, Leases ). The present value of the lease obligation is recorded in the liability section of the consolidated balance sheets.

Income Taxes — The Company accounts for income taxes under ASC 740 (previously SFAS No. 109, Accounting for Income Taxes ). This statement requires the recognition of deferred tax assets and liabilities for the future consequences of events that have been recognized in the Company’s financial statements or tax returns. The Company measures tax assets and liabilities using the enacted tax rates expected to apply to taxable income in the years in which the Company expects to recover or settle those temporary differences. The Company recognizes the effect of a change in tax rates on deferred tax assets and liabilities in income in the period that includes the enactment date. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.

The Company accounts for uncertainty in income taxes under ASC 740-10 (previously Financial Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an Interpretation of ASC 740 ). ASC 740-10 prescribes a recognition threshold and measurement methodology to recognize and measure an income tax position taken, or expected to be taken, in a tax return. The evaluation of a tax position is based on a two-step approach. The first step requires an entity to evaluate whether the tax position would “more likely than not” be sustained upon examination by the appropriate taxing authority. The second step requires the tax position be measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. In addition, previously recognized benefits from tax positions that no longer meet the new criteria would be derecognized. The cumulative effect of applying the provisions of ASC 740-10 are reported as an adjustment to the opening balance of retained earnings in the period of adoption.

The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In general, the Company is no longer subject to U.S. federal tax examinations for tax years ended prior to 2006 and for state tax examinations for tax years ended prior to 2005. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

Earnings Per Share — Basic earnings per share, or EPS, is calculated in accordance with ASC 260-10 (previously SFAS No. 128, Earnings per Share ) using the weighted average number of common shares outstanding during each period.

Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share. For purposes of this calculation, common stock subject to repurchase by the Company, options and warrants are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.

Basic net income (loss) per share is computed by dividing net income (loss) available to ordinary stockholders by the weighted average number of ordinary shares outstanding. Diluted net income (loss) per share includes the effect of potential shares outstanding, including dilutive share options and warrants, using the treasury stock method as prescribed by ASC 260-10. The Company maintains a dual-class structure of common stock. Earnings per share for each class are determined based on an allocation method that considers the participation rights in undistributed earnings or losses for each class. The net income per share amounts are the same for Class A and Class B common stock because the holders of each class are legally entitled to equal per share distributions whether through dividends or in liquidation. The following table sets forth the computation of basic and diluted net income per share of Class A and B common stock (in thousands, except share and per share amounts):

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		Three months ended September 30,
		2010						2009
Numerator—basic and diluted:
Net income allocated, basic		$	2,851		$	207		$	3,060		$	235

Conversion of Class B to Class A shares			207			-			235			-
Reallocation of undistributed earnings to Class B shares			-			(15	)		-			(20	)
Net income attributable to common stockholders, diluted		$	3,058		$	192		$	3,295		$	215

Denominator:
Weighted-average common shares			43,248,409			3,025,000			41,897,181			3,025,000
Weighted-average unvested restricted stock subject to repurchase			(1,506,172	)		-			(1,298,732	)		-

Denominator for basic calculation			41,742,237			3,025,000			40,598,449			3,025,000
Weighted-average effect of dilutive securities:
	Conversion of Class B to Class A shares		3,025,000			-			3,025,000			-
	Employee stock options		2,073,269			-			1,576,630			-
	Unvested restricted stock subject to repurchase		1,506,172			-			1,298,732			-
Denominator for diluted calculation			48,346,678			3,025,000			46,498,811			3,025,000

Net income per share—basic		$	0.07		$	0.07		$	0.08		$	0.08
Net income per share—diluted		$	0.06		$	0.06		$	0.07		$	0.07

		Nine months ended September 30,
		2010						2009
Numerator—basic and diluted:
Net income allocated, basic		$	9,972		$	727		$	7,539		$	564

Conversion of Class B to Class A shares			727			-			564			-
Reallocation of undistributed earnings to Class B shares			-			(51	)		-			(30	)
Net income attributable to common stockholders, diluted		$	10,699		$	676		$	8,103		$	534

Denominator:
Weighted-average common shares			42,939,475			3,025,000			41,605,962			3,025,000
Weighted-average unvested restricted stock subject to repurchase			(1,466,975	)		-			(1,196,042	)		-

Denominator for basic calculation			41,472,500			3,025,000			40,409,920			3,025,000
Weighted-average effect of dilutive securities:
	Conversion of Class B to Class A shares		3,025,000			-			3,025,000			-
	Employee stock options		1,916,898			-			1,215,717			-
	Unvested restricted stock subject to repurchase		1,466,975			-			1,196,042			-
Denominator for diluted calculation			47,881,373			3,025,000			45,846,679			3,025,000

Net income per share—basic		$	0.24		$	0.24		$	0.19		$	0.19
Net income per share—diluted		$	0.22		$	0.22		$	0.18		$	0.18

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Comprehensive Income — Comprehensive income includes all changes in equity during a period from non-owner sources. Other comprehensive income refers to gains and losses that under accounting principles generally accepted in the United States are recorded as an element of stockholders’ equity but are excluded from net income. For the three and nine months ended September 30, 2010 and 2009, the Company’s comprehensive income consisted of its net income, unrealized gains and losses on investments classified as available for sale and cumulative translation adjustments (in thousands).

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009

Net income	$	3,058		$	3,295		$	10,699		$	8,103
Unrealized currency translation gain (loss)		145			409			(163	)		631
Realized currency translation gain		-			-			(1,564	)		-
Investments, fair value adjustment		(69	)		(14	)		(36	)		(148	)

Comprehensive income	$	3,134		$	3,690		$	8,936		$	8,586

Foreign Currency —The financial position and results of operations of the Company’s Canadian subsidiaries are measured using the Canadian Dollar as the functional currency. Revenues and expenses of these subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting translation gain and loss adjustments are recorded as foreign currency translation adjustment, a component of other comprehensive income (loss).

Gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the consolidated results of operations in accordance with ASC 830 (previously SFAS No. 52, Foreign Currency Translation ).

NOTE 4. RECENTLY ISSUED ACCOUNTING STANDARDS

In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, which amends ASC Topic 605, Revenue Recognition , to require companies to allocate revenue in multiple-element arrangements based on an element’s estimated selling price if vendor-specific or other third-party evidence of value is not available. ASU 2009-13 is effective beginning January 1, 2011. Earlier application is permitted. These amended standards will not have a material impact on the Company’s consolidated financial statements.

In October 2009, the FASB issued ASU 2009-14, which amends ASC Topic 985-605, Software-Revenue Recognition , to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product's essential functionality. ASU 2009-14 will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after September 15, 2010, and early adoption will be permitted. These amended standards will not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU 2010-1 which amended standards that require additional fair value disclosures. These disclosure requirements are effective in two phases. In the first quarter of 2010, the amended requirements include disclosures about inputs and valuation techniques used to measure fair value as well as disclosures about significant transfers. Beginning in the first quarter of 2011, these amended standards will require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3). These amended standards will not have a material impact on the Company’s consolidated financial statements.

NOTE 5. INVESTMENTS

We consider investments with an initial term to maturity of three months or less at the date of purchase to be cash equivalents. Short-term investments are diversified and primarily consist of investment grade securities that: (a) mature within the next 12 months; (b) have characteristics of short-term investments; or (c) are available to be used for current operating activities.

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Short and long-term investments are classified as available-for-sale and carried at fair value based on quoted market prices. Investments are recorded net of unrealized gains or losses and the related tax impact thereon. Unrealized gains or losses are reported in stockholders’ equity as a component of accumulated other comprehensive income.

