You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. This discussion and other parts of this Annual Report on Form 10-K contain forward-looking statements relating to our anticipated plans, products, services, and financial performance. The words "believe," "expect," "anticipate," "intend" and similar expressions identify forward-looking statements, but their absence does not mean the statement is not forward looking. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially from those anticipated in the forward looking statements. Factors that could affect our actual results include, but are not limited, to our ability to retain and increase our customer base, to respond to competitive threats and real estate market conditions, to manage lead generation and other costs, to develop new products, to expand into new lines of business, and those discussed in "Risk Factors" contained in Item 1A. of this Annual Report and in our other SEC filings. Given these risks and uncertainties, you should not place undue reliance on these forward looking statements. The forward looking statements are made as of the date of this report and, except as required by law, we assume no obligation to update any such statements to reflect events or circumstances after the date hereof.

Overview

Market Leader provides real estate professionals with the tools and services they need to manage and grow their real estate businesses. We have been an innovator in internet-based marketing services for real estate professionals since the company's inception in 1999. We recently began to shift our business model from its original lead generation model and toward offerings that combine software-as-a-service with access to industry-leading media buying and lead generation services. Traditional lead generation products continued to account for the majority of customer relationships and revenue in 2008.

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

Additionally, Market Leader provides consumers with free access to the information and tools they need throughout the home buying and selling process. Our nationwide consumer web sites include: JustListed.com, a service that notifies home buyers as soon as new homes hit the market; HouseValues.com, a service that provides home sellers with market valuations of their current homes; and HomePages.com, a real estate portal that enables consumers to see all the home listings in their area, view detailed neighborhood and school data, compare recent home sales, find local real estate agents, and find the value of their own homes. Our new family of products also provides consumers with free access to similar information through localized web sites that we operate on behalf of our real estate professional customers.

How We Generate Revenues

We generate the majority of our revenues from the services we provide to real estate agents and brokers.

Growth Leader, Team Leader, and Realty Generator: We charge real estate professionals a one-time set-up fee and a monthly fixed fee for services, which include a personalized web site, the Vision CRM tool, marketing materials, training and support. We also generate revenue by placing online advertising for our real estate professional customers, to drive traffic and leads to their web site. We acquired the RealtyGenerator product in November 2007 and launched the Growth Leader and Team Leader products in late 2008.

HouseValues: We charge real estate agents a one-time set-up fee and a monthly fixed fee for a monthly bundle of exclusive leads on prospective home sellers, the Market Leader CRM tool, training and coaching programs.

JustListed: Like the HouseValues' product, we charge real estate agents a one-time set-up fee and a monthly fixed fee for a monthly bundle of exclusive leads on prospective home buyers, the Market Leader CRM tool, training and coaching programs.

HomePages/Showcase: We charged a monthly fixed fee for Showcase, an online marketing subscription to real estate professionals that allowed them to feature selected listings on our HomePages web site.

We generally provide our services under terms of a one-year agreement that then continues on a month-to-month basis until terminated. Growth Leader customers have the option of selecting agreements with a short-term commitment and higher monthly fees.

All initial set-up fees are recognized as revenue on a pro rata basis over the estimated customer life or the life of the contract, whichever is longer. The remainder of our revenue is derived from monthly fees for stand-alone use of our Market Leader CRM system, advertising income and other marketing services, sales of excess leads and traffic, and the collection of contract termination fees, none of which materially affects our operating results. These sources of revenues in the aggregate were less than 5% of our revenues for all annual periods presented in this Annual Report on Form 10-K.

Our Expenses

The largest components of our expenses are personnel and marketing costs. Personnel expenses consist of salaries, benefits and incentive compensation for our employees, including commissions for sales people. These expenses are categorized in our statements of operations based on each employee's principal function. Marketing expenses consist of programs designed to attract consumers to our web sites and to promote our services to potential customers, primarily residential real estate agents. The largest component of our marketing expenses consists of advertising designed to increase the number of potential home buyers and sellers who visit our web sites.

The Impact of Seasonality and Cyclicality

The residential real estate and advertising markets are influenced by seasonality as well as overall economic cycles.

Seasonality

While individual geographic markets vary, real estate transaction activity tends to progressively increase from January through the summer months, and then gradually slows over the last quarter of the calendar year. As a result, we may experience slower lead generation and customer adoption toward the end of the year. We are also subject to seasonal fluctuations in advertising rates and lead generation. Television advertising costs are generally more expensive in the second and fourth calendar quarters in connection with network premieres and finales and the holiday season.