Available-for-sale investments at their estimated fair value and contractual maturities as of September 30, 2010 are as follows (in thousands):

	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Government and agency securities	$	15,336	$	5	$	(2	)	$	15,339
Corporate debt securities		1,272		4		-			1,276
Total investments in available-for-sale securities	$	16,608	$	9	$	(2	)	$	16,615

Contractual maturity dates for investment in bonds and notes:
Less than one year								$	16,374
One to five years									241
								$	16,615

Available-for-sale investments at their estimated fair value and contractual maturities as of December 31, 2009 are as follows (in thousands):

	Amortized Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Government and agency securities	$	21,104	$	64	$	(10	)	$	21,158
Corporate debt securities		558		20		-			578
Total investments in available-for-sale securities	$	21,662	$	84	$	(10	)	$	21,736

Contractual maturity dates for investment in bonds and notes:
Less than one year								$	19,504
One to five years									2,232
								$	21,736

NOTE 6. ACQUISITIONS OF BUSINESSES AND INTANGIBLES

During the nine months ended September 30, 2010 the Company completed fourteen website-related acquisitions in the Consumer Internet segment for a total aggregate purchase price of $23.3 million. The acquisitions were designed to extend and further diversify the Company’s audiences and advertising base. The preliminary amounts of goodwill recognized in those transactions amounted to $19.5 million and the preliminary amounts of intangible assets, consisting of acquired technology, customer relationships, content and domain names and trade names, amounted to $3.8 million.

During the nine months ended September 30, 2009 the Company completed eleven website-related acquisitions in the Consumer Internet segment for a total aggregate purchase price of $11.8 million. The acquisitions were designed to extend and further diversify the Company’s audiences and advertising base. Goodwill recognized in those transactions amounted to $8.7 million. Intangible assets, consisting of acquired technology, customer relationships, and domain names and trademarks, amounted to $3.1 million.

The acquisitions consummated during the nine months ended September 30, 2010 are not material individually; however, in aggregate they represent a material portion of our revenue in the nine months ended September 30, 2009. The unaudited pro forma results presented below include the effect of these acquisitions as if they were consummated as of January 1, 2009. The pro forma results do not include the effect of anticipated synergies which typically drive the growth in revenue and earnings that arise once these acquisitions have been moved onto the Company’s operating platform.

The unaudited pro forma financial information below is not necessarily indicative of either future results of operations nor of results that might have been achieved had the acquisitions been consummated as of January 1, 2009 (in thousands, except per share amounts).

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	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Revenue	$	29,180	$	27,257	$	84,324	$	77,884
Income from operations		4,230		5,626		15,283		14,310
Net income		3,075		3,295		10,820		8,375
Basic net income per share	$	0.07	$	0.08	$	0.24	$	0.19
Diluted net income per share	$	0.06	$	0.07	$	0.22	$	0.18

NOTE 7. STOCK OPTIONS AND WARRANTS

The Company has adopted three equity plans referred to as the 1998 Stock Plan, the 2000 Stock Plan, and the 2007 Equity Plan.

The 1998 Stock Plan provided for the granting of nonstatutory and incentive stock options to employees, officers, directors and consultants of the Company. Options granted generally vest over a four-year period and generally expire ten years from the date of grant. In addition, certain employees have options that have accelerated vesting provisions upon the transfer of ownership of 50% or more of the Company’s common stock. The December 2007 amendment provided that no further grants would be made under the plan.

The 2000 Stock Plan provided for the granting of nonstatutory and incentive stock options to employees, officers, directors and consultants of the Company. Options granted generally begin vesting over a four-year period. Additional options granted to employees previously holding options under either the 1998 Stock Plan or the 2000 Stock Plan vest quarterly over four years. Options generally expire ten years from the date of grant. The December 2007 amendment to the 2000 Stock Plan provided that (1) no further grants would be made under the plan and (2) the options previously awarded under the plan were exercisable for Class A common stock.

On October 23, 2007, the Company adopted the 2007 Equity Plan, which, as amended and restated on December 21, 2007, provides for an aggregate of 1,868,251 shares of the Company’s Class A common stock to be available for stock-option and restricted stock awards, subject to annual increases of up to 1,500,000 shares for five years beginning in 2009. The number of shares available under the 2007 Equity Plan may be further increased by certain shares awarded under the 2007 Equity Plan, the 1998 Stock Plan, or the 2000 Stock Plan that are surrendered or forfeited after the effective date of the 2007 Equity Plan. The maximum number of shares available for awards will not exceed 12,282,006 and, unless earlier terminated by the Board of Directors, the 2007 Equity Plan will expire on October 23, 2017 and no further awards may be granted after that date.

The following table summarizes stock option activity under the 1998 Stock Plan, 2000 Stock Plan and 2007 Equity Plan:

	Number of Shares		Approximate Weighted- Average Exercise Price

Options outstanding at December 31, 2009	2,305,242		$	3.95
Granted	16,000		9.97
Exercised	(144,929	)		3.40
Forfeited/expired	(100,868	)		7.96
Options outstanding at September 30, 2010	2,075,445		$	3.84

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The following table summarizes restricted stock activity under the 2007 Equity Plan:

	Number Of Restricted Shares	Approximate Price at Grant Date

Restricted Shares granted at December 31, 2009	1,254,764	$		6.31
Granted	628,532			8.68
Vested	(334,415)		5.66
Forfeited/expired	(55,411)		6.85
Restricted Shares outstanding at September 30, 2010	1,493,470	$			7.43

At September 30, 2010, the Company had 75,000 outstanding options to purchase Class A common stock of the Company that had been granted outside the Company’s 1998 Stock Plan, 2000 Stock Plan, and 2007 Equity Plan at a weighted average exercise price of $1.50 per share. All options were vested and exercisable at September 30, 2010 with 4.4 years of remaining contractual life.

NOTE 8. SEGMENT INFORMATION

The Company manages its business within two identifiable segments. The following tables present the summarized information by segment (in thousands):

	Consumer Internet		Licensing		Total
For the nine-month period ended September 30, 2010
Revenues	$	56,910	$	26,608	$	83,518
Investment and other income	1,607		1,692		3,299
Depreciation and amortization	11,061		2,096		13,157
Segment pre-tax income	10,998		7,382		18,380
Segment assets	$	373,958	$	35,080	$	409,038

	Consumer Internet		Licensing		Total
For the nine-month period ended September 30, 2009
Revenues	$	48,624	$	23,454	$	72,078
Investment and other income (loss)	938		(1,023)		(85)
Depreciation and amortization	9,898		2,122		12,020
Segment pre-tax income	7,532		6,240		13,772
Segment assets	$	312,682	$	77,131	$	389,813

NOTE 9. COMMITMENTS AND CONTINGENCIES

On October 7, 2008, the Company entered into a Loan and Security Agreement with Silicon Valley Bank pursuant to which the Company has access to a $35 million revolving line of credit that will mature on October 7, 2012. The interest to be paid on the used portion of the credit facility will be based upon LIBOR or the prime rate plus a spread based on the ratio of debt to adjusted earnings before interest, taxes, depreciation and amortization. In addition, the obligations under the Loan and Security Agreement are secured by a lien on substantially all of the assets of the Company. There is currently no debt outstanding under the facility.

Contingencies —From time to time, the Company has been party to various litigation and administrative proceedings relating to claims arising from its operations in the normal course of business. Based on the information presently available, including discussion with counsel, management believes that resolution of these matters will not have a material adverse effect on the Company’s business, consolidated results of operations, financial condition, or cash flows.

Earnout Agreements — The Company has entered into earnout agreements as part of the consideration for certain acquisitions. The Company accounts for earnout consideration in accordance with ASC 805 (previously SFAS No.141R, Business Combinations ), as an addition to goodwill and accrued expenses at the present value of all future earnouts at the acquisition date for acquisitions occurring in fiscal years beginning after December 15, 2008. Earnouts occurring from acquisitions prior to December 31, 2008 are accounted for under EITF 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Combination as an addition to compensation expense or goodwill in the period earned. For the nine months ended September 30, 2010, the Company paid earnouts totaling $3.0 million. As of September 30, 2010 the Company recorded liabilities for future earnout payments of $1.2 million. The Company cannot reasonably estimate maximum earnout payments, as a significant number of the Company’s acquisition agreements do not contain maximum payout clauses.

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Capital Lease Obligations — The Company has entered into leases for certain information technology equipment and software and has accounted for them as capital leases in accordance with ASC 840 (previously SFAS No. 13, Leases ). As of September 30, 2010, the Company had $0.3 million of net property, plant and equipment assets with short-term liabilities of $0.2 million and long-term liabilities of $0.1 million recorded on its consolidated balance sheet associated with these capital leases. The Company’s future minimum lease payments, including interest and service fees, over the next five years are as follows (in thousands):


2010	$	40
2011		159
2012		106
2013		-
		305
Less: interest expense		(10	)

Present value of
minimum lease payments	$	295

Severance Payment Agreements —The Company has entered into severance payment agreements with certain members of management which provide for minimum salaries, perquisites and payments due upon certain defined future events.

Legal Contingencies — The Company, its directors, and control stockholder have been named as defendants in two purported class actions filed on behalf of the public stockholders of the Company challenging the proposed transaction pursuant to which an affiliate of Hellman & Friedman will acquire all of the outstanding shares of the Company’s common stock for $13.35 per share in cash pursuant to the terms and conditions of a Merger Agreement among the parties dated September 17, 2010. On October 7, 2010, Tandem Trading filed suit against the Company, Hellman & Friedman Capital Partners VI, L.P., Idealab, Howard Lee Morgan, Robert N. Brisco, Kenneth B. Gilman, Marcia Goodstein, William Gross, Martin R. Melone, James R. Ukropina, W. Allen Beasley (together, the “Class Action Defendants”), Micro Holding Corp., and Micro Acquisition Corp., in Superior Court of Los Angeles County, California. On October 13, 2010, John Norton filed suit against the Class Action Defendants in the Court of Chancery in Delaware. The complaints in these actions contain substantially similar allegations. Among other things, plaintiffs allege that the director defendants have breached their fiduciary duties to the Company's stockholders in pursuing the proposed transaction, including by accepting an unfair and inadequate acquisition price and failing to take appropriate steps to maximize stockholder value in connection with the sale of the Company. Plaintiffs seek, among other things, compensatory and other unspecified damages. Plaintiff in the Norton action also includes a request that the proposed transaction be enjoined. The defendants in each of these actions are actively contesting these claims. Any conclusion of these lawsuits in a manner adverse to the Company could have a material adverse effect on the Company’s business, results of operation, financial condition and cash flows or on its ability to proceed with the proposed transaction. In addition, the cost to the Company of defending these lawsuits, even if resolved in the Company’s favor, could be substantial. Such lawsuits could also substantially divert the attention of the Company’s management and the Company’s resources in general.

On August 8, 2008, Versata Software, Inc. (Versata Software) and Versata Development Group, Inc. (Versata Development) filed suit against the Company and its subsidiaries, Autodata Solutions Company (Autodata) and Autodata Solutions, Inc. (Autodata Solutions) in the United States District Court for the Eastern District of Texas, Marshall Division, claiming that certain software and related services the Company and its Autodata subsidiaries offer violate Versata Development’s U.S. Patent No. 7,130,821 entitled “Method and Apparatus for Product Comparison” and its U.S. Patent No. 7,206,756 entitled “System and Method for Facilitating Commercial Transactions over a Data Network,” breach of a settlement agreement entered into in 2001 related to a previous lawsuit brought by the Versata entities, and tortious interference with an existing contract and prospective contractual relations. On August 25, 2008, Versata Software and Versata Development filed an amended complaint against the Company, Autodata and Autodata Solutions, asserting additional claims that certain software and related services offered by the Company and its Autodata subsidiaries violate Versata Development’s U.S. Patent No. 5,825,651 entitled “Method and Apparatus for Maintaining and Configuring Systems,” Versata Development’s U.S. Patent No. 6,675,294 entitled “Method and Apparatus for Maintaining and Configuring Systems,” and Versata Software’s U.S. Patent No. 6,405,308 entitled “Method and Apparatus for Maintaining and Configuring Systems” and seeking declaratory judgment regarding the validity of the Versata entities’ revocation and termination of licenses included in the 2001 settlement agreement. Versata Software and Versata Development seek unspecified damages, attorneys’ fees and costs and permanent injunctions against the Company, Autodata and Autodata Solutions. Discovery is pending. On September 8, 2010, Autodata Solutions filed suit against Versata Software and Versata Development in the Circuit Court of Oakland County, Michigan, asserting claims for unfair competition and misappropriation of Autodata Solution’s trade secrets, among other claims.

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The Company believes the claims against it are without merit and intend to vigorously defend the lawsuits, but the Company cannot predict the outcome of these matters, and an adverse outcome could have a material impact on our financial condition, results of operations or cash flows. Even if the Company is successful in defending the lawsuits or pursuing its counterclaims, the Company may incur substantial costs and diversion of management time and resources to defend the litigation and pursue its counterclaims. The Company is not able to estimate a probable loss or recovery, if any.

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

Investors are cautioned that certain statements contained in this Report, as well as some statements by us in periodic press releases and other public disclosures and some oral statements by us to securities analysts and stockholders during presentations, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements give management’s expectations about the future and are not guarantees of performance. Words like “believe,” “expect,” “anticipate,” “promise,” “plan” and other expressions or words of similar meaning, as well as future or conditional verbs such as “will,” “would,” “should,” “could,” or “may” are generally intended to identify forward-looking statements. Generally, forward-looking statements include projections of our revenues, income, earnings per share, capital structure, or other financial items; descriptions of our plans or objectives for future operations, products or services; forecasts of our future economic performance, interest rates, profit margins and our share of future markets; statements regarding the consummation of the merger with Micro Holding Corp., a Delaware corporation (“Parent”), and Micro Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Micro Holding Corp. (“Merger Sub”) ; and descriptions of assumptions underlying or relating to any of the foregoing. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our operations and economic and market factors, among other things. Such factors, many of which are beyond our control, could cause actual results and timing of selected events to differ materially from management’s expectations.

Given such risks and uncertainties, investors are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date they are made. We undertake no obligation to revise or update such statements. Please see our periodic reports and other filings with the Securities and Exchange Commission, or SEC, for further discussion of risks and uncertainties applicable to our business.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes to those statements included elsewhere in this Report. References in this Report to “we,” “our,” “the Company” and “Internet Brands” refer to Internet Brands, Inc. and its consolidated subsidiaries, unless otherwise indicated.

Overview

We are an Internet media company that owns, operates and grows branded websites in categories marked by highly focused consumer involvement and strong advertising spending. We believe that consumers seek knowledge from experts and fellow visitors online to save time and money in their daily lives. Our vertical websites provide knowledge that is accessible and valuable to our audiences and the advertisers that want to market to them.

Consumer Internet Segment. In our Consumer Internet segment, we have continued to expand and diversify our vertical website categories to serve a wide range of audiences and advertisers. Our network of websites is grouped into seven vertical categories: automotive, careers, health, home, money, legal and business, shopping, and travel and leisure. We own and operate over 250 websites of which more than 100 received in excess of 100,000 monthly unique visitors as of September 30, 2010, which we refer to as our “principal websites.” Our number of principal websites has grown from 45 in December 2007, to over 80 in December 2008, to more than 100 in September 2010. More than 98% of our websites’ traffic is from non-paid sources. Our international audiences accounted for approximately 29% of total monthly average unique visitors in September 2010.

Throughout this Report, we use Google analytics measurement services to report Internet audience metrics. The measurement term “monthly unique visitors” refers to the total number of unique users (a user is defined as a unique IP address) who visit one of our websites in a given month. We measure the total number of unique visitors to our websites by adding the number of unique visitors to each of our websites in a given month. The term “monthly visitors” is defined as the total number of user-initiated sessions with our websites within a month. “Page views” refers to the number of website pages that are requested by and displayed to our users. Traffic calculations for the first nine months of 2010 include websites acquired in the first nine months of 2010 on a pro forma basis. In the third quarter of 2010, our websites averaged a total of 69 million unique visitors per month, an increase of approximately 38% from 50 million monthly average unique visitors in the third quarter of 2009, and an average of 706 million page views in the third quarter of 2010, an increase of approximately 4% from 679 million page views in the third quarter of 2009. The ratio of page views to unique visitors declined year-over-year primarily as a result of new website features that combined elements from multiple pages to single pages.