Cyclicality

The success of our business depends on the health of the residential real estate market, which historically has been subject to economic cycles. Following a period of sustained growth, the residential real estate market has entered a down cycle. Housing prices have declined and residential real estate transactions have slowed significantly in major markets that are important to our business.

Typically, during downturns in housing markets, demand for residential real estate decreases and demand for the services of real estate professionals similarly decreases. In these markets, the number of real estate professionals may decline significantly as less successful agents and brokers leave the profession and fewer people seek to become real estate professionals. A decline in the number of customers or a decrease in the amount they wish to spend on services such as ours will negatively impact our revenue and increase our customer acquisition costs. In addition, the decline in the demand for housing could increase our lead generation costs and adversely impact our margins.

Trends in the real estate market are unpredictable; therefore our operating results, to the extent they reflect changes in the broader real estate industry, may be subject to significant fluctuation.

Current Year Overview

Revenue from continuing operations was $38.4 million for the year, a 36% decline compared to 2007. Revenue decreased in 2008 due primarily to a 32% decrease in average customer count and a 5% decrease in average revenue per customer. The related declines in revenue were partially offset by the addition of RealtyGenerator revenues which were $5.7 million in 2008 compared to $0.9 million in 2007.

We incurred a net loss from continuing operations of $13.1 million for the year compared to net loss from continuing operations of $12.6 million in 2007. Our net loss from continuing operations in 2008 includes noncash charges of $4.9 million related to the full impairment of goodwill and $1.3 million related to the "other-than-temporary" impairment of our investment in ActiveRain. Our net loss from continuing operations in 2007 includes noncash charges of $6.1 million related to our write-down of goodwill and long-lived assets and $3.1 million related to the application of a full valuation allowance to our net deferred tax assets. These charges in 2007 and 2008 reflect our history of operating losses, difficult market conditions in the residential real estate market that impacts our near term forecasted operations and cash flows, and the decline in our stock price. See further discussion of these items in Note 3, 8, 10 and 13 of the Notes to Consolidated Financial Statements.

Our operating results for the year continue to reflect the broader real estate market conditions, which remain challenging and we expect will be further affected by crisis conditions in the global banking, credit and mortgage-lending markets. We believe these broader economic trends negatively impact consumers' ability and willingness to engage in real estate transactions, the commissions earned by real estate professionals, and the marketing investments that they are able and willing to make.

Over the past several quarters, we have adapted to changing market conditions by better aligning expenses with expected revenue in an effort to avoid non-strategic use of cash. We believe that selective acquisitions, share repurchases and continued investments in our business can all potentially be strategic uses of cash. Because we cannot be certain of the depth and duration of the downturn amid the unprecedented economic uncertainty we are facing in at least the near-term, we believe that cash has significant option value, and preserving that value will continue to be prudent until we have greater visibility in the economy and our business. That said, we believe that the potential benefits of investment in the business have been enhanced by our recent introduction of innovative products, and we expect to gain share of mind and market by beginning to present our new solutions ahead of the inflection point of the real estate industry downturn.

Significant Business Developments

The following significant business developments affect the comparability of our financial statements:

Purchase of Realty Generator. On November 1, 2007, we completed our acquisition of substantially all of the assets of Realty Generator, LLC and a related entity for approximately $11.2 million in cash and assumed liabilities, including incentives based on the post-acquisition performance of the acquired assets. We accounted for this acquisition as a business combination and have included Realty Generator's results of operations from the transaction date forward.

Investment in ActiveRain. On November 16, 2007, we acquired 32.4% of the outstanding voting stock of ActiveRain Real Estate Network for $2.75 million. During September 2008 ActiveRain's redemption of founder shares increased our ownership percentage to 33.3%. ActiveRain is a professional community and social networking platform serving the real estate community. ActiveRain has grown its membership over the past two years to more than 135,000 real estate professionals. Our investment in ActiveRain is recorded using the equity method of accounting which requires that we record our proportionate share of their net loss adjusted for any difference between our cost and the underlying equity in their net assets at the acquisition date.

As broader market conditions have contributed to the decline in our revenue, we have taken a series of actions since January 2007 to significantly reduce our cost structure to align with our revenue trends.

• Reduction in Workforce. In January 2008, we reduced our workforce by approximately 45 employees. We recorded cash severance charges of approximately $0.6 million and additional accelerated vesting charges of $0.2 million related to equity compensation in the first quarter of 2008.