Licensing Segment. In our Licensing segment, we license certain of our Internet technology products and services to major companies and individual website owners around the world. Our Autodata Solutions division supplies licensed technology and content services to the automotive industry, serving most of the U.S., Japanese and European automotive manufacturers. We also own and operate vBulletin software products that are tailored to the growing market of specialized online communities and include robust discussion forums and a fully-integrated content management system. During 2009, we transitioned our vBulletin operations from the U.K. to the U.S. During the second quarter of 2010, we substantially shut down our U.K. facilities. In accordance with ASC 830 (previously SFAS No. 52, Foreign Currency Translation ), upon the substantial wind-up of foreign legal entities, we are required to reverse any unrealized foreign exchange translation gains or losses and record such amounts as realized gains or losses to the consolidated statement of operations. As a result, during the second quarter of 2010, we recorded a $1.7 million one-time, non-cash gain.

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Our goal is to grow the audiences, revenues and profitability of our Consumer Internet and Licensing businesses through the deployment of our common operating platform, by acquiring additional websites in our existing vertical categories and by continuing to expand into new categories. Our proprietary technologies and shared operating, sales and content creation resources are highly scalable and allow us to rapidly and cost effectively create and deploy valuable knowledge and technology improvements on our websites that gain audiences and advertisers over time. Our targeted content includes a diverse range of articles, guides, product comparisons, expert and user reviews, discussion forums, photographs, directories, deals, discounts and coupons. We monetize through various advertising models, including cost per click (CPC), cost per lead (CPL), cost per action (CPA), cost per thousand impressions (CPM) and flat fees.

During the period from January 1, 2010 through September 30, 2010, we completed fourteen website-related acquisitions in our Consumer Internet segment for an aggregate purchase price of $23.3 million, including $19.5 million for goodwill and $3.8 million for intangible assets. We expect to continue to grow our business by acquiring additional websites and improving our existing websites through the application of our operating platform. We have historically been able to deploy capital for acquisitions efficiently, and then integrate acquired websites onto our platform quickly and effectively. Although we believe we will continue to identify, negotiate and purchase websites that meet our operating platform criteria, we cannot predict whether we can continue to purchase websites at the same rate and on similarly favorable terms.

Planned Merger with an Affiliate of Hellman & Friedman

On September 17, 2010, we entered into the Merger Agreement with Parent and Merger Sub. Parent and Merger Sub were formed by Hellman & Friedman. Under the terms of the Merger Agreement, Merger Sub will be merged with and into The Company, which we refer to as the “merger,” with The Company continuing as the surviving corporation. Idealab, which beneficially owns approximately 19% of our outstanding common stock and approximately 64% of our voting power, has entered into a voting agreement with an affiliate of Hellman & Friedman relating to the Merger Agreement.

If the merger is completed, each outstanding share of the our common stock (other than treasury shares, shares held by any of our wholly owned subsidiaries, shares held by Parent or any of its subsidiaries, and shares held by any of our stockholders who are entitled to and who properly exercise appraisal rights under Delaware law) will be converted into the right to receive $13.35 in cash. At the effective time of the merger, each outstanding option, whether or not then vested or exercisable, will be cancelled and terminated and converted into the right to receive a cash payment equal to the excess of $13.35 over the exercise price per share for each share subject to such option. At the effective time of the merger, each outstanding share of restricted stock awarded under our equity incentive plans will vest in full and be converted into the right to receive $13.35 in cash per share. To the extent any share of restricted stock would not, by the express terms of the relevant grant, have automatically vested at the effective time of the merger, we may set aside the consideration attributable to such share of restricted stock, and we will release such consideration to the former holder of restricted stock upon the satisfaction, if ever, of the original vesting criteria following the effective time of the merger. Completion of the merger is subject to:

·	Stockholder approval, including approval by holders of a majority of the outstanding common stock not owned by Idealab and certain other excluded parties, and

·	Other customary closing conditions.

For further information related to the merger, see our Preliminary Proxy Statement on Schedule 14A as filed with the SEC on September 30, 2010. The foregoing description of the Merger Agreement does not purport to be complete, and is qualified in its entirety by reference to the Merger Agreement, which is incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K as filed with the SEC on September 22, 2010.

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Our Revenues

We derive our revenues from two segments: Consumer Internet and Licensing. In our Consumer Internet segment, our revenues are primarily derived from advertisers. In our Licensing segment, our revenues are derived from the licensing of data and technology tools and services to automotive manufacturers and proprietary software for website communities.

Consumer Internet Revenues

Our Consumer Internet segment generates revenues through sales of online advertising in various monetization formats such as cost per thousand impressions (CPM), cost per click (CPC), cost per lead (CPL), cost per action (CPA) and flat fees. Under the CPM format, advertisers pay a fee for displays of their graphical advertisements, typically at an incremental rate per thousand displays or "impressions." Under the CPC model, we earn revenues based on "click-throughs" on text-based links displayed on our websites, which occur when a user clicks on an advertiser's listing. We derive revenues on a CPC model through direct sales to advertisers, as well as through various third-party advertising networks, such as Google. Under the CPL model, our advertiser customers pay for leads generated through our websites and accepted by the customer. Under the CPA format, we earn revenues based on a percentage or negotiated amount of a consumer transaction undertaken or initiated through our websites. Revenues from flat-fee, listings-based services are based on a customer's subscription to a service.

We vary our advertising formats based on consumer and advertiser preferences in a particular category and our ability to optimize revenue yields. For example, we sell display advertising directly to automotive manufacturers and home improvement advertisers on a CPC or CPM basis, and consumer automotive and automotive finance leads to automotive dealers on a CPL basis. We typically invoice our advertisers for display advertisements and CPL products on a monthly basis after we have run the advertisements or delivered the leads. Our contracts with these advertisers are typically on a multiple-month basis and are cancelable on 60 days or less notice. Revenue from our shopping sites is typically generated on a CPA basis where we earn commissions as website users buy products online. We also sell classified listings for flat fees to thousands of summer camps, vacation rental property owners and managers, physicians, lawyers, and bed and breakfast owners. Advertisers typically pay flat fees by credit card, PayPal or similar online payment service, utilizing online "self serve" tools provided on our websites. Some of these flat fees are automatically renewed utilizing payment information on file with us. Our policy is not to offer refunds for mid-term cancellation of advertisements sold on a flat-fee basis. As consumer and advertiser preferences continue to evolve, we expect that we will adjust our revenue sources and mix on our websites to address those changing needs and optimize our revenue yields.

Our advertiser base is highly diversified across our Consumer Internet categories. We also utilize a variety of advertising networks and affiliate relationships to monetize our websites. As our website audiences continue to grow and diversify among our consumer categories, we expect that our sources of advertising revenues will likewise continue to grow and diversify.

Licensing Revenues

We license customized products and services and automotive vehicle and marketing data to most major U.S., Japanese and European automotive manufacturers and other online automotive service providers through our Autodata division. Customers typically enter into multi-year licensing and technology development agreements for these products and services, which include market analytics, product planning, vehicle configuration, management and order placement, in-dealership retail systems and consumer-facing websites.

Through vBulletin Solutions we also sell and license vBulletin Internet software to U.S. and international website owners. During the fourth of quarter of 2009, we launched the vBulletin 4.0 Publishing Suite and Forum products. The new product suite includes a new forum product, content management system, blogging tools and more powerful administration features to help customers manage their websites and grow vibrant communities. Revenues from vBulletin 4.0 are derived from software license purchases for a flat fee and annual maintenance fees were eliminated.

Expenses

The largest component of our expenses is personnel. Personnel costs include salaries and benefits for our employees, commissions for our sales staff and stock-based compensation, which are categorized in our statements of operations based on each employee’s principal function (i.e. Sales and Marketing, Technology or General and Administrative). Cost of revenues primarily consist of development costs, including personnel costs, related to the licensing business, marketing costs directly related to the fulfillment of specific customer advertising orders and costs of hosting our websites and data center operational expenses. Sales and marketing expenses include both personnel and online marketing costs. General and administrative expenses include personnel, audit, tax and legal fees, insurance and facilities costs.

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Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and the accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We believe the following accounting policies to be the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue in accordance with Accounting Standards Codification (ASC) 605-10 (previously SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition ). Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectibility of the resulting receivable is reasonably assured. Our revenues are derived from our Consumer Internet and Licensing segments.

Consumer Internet

Consumer Internet segment revenue is earned from online advertising sales on a cost per impression (CPM), cost per click (CPC), cost per lead (CPL), cost per action (CPA) or flat-fee basis.

·	We earn CPM revenue from the display of graphical advertisements. An impression is delivered when an advertisement appears on website pages viewed by users. Revenue from graphical advertisement impressions is recognized based on the actual impressions delivered in the period.

·	Revenue from the display of text-based links to the websites of our advertisers is recognized on a CPC basis, and search advertising is recognized as "click-throughs" occur. A "click-through" occurs when a user clicks on an advertiser's link.

·	Revenue from advertisers on a CPL basis is recognized in the period the leads are accepted by the advertiser, following the execution of a service agreement and commencement of services. Service agreements generally have a term of twelve months or less.

·	Under the CPA format, we earn revenues based on a percentage or negotiated amount of a consumer transaction undertaken or initiated through our websites. Revenue is recognized at the time of the transaction.

·	Revenue from flat-fee, listings-based services is based on a customer's subscription to the service for up to twelve months and are recognized on a straight-line basis over the term of the subscription.

Licensing

We enter into contractual arrangements with customers to develop customized software and content products; revenue is earned from software licenses, content syndication, maintenance fees and consulting services. Agreements with these customers are typically for multi-year periods. For each arrangement, revenue is recognized when both parties have signed an agreement, the fees to be paid by the customer are fixed or determinable, collection of the fees is probable, delivery of the product has occurred, and no other significant obligations on our part remain. We do not offer a right of return on these products.

Software-related revenue is accounted for in accordance with ASC 985-605 (previously Statement of Position (SOP) No. 97-2, Software Revenue Recognition) , and interpretations thereof. Post-implementation development and enhancement services are not sold separately; the revenue and all related costs of these arrangements are deferred until the commencement of the applicable license period. Revenue is recognized ratably over the term of the license; deferred costs are amortized over the same period as the revenue is recognized.

Fees for stand-alone projects are fixed-bid and determined based on estimated effort and client billing rates since we can reasonably estimate the required effort to complete each project or each milestone within the project. Recognition of the revenue and all related costs of these arrangements is deferred until delivery and acceptance of the projects in accordance with the terms of the contract.

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During the fourth quarter of 2009, we began selling and electronically delivering the vBulletin 4.0 Publishing Suite and Forum products. We recognize revenue from the sale of the perpetual license of this product as legal title transfers when the customers download the product from the Internet. In connection with the sale of vBulletin 4.0, we provide customers with free email technical support. We do not defer the recognition of any vBulletin 4.0 revenue as (a) historically, the majority of customers utilize their free email support within the first month of owning the product, and (b) the cost of providing this free email support is insignificant. We accrue the estimated cost of providing this free email support upon delivery of the product.

Business Combinations

We use the purchase method of accounting for business combinations and the results of the acquired businesses are included in the income statement from the date of acquisition. Historically, the purchase price included the direct costs of the acquisition. However, beginning in fiscal year 2009, acquisition-related costs were expensed as incurred, in accordance with ASC 805 (previously Financial Accounting Standards Board (FASB) issued revision to Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations ). Under the purchase method of accounting, we allocate the purchase price of acquired websites to the identifiable tangible and intangible assets. Goodwill represents the excess of consideration paid over the net identifiable business assets acquired. Amounts allocated to intangible assets are amortized over their estimated useful lives; no amounts are allocated to in-progress research and development. We have entered into earnout agreements which are contingent on the acquired website business achieving agreed upon performance milestones. Earnout payments are not based on the seller's on-going service to the Company; when the seller provides services following the acquisitions, the cost of the seller's services is recorded as compensation expense in the period the services were performed. Historically, we have accounted for earnout consideration as an addition to goodwill in the period earned. Beginning with fiscal year 2009 acquisitions, in accordance with ASC 805, we estimated the net present value of expected earnout payments and recorded such amounts as an addition to goodwill and liability or equity, at the time of closing of the acquisition. Subsequent changes are recorded on the statement of operations as other income or expense in the period of re-measurement. If earnout projections are recorded as equity, then no subsequent re-measurement is required.

Goodwill, Intangible Assets and the Impairment of Long-Lived Assets

We assess the recoverability of the carrying value of long-lived assets. If circumstances suggest that long-lived assets may be impaired, and a review indicates that the carrying value will not be recoverable, the carrying value is reduced to its estimated fair value. ASC 350 -20 (previously SFAS No. 142, Goodwill and Other Intangible Assets ), requires goodwill to be tested for impairment on an annual basis and between annual tests in certain circumstances, and written down when impaired. Our impairment review process compares the fair value of the reporting unit in which the goodwill resides to its carrying value. We determined that our reporting units are equivalent to our Consumer Internet and Licensing operating segments for the purposes of completing our ASC 350-20 analysis. Goodwill is assigned to the reporting unit that is expected to benefit from the anticipated revenue and cash flows of the business combination.

We utilize a two-step approach to test goodwill for impairment. The first step determines the fair value of our reporting units using an Income Approach and a Market Approach. Under the Income Approach, the fair value of a business unit is based on the cash flows it can be expected to generate over its remaining life. The estimated cash flows are converted to their present value equivalent using an appropriate rate of return. The Market Approach utilizes a market comparable method whereby similar publicly-traded companies are valued using Market Values of Invested Capital, or MVIC, multiples (i.e., MVIC to Enterprise Value/EBITDA ratio and MVIC to Price/Earnings ratio) and then, these MVIC multiples are applied to a company’s operating results to arrive at an estimate of value. If the fair values exceed the carrying values, goodwill is not impaired. The second step, if necessary, measures the amount of any impairment by applying fair value-based tests to individual assets and liabilities. If the reporting unit's carrying value exceeds its fair value, the Company compares the fair value of the goodwill with the carrying value of the goodwill. If the carrying value of goodwill for the Company exceeds the fair value of that goodwill, an impairment loss is recognized in the amount equal to that excess.

Intangible assets are carried at cost less accumulated amortization. Intangible assets are amortized on a straight-line basis over the expected useful lives of the assets, between two and nine years, with the exception of customer relationships, which are amortized using a double-declining balance method, to more accurately reflect the pattern in which the economic benefit is consumed. Other intangible assets are reviewed for impairment in accordance with ASC 360-10-35 (previously SFAS 144, Accounting for Impairment or Disposal of Long-Lived Assets ), whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Measurement of any impairment loss for long-lived assets and identifiable intangible assets that management expects to hold and use is based on the amount of the carrying value that exceeds the fair value of the asset.

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We have acquired many companies in each of the last few years and our current business strategy includes continuing to make additional acquisitions in the future. These acquisitions will continue to give rise to goodwill and other intangible assets which will need to be assessed for impairment from time to time.

Provision for Income Taxes and Deferred Income Taxes

Deferred income tax assets and liabilities are periodically computed for temporary differences between the financial statement and income tax bases of assets and liabilities. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to years in which the differences are expected to reverse. A valuation allowance is established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. Significant judgment is necessary in determining valuation allowances necessary for our deferred tax assets. Accounting standards require us to establish a valuation allowance for that portion of our deferred tax assets for which it is more likely than not that we will not receive a future benefit. In making this judgment, all available evidence is considered, some of which, particularly estimates of future profitability and income tax rates, are subjective in nature. Estimates of deferred income taxes are based on management's assessment of actual future taxes to be paid on items reflected in the consolidated financial statements, giving consideration to both timing and the probability of realization. Actual income taxes could vary from these estimates due to future changes in income tax law, state income tax apportionment or the outcome of any review of our tax returns by the Internal Revenue Service, as well as actual operating results that vary significantly from anticipated results. Our effective income tax rate for the nine months ended September 30, 2010 was 41.8%.