• Closure of the Yakima Facility. On July 31, 2007, we implemented a plan to reduce operating expenses, including the closure of our Yakima, Washington satellite center. In connection with this plan, we reduced our workforce by approximately 100 employees. In the third quarter of 2007, we recorded severance and related charges of $0.5 million. At the same time, we recognized an impairment charge of $1.2 million to reduce the Yakima leasehold improvements to their estimated fair value less estimated selling costs.

In January 2008, we terminated our lease for the Yakima facility and in a related transaction, assigned our purchase option for the Yakima facility and its remaining assets to a third party for net cash of $1.2 million. We recorded a gain of $0.8 million on this transaction in the first quarter of 2008.

• Discontinued Mortgage Operations. In January 2007, we announced our exit from the mortgage lead generation business and our intention to scale back or eliminate initiatives that were not critical to our real estate agent customers. These activities resulted in an overall reduction of our workforce by approximately 60 employees. In connection with the discontinuation of our mortgage operations and the reduction in workforce, we paid payroll and related costs of approximately $0.5 million in 2007 and incurred accelerated stock compensation expense estimated of approximately $0.5 million.

Results of Operations

Our discussion of operating results addresses results from continuing operations. Our former mortgage business is presented in our financial statements as discontinued operations. The following table presents our historical operating results for continuing operations as a percentage of revenues for the periods indicated:

                                                             Years Ended December 31,
                                                        2008           2007           2006
Revenues                                                  100 %          100 %          100 %
Expenses:
Sales and marketing                                        65             66             65
Technology and product development                         17             15             13
General and administrative                                 24             20             14
Gain on sale of fixed assets                               (2 )           -              -
Impairment of goodwill and long-lived assets               13             10             -
Depreciation and amortization of property and
equipment                                                  11             10              6
Amortization of acquired intangible assets                  5              1              1

Total expenses                                            132            122             99

(Loss) income from continuing operations                  (32 )          (22 )            1
Equity in loss of unconsolidated subsidiary                (5 )           -              -
Interest income and expense, net                            3              5              3
Income tax expense                                         -               4             -

Net (loss) income from continuing operations              (34 %)         (21 %)           4 %

Comparison of Years Ended December 31, 2008 and December 31, 2007

Revenues



                                      Years Ended December 31,
                                                                 Percent
                               2008       2007     Decrease      Change
                                       (dollars in thousands)
                  Revenues   $ 38,368   $ 59,808   $ (21,440 )       (36 %)

2008 revenues decreased 36% from last year. Our average customer count decreased by 32% and our average revenue per customer declined by 5%. The cyclical downturn in the real estate industry, reflected in significant declines in existing home sales as well as housing prices over the past two years, has caused double-digit declines in the total amount of real estate commissions earned for the third year in a row according to Real Trends. We believe this downturn has negatively impacted the ability of real estate professionals to pay for marketing services and other lead generation costs, which has resulted in lower customer acquisition this year and a continued decline in our customer base. We nonetheless improved our customer retention rates in 2008 compared to 2007 rates by working with customers to manage, and in many cases, reduce their monthly marketing commitment, which has resulted in lower average revenue per customer.

The revenue decline was partially offset by the increased contribution from our RealtyGenerator product revenue which was $5.7 million in 2008 and $0.9 million for the two months that we had the product in 2007. Consistent with our goal of growing the product revenue, we added sales resources dedicated to RealtyGenerator in 2008, and despite difficult market conditions, increased revenue from this product by 4% in 2008 compared to the pro forma full-year revenue amount of $5.5 million in 2007.

More detailed information about the sequential change in customers and average revenue per customer is included in the "Key Operational Metrics" section of Management's Discussion and Analysis.

In 2009, we anticipate that revenues from our new Vision family of products - RealtyGenerator, Team Leader and Growth Leader - will become an increasing part of our revenue base. Based on our experience with the RealtyGenerator product, we believe these additional product offerings will help us to achieve better customer retention rates and improved operating results over time. However, we expect the ongoing challenges in the real estate market, as well as the broader negative economic trends will continue to impact real estate professionals and their ability to fund marketing expenditures. Therefore, we expect our current revenue trend to continue for at least the first half of 2009. Given the expected shift in our product mix and lower customer base, we expect that the quarterly declines will moderate later in the year and this will create an opportunity for us to build on this baseline and return the business to growth as economic conditions improve.