Seasonality

The automotive industry in which we provide consumer Internet products and services has historically experienced seasonality with relatively stronger sales in the second and third quarters and weaker sales in the fourth quarter. In 2008, we entered the online shopping category which has historically experienced relatively stronger sales in the fourth quarter .

Results of Operations

The following table sets forth our consolidated statements of operation data as a percentage of total revenues for each of the periods indicated:

	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
	(unaudited)

Revenues		100.0	%		100.0	%		100.0	%		100.0	%

Costs and operating expenses

Cost of revenues		17.6			17.7			18.2			19.0
Sales and marketing		19.4			18.5			19.2			19.4
Technology		9.7			10.5			9.2			9.8
General and administrative		16.2			14.6			16.9			15.9
Depreciation and amortization of intangibles		15.1			16.6			15.8			16.7
Transaction costs		7.6			-			2.6			-
Total operating expenses		85.6			77.9			81.9			80.8
Operating income		14.4			22.1			18.1			19.2
Investment and other (expense) income		4.5			-			4.0			(0.1	)
Income from operations before income taxes		18.9			22.1			22.1			19.1
Provision for income taxes		8.4			9.2			9.2			7.9
Net income		10.5	%		12.9	%		12.9	%		11.2	%

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Revenues

	Three Months Ended				Increase (decrease)					Nine Months Ended				Increase (decrease)
	September 30,				2010 vs. 2009					September 30,				2010 vs. 2009
	2010		2009		$			%			2010		2009	$		%
Revenues:
Consumer Internet	$	20,453	$	16,648	$	3,805		22.9	%	$	56,910	$	48,624	$	8,286	17.0	%
Licensing		8,615		8,674		(59	)	(0.7	)%		26,608		23,454		3,154	13.4	%
Total revenues	$	29,068	$	25,322	$	3,746		14.8	%	$	83,518	$	72,078	$	11,440	15.9	%

Our revenues for the three month period ended September 30, 2010, increased $3.7 million, or 15%, over our revenues in the three month period ended September 30, 2009.

Consumer Internet revenues increased by $3.8 million, or 23%, during the three-month period ended September 30, 2010 compared to the prior year period. Consumer Internet advertising revenues from our non-auto e-commerce websites increased $4.3 million on a year-over-year basis, driven primarily by growth from our shopping, careers, auto enthusiast and legal websites. This increase was partially offset by a $0.5 million decrease in automotive e-commerce revenues, which was due to continued weakness in demand from automotive dealerships. Excluding automotive e-commerce, revenues from websites grew organically by 14% in the third quarter of 2010 as compared to the third quarter of 2009, and 12% for websites owned more than one year.

Licensing revenues were flat during the three-month period ended September 30, 2010 compared to the prior year period.

Our revenues for the nine-month period ended September 30, 2010, increased by $11.4 million, or 16%, over our revenues in the nine-month period ended September 30, 2009.

Consumer Internet revenues increased $8.3 million, or 17%, during the nine-month period ended September 30, 2010 compared to the prior year period. Consumer Internet advertising revenues from our non-auto e-commerce websites increased $12.0 million on a year-over-year basis, driven primarily by growth from our auto enthusiast, home, and careers websites. This increase was offset by a $3.7 million decrease in automotive e-commerce revenues, which was due to continued weakness in demand from automotive dealerships.

Licensing revenues increased by $3.2 million, or 13%, during the nine-month period ended September 30, 2010 compared to the prior year period. The higher revenues were due primarily to a $3.0 million increase at the Company’s Autodata division, a result of new client accounts and the sale of additional services to existing clients.

Cost of revenues

	Three Months Ended						Increase (decrease)				Nine Months Ended						Increase (decrease)
	September 30,						2010 vs. 2009				September 30,						2010 vs. 2009
	2010			2009			$		%			2010			2009		$		%
Cost of revenues	$	5,128		$	4,470		$	658	14.7	%	$	15,233		$	13,659		$	1,574	11.5	%
Percentage of revenues		17.6	%		17.7	%						18.2	%		19.0	%

Our cost of revenues increased $0.7 million, or 15%, in the three-month period ended September 30, 2010 over the prior year period. The higher cost of revenues was due to a $0.5 million increase in Autodata division costs, consistent with the increase in revenues from new client accounts and the sale of additional services.

Our cost of revenues increased $1.6 million, or 12%, in the nine-month period ended September 30, 2010 over the prior year period. The higher cost of revenues was primarily driven by a $2.2 million increase in Autodata division costs, consistent with the increase in revenues from new client accounts and the sale of additional services. Offsetting this increase was a $0.3 million decrease in fulfillment costs associated with specific advertiser orders, consistent with the decline in revenues from our automotive e-commerce business.

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Operating expenses

Sales and Marketing

	Three Months Ended						Increase (decrease)				Nine Months Ended						Increase (decrease)
	September 30,						2010 vs. 2009				September 30,						2010 vs. 2009
	2010			2009			$		%			2010			2009		$		%
Sales and marketing	$	5,634		$	4,675		$	959	20.5	%	$	16,049		$	14,012		$	2,037	14.5	%
Percentage of revenues		19.4	%		18.5	%						19.2	%		19.4	%

Sales and marketing expenses increased $1.0 million, or 21%, and $2.0 million, or 15%, in the three- and nine-month periods, respectively, ended September 30, 2010 over the prior year periods. The increase for both periods relates to additional headcount and support costs, including stock based compensation, and increased content costs to further develop our growing number of websites.

Technology

	Three Months Ended						Increase (decrease)				Nine Months Ended						Increase (decrease)
	September 30,						2010 vs. 2009				September 30,						2010 vs. 2009
	2010			2009			$		%			2010			2009		$		%
Technology	$	2,812		$	2,660		$	152	5.7	%	$	7,688		$	7,066		$	622	8.8	%
Percentage of revenues		9.7	%		10.5	%						9.2	%		9.8	%

Technology expenses increased $0.2 million, or 6%, and $0.6 million, or 9%, in the three- and nine- month periods, respectively, ended September 30, 2010 over the prior year periods. The increases for both periods relate to additional headcount and support costs, including stock based compensation, to further develop our growing number of websites.

General and administrative

	Three Months Ended						Increase (decrease)				Nine Months Ended						Increase (decrease)
	September 30,						2010 vs. 2009				September 30,						2010 vs. 2009
	2010			2009			$		%			2010			2009		$		%
General and administrative	$	4,708		$	3,697		$	1,011	27.3	%	$	14,103		$	11,464		$	2,639	23.0	%
Percentage of revenues		16.2	%		14.6	%						16.9	%		15.9	%

General and administrative expenses increased $1.0 million, or 27% , and $2.6 million, or 23%, in the three- and nine-month periods, respectively, ended September 30, 2010 over the prior year periods. The higher costs for the three-month period are primarily due to increases in stock based compensation of $0.4 million, professional fees of $0.2 million, facilities cost of $0.1 million and bad debt expense of $0.1 million. The higher costs for the nine-month period are primarily due to increases in stock based compensation of $1.2 million, professional fees of $0.3 million, facilities cost of $0.2 million, bank fees of $0.2 million and bad debt expense of $0.2 million.

Depreciation and amortization

	Three Months Ended						Increase (decrease)				Nine Months Ended						Increase (decrease)
	September 30,						2010 vs. 2009				September 30,						2010 vs. 2009
	2010			2009			$		%			2010			2009		$		%
Depreciation and amortization
of intangibles	$	4,377		$	4,194		$	183	4.4	%	$	13,157		$	12,020		$	1,137	9.5	%
Percentage of revenues		15.1	%		16.6	%						15.8	%		16.7	%

Depreciation and amortization expenses increased $0.2 million, or 4%, and $1.1 million, or 10%, in the three- and nine- month periods, respectively, ended September 30, 2010 over the prior year periods. The increases for both periods are is due to continued acquisitions of website intangibles and higher capitalized internal use software costs as we continue to develop our existing websites.

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Transaction costs

	Three Months Ended						Increase (decrease)					Nine Months Ended						Increase (decrease)
	September 30,						2010 vs. 2009					September 30,						2010 vs. 2009
	2010			2009			$		%				2010			2009		$		%
Transaction costs	$	2,207		$	-		$	2,207		0.0	%	$	2,207		$	-		$	2,207	0.0	%
Percentage of revenues		7.6	%		0.0	%							2.6	%		0.0	%

The increase in transaction costs was primarily due to legal, accounting and financial advisory fees of $2.2 million related to the potential merger with Hellman & Friedman.

Investment and other income (expense)

	Three Months Ended						Increase (decrease)				Nine Months Ended						Increase (decrease)
	September 30,						2010 vs. 2009				September 30,						2010 vs. 2009
	2010			2009			$		%			2010			2009		$		%
Investment and other (expense)	$	1,311		$	(8	)	$	1,319	16487.5	%	$	3,299		$	(85	)	$	3,384	3981.2	%
income
Percentage of revenues		4.5	%		0.0	%						4.0	%		(0.1	)%

Investment and other income increased $1.3 million for the three-month period ending September 30, 2010. The increase was primarily due to a $0.6 million gain on sale of a level 3 investment, $0.2 million from foreign exchange gains and $0.2 million from gains on other investments. Investment and other income increased $3.4 million for the nine-month period ending September 30, 2010. The increase was primarily due to a one-time, non-cash gain recognized in the second quarter of 2010 associated with foreign exchange translation gains in our vBulletin business in the U.K.

Provision for income taxes

	Three Months Ended						Increase (decrease)				Nine Months Ended						Increase (decrease)
	September 30,						2010 vs. 2009				September 30,						2010 vs. 2009
	2010			2009			$		%			2010			2009		$		%
Provision (benefit) from income taxes	$	2,455		$	2,323		$	132	5.7	%	$	7,681		$	5,669		$	2,012	35.5	%
Percentage of revenues		8.4	%		9.2	%						9.2	%		7.9	%

Our provision for income taxes increased $0.1 million, or 6%, and $2.0 million, or 36%, in the three- and nine- month periods ended September 30, 2010, respectively, over the prior year periods, which was a result of higher pre-tax income. The effective tax rates for the three- and nine-month periods ended September 30, 2010 and 2009 were 44.5%, 41.8%, 41.3% and 41.2%, respectively.

Adjusted EBITDA

We employ Adjusted EBITDA, defined as earnings before investment and other income, income tax provision, depreciation and amortization, transaction costs related to the potential merger with Hellman & Friedman, and stock-based compensation, for several purposes, including as a measure of our operating performance. We use Adjusted EBITDA because it removes the impact of items not directly resulting from our core operations, thus allowing us to better assess whether the elements of our growth strategy (increasing audience sizes, increasing monetization of such audiences, selling additional licenses and related products, and adding and developing new websites) are yielding positive results.

A reconciliation of Adjusted EBITDA to net income, the most directly comparable measure under accounting principles generally accepted in the United States, for each of the fiscal periods indicated, is as follows (in thousands):

	Three months ended		Nine months ended
	September 30,		September 30,
	2010	2009	2010	2009
	(unaudited)

Net income	$ 3,058	$ 3,295	$ 10,699	$ 8,103
Provision for income taxes	2,455	2,323	7,681	5,669
Depreciation and amortization	4,377	4,194	13,157	12,020
Stock-based compensation	1,494	874	4,033	2,418
Investment and other income (expense)	(1,311)	8	(3,299)	85
Transaction costs	2,207	-	2,207	-

Adjusted EBITDA	$ 12,280	$ 10,694	$ 34,478	$ 28,295

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Liquidity and Capital Resources

We have financed our operations primarily through cash provided by our operating activities and private and public sales of our common stock. At September 30, 2010, we had $60.2 million in cash, cash equivalents and available-for-sale investments; these investments are comprised mainly of government and debt securities.

Our principal sources of liquidity are cash, cash equivalents and available-for-sale investments, as well as the cash flow that we generate from our operations. We believe that our existing cash, cash equivalents, available-for-sale investment and cash generated from operations will be sufficient to satisfy our currently anticipated cash requirements through at least the next twelve months.

On October 7, 2008, we entered into an agreement with Silicon Valley Bank that entitles us to borrow up to a $35 million revolving line of credit under a four year term. The interest to be paid on the used portion of the credit facility will be based upon LIBOR or the prime rate plus a spread based on the ratio of debt to adjusted earnings before interest, taxes, depreciation and amortization. In addition, the obligations under the agreement are secured by a lien on substantially all of the assets of the Company. At September 30, 2010, we have no outstanding debt under this revolving line of credit.

Operating Activities

We generated $32.8 million of net cash from operating activities for the nine months ended September 30, 2010, compared to $27.1 million for the same period in 2009.

Acquisitions Activities

During the nine months ended September 30, 2010, cash used in acquisition-related activities, including acquisition and earnout payments, totaled $22.3 million. Fourteen website-related acquisitions were completed during the first nine months of 2010 for an aggregate purchase price of $23.3 million. The acquisitions were designed to extend and further diversify the Company’s audiences and advertising base across our seven vertical categories. The preliminary amounts of goodwill recognized in the first nine months of transactions amounted to $19.5 million and the preliminary amounts of intangible assets, consisting of acquired technology, customer relationships, content and domain names and trade names, amounted to $3.8 million.

During the nine months ended September 30, 2009, we completed eleven website-related acquisitions for an aggregate purchase price of $11.8 million. Of this amount, $8.7 million represented goodwill and $3.1 million represented intangible assets.

We have entered into earnout agreements as part of the consideration for certain acquisitions. We account for earnout consideration in accordance with ASC 805 (previously SFAS No.141R, Business Combinations ), as an addition to goodwill and accrued expenses at the present value of all anticipated future earnouts at the acquisition date for acquisitions occurring in fiscal years beginning after December 15, 2008. Earnouts occurring from acquisitions prior to December 31, 2008 are accounted for under EITF 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Combination, as an addition to compensation expense or goodwill in the period earned. For the nine months ended September 30, 2010, we paid earnouts totaling $3.0 million. As of September 30, 2010 we recorded liabilities for future earnout payments of $1.2 million. We cannot reasonably estimate maximum earnout payments as a significant number of agreements do not contain maximum payout clauses. Earnouts related to each website business are contingent upon achievement of agreed upon performance milestones such as future web site traffic, page views, revenue growth and operating income. A significant portion of earnout payments is triggered upon achieving significant revenue and operating income milestones and is specifically designed such that the additional cash flow outweighs the liquidity impact of the earnout payments. As a result, we do not believe that future earnout payments will have a significant impact on our liquidity and cash position.

Contingencies

From time to time, we have been party to various litigation and administrative proceedings relating to claims arising from operations in the normal course of business. Based on the information presently available, including discussion with counsel, management believes that resolution of these matters will not have a material adverse effect on our business, consolidated results of operations, financial condition, or cash flows; see Part II, Item 1, Legal Proceedings .

Off-Balance Sheet Arrangements

As of September 30, 2010, we did not have any off-balance sheet arrangements.

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Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, which amends ASC Topic 605, Revenue Recognition , to require companies to allocate revenue in multiple-element arrangements based on an element’s estimated selling price if vendor-specific or other third-party evidence of value is not available. ASU 2009-13 is effective beginning January 1, 2011, and earlier application is permitted. These amended standards will not have a material impact on our consolidated financial statements.

Item 3. Quantitative and Qualitative Dis closures About Market Risk.

Interest Rate Risk

As of September 30, 2010, we had cash and cash equivalents of $43.6 million, which consisted primarily of cash and U.S. government debt securities with original maturities of 90 days or less from the date of purchase. We also had marketable securities of $16.6 million, which consisted primarily of highly liquid government securities with original maturities of more than 90 days but less than two years from the date of purchase and are available for use in current operations. Marketable securities that are available for use in current operations are classified as current assets in the accompanying condensed consolidated balance sheets regardless of the remaining time to maturity.

The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. Fixed rate securities may be adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected when interest rates fall. To minimize this risk, we intend to maintain our portfolio of highly liquid cash equivalents and marketable securities in a variety of instruments, including U.S. government securities, money market funds and high-quality debt securities. We do not use financial instruments for trading or other speculative purposes, nor do we use leveraged financial instruments. Our investment policy limits investments to certain types of securities issued by institutions with investment-grade credit ratings and places restrictions on maturities and concentration by type and issue.

Item 4. Controls an d Procedures.

Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the participation of our Company’s management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Report. Based on the evaluation as of September 30, 2010, 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) were effective as of September 30, 2010.

Changes in Internal Control over Financial Reporting .

There have been no changes in our internal controls over financial reporting during the first nine months of 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal P roceedings.

The Company, its directors and control stockholder have been named as defendants in two purported class actions filed on behalf of the public stockholders of the Company challenging the proposed transaction pursuant to which an affiliate of Hellman & Friedman will acquire all of the outstanding shares of the Company’s common stock for $13.35 per share in cash pursuant to the terms and conditions of the Merger Agreement.

On October 7, 2010, Tandem Trading filed suit against the Company, Hellman & Friedman Capital Partners VI, L.P., Idealab, Howard Lee Morgan, Robert N. Brisco, Kenneth B. Gilman, Marcia Goodstein, William Gross, Martin R. Melone, James R. Ukropina, W. Allen Beasley (together, the “Class Action Defendants”), Micro Holding Corp., and Micro Acquisition Corp., in the Superior Court of Los Angeles County, California. On October 13, 2010, John Norton filed suit against the Class Action Defendants in the Court of Chancery in Delaware. The complaints in these actions contain substantially similar allegations. Among other things, plaintiffs allege that the director defendants have breached their fiduciary duties to the Company's stockholders in pursuing the proposed transaction, including by accepting an unfair and inadequate acquisition price and failing to take appropriate steps to maximize stockholder value in connection with the sale of the Company. Plaintiffs seek, among other things, compensatory and other unspecified damages. Plaintiff in the Norton action also includes a request that the proposed transaction be enjoined. The defendants in each of these actions are actively contesting these claims. Any conclusion of these lawsuits in a manner adverse to the Company could have a material adverse effect on the Company’s business, results of operation, financial condition and cash flows or on its ability to proceed with the proposed transaction. In addition, the cost to the Company of defending these lawsuits, even if resolved in the Company’s favor, could be substantial. Such lawsuits could also substantially divert the attention of the Company’s management and the Company’s resources in general.

From time to time, we may be subject to legal proceedings and claims arising in the ordinary course of business.

On August 8, 2008, Versata Software, Inc. (Versata Software) and Versata Development Group, Inc. (Versata Development) filed suit against us and our subsidiaries, Autodata Solutions Company (Autodata) and Autodata Solutions, Inc. (Autodata Solutions) in the United States District Court for the Eastern District of Texas, Marshall Division, claiming that certain software and related services we and our Autodata subsidiaries offer violate Versata Development’s U.S. Patent No. 7,130,821 entitled “Method and Apparatus for Product Comparison” and its U.S. Patent No. 7,206,756 entitled “System and Method for Facilitating Commercial Transactions over a Data Network,” breach of a settlement agreement entered into in 2001 related to a previous lawsuit brought by the Versata entities, and tortious interference with an existing contract and prospective contractual relations. On August 25, 2008, Versata Software and Versata Development filed an amended complaint against us, Autodata and Autodata Solutions, asserting additional claims that certain software and related services offered by the Company and its Autodata subsidiaries violate Versata Development’s U.S. Patent No. 5,825,651 entitled “Method and Apparatus for Maintaining and Configuring Systems,” Versata Development’s U.S. Patent No. 6,675,294 entitled “Method and Apparatus for Maintaining and Configuring Systems,” and Versata Software’s U.S. Patent No. 6,405,308 entitled “Method and Apparatus for Maintaining and Configuring Systems” and seeking declaratory judgment regarding the validity of the Versata entities’ revocation and termination of licenses included in the 2001 settlement agreement. Versata Software and Versata Development seek unspecified damages, attorneys’ fees and costs and permanent injunctions against the Company, Autodata and Autodata Solutions. Discovery is pending. On September 8, 2010, Autodata Solutions filed suit against Versata Software and Versata Development in the Circuit Court of Oakland County, Michigan, asserting claims for unfair competition and misappropriation of Autodata Solution’s trade secrets, among other claims.

We believe the claims against us are without merit and intend to vigorously defend the lawsuits, but we cannot predict the outcome of these matters, and an adverse outcome could have a material impact on our business, financial condition, results of operations or cash flows. Even if we are successful in defending the lawsuits or pursuing our counterclaims, we may incur substantial costs and diversion of management time and resources to defend the litigation and pursue our counterclaims. We are not able to estimate a probable loss or recovery, if any.

Item 1A. Risk Factors.

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, Item IA, Risk Factors , in our Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the SEC on March 3, 2010.

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The Failure to Complete the Merger Could Adversely Affect our Business

There is no assurance that our merger with an affiliate of Hellman & Friedman will be completed. If the merger is not approved by our stockholders or if the merger is not completed for any other reason, we will remain a public company and our Class A common stock will continue to be listed and traded on The NASDAQ Global Select Market. While we expect that that management will operate our business in a manner similar to that in which it is being operated today, if the merger is not completed, we may suffer negative financial ramifications, including as a result of paying a termination fee of $23 million or reimbursement of the buyer’s out-of-pocket fees and expenses, up to a cap of $4 million, under certain circumstances. In the event we have to pay any such amount, the amount of any termination fee we would have to pay (if any) would be reduced by the amount of any reimbursement of fees and expenses. In addition, the current market price of our Class A common stock may reflect a market assumption that the merger will occur, and a failure to complete the merger could result in a decline in the market price of our Class A common stock. Also, there may be substantial disruption to our business and a distraction of our management and employees from day-to-day operations, because matters related to the merger may require substantial commitments of their time and resources.

While the Merger Agreement is in Effect, we are Subject to Restrictions on Our Business Activities

While the Merger Agreement is in effect, we are subject to significant restrictions on our business activities and must generally operate our business in the ordinary course (subject to certain exceptions or the consent of an affiliate of Hellman & Friedman). These restrictions on our business activities could have a material adverse effect on our future results of operations or financial condition.

Item 2. Unregistered Sales of Equity Securities a nd Use of Proceeds.

None

Item 3. Default Upon Senior Securities.

None

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

None.

Item 5. Other Information.

None

Item 6. Exh ibits.

(a) Index to Exhibits


Exhibit Number	Exhibit Description
31.1*	Certification of Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002

31.2*	Certification of Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002

32.1**	Certification of Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002

32.2**	Certification of Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith.

** Furnished herewith.

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SIGN ATURES

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.

INTERNET BRANDS, INC.



Date: November 2, 2010	By:	/S/ ROBERT N. BRISCO
		Robert N. Brisco
		President, Chief Executive Officer, and Director Principal Executive Officer


Date: November 2, 2010	By:		/S/ SCOTT A. FRIEDMAN
			Scott A. Friedman
			Chief Financial Officer Principal Financial and Accounting Officer

-30 -

EXHIBIT INDEX

Exhibit Number	Exhibit Description
31.1*	Certification of Chief Executive Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002

31.2*	Certification of Chief Financial Officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002

32.1**	Certification of Chief Executive Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002

32.2**	Certification of Chief Financial Officer, as required by Section 906 of the Sarbanes-Oxley Act of 2002

* Filed herewith.

** Furnished herewith.

-31-

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