Sales and Marketing



                                               Years Ended December 31,
                                                                          Percent
                                        2008       2007     Decrease      Change
                                                (dollars in thousands)
        Sales and marketing expense   $ 24,978   $ 39,453   $ (14,475 )       (37 %)

Sales and marketing expenses consist primarily of online and television advertising, as well as salaries, commissions and related expenses for our sales and marketing staff. Other expenses include credit card fees and corporate marketing and communications expenses.

Sales and marketing expense decreased in absolute dollars and decreased slightly as a percentage of revenue during 2008 when compared to 2007, primarily due to reduced advertising costs (lead and traffic generation

costs), as well as a reduction in payroll and related costs. The decrease in advertising costs was consistent with our decrease in revenues and remained consistent as a percentage of revenue in 2008 compared to 2007. Payroll and related costs decreased in 2008 due to decreased average headcount, as we realigned our cost structure to our projected revenues. Sales and marketing headcount decreased to 110 at December 31, 2008, which compares to 153 at December 31, 2007.

In 2009, we expect sales and marketing expense to decrease due to a lower advertising expense consistent with reduced revenue and because of lower average staffing levels compared to 2008. Given the expected shift in our product mix to our Vision-based products, we anticipate advertising costs will become an increased percentage of revenue, driving an overall increase in sales and marketing expenses as a percentage of revenue during 2009.

Technology and Product Development



                                                       Years Ended December 31,
                                                                                 Percent
                                                2008      2007     Decrease      Change
                                                        (dollars in thousands)
  Technology and product development expense   $ 6,409   $ 9,114   $  (2,705 )       (30 %)

Technology and product development expenses consist primarily of salaries and related expenses for employees responsible for customer and internal technology services. Also included are license fees, maintenance costs, Internet and phone connectivity and hosting costs.

Technology and product development expense decreased in absolute dollars for 2008 as compared to 2007, as we reduced the number of employees to bring our cost structure into alignment with our decreasing revenues. In addition, communications and connectivity expenses decreased due to the closure of Yakima office during 2007. Technology and product development headcount decreased to 28 at December 31, 2008, which compares to 41 at December 31, 2007. Despite the decline in absolute dollars, these costs increased as a percentage of revenue due to the year-over-year decline in revenues.

In 2009, we expect the level of technology and product development costs to remain fairly consistent with the quarterly average in 2008, but to increase as a percentage of lower revenue, as we continue to build out the infrastructure and enhance our new Vision-based products and to develop new product offerings on the Vision platform.

General and Administrative



                                                   Years Ended December 31,
                                                                             Percent
                                           2008       2007     Decrease      Change
                                                    (dollars in thousands)
     General and administrative expense   $ 9,245   $ 12,166   $  (2,921 )       (24 %)

General and administrative expenses consist primarily of salaries and related expenses for executive, accounting, and human resources personnel. These costs also include audit and legal fees, business consulting fees, business insurance premiums, rent and related expenses.

General and administrative expenses decreased as we reduced the number of employees and reduced other expenses such as facility costs, recruiting and business insurance to bring our cost structure into alignment with our decreasing revenues. Despite the decline in absolute dollars, these costs increased as a percentage of revenue due to the year-over-year decline in revenues. Headcount decreased to 22 at December 31, 2008 from 32 at December 31, 2007.

In 2009, we expect general and administrative expenses to decrease modestly in total dollars as we manage operational costs, but to increase as a percentage of revenue on lower expected revenues.

Impairment of Goodwill and Long-Lived Assets

Based on our history of operating losses and the decline in the economy and in the market value of our common stock, we evaluated the recoverability of our goodwill and long-lived assets and assessed potential impairment using market prices and other available information. As a result we recorded an impairment charge to goodwill of $4.9 million.

During 2007, we evaluated the recoverability of our goodwill and long-lived assets and assessed potential impairment using similar market information as in 2008. As a result we recorded an impairment charge to goodwill of $3.6 million and an impairment charge of $0.8 million related to other long-lived assets. In addition, during the year we determined that certain internally developed software projects had limited future benefits, resulting in impairment charges totaling $0.6 million.

In July 2007, we closed our satellite sales and service center in Yakima, Washington, and recognized an impairment charge of $1.2 million to reduce the related leasehold improvements to their estimated fair value less selling costs.

Depreciation and Amortization of Property and Equipment

Depreciation and amortization of property and equipment decreased year-over-year primarily due to the lower asset values resulting from impairment charges taken against our capital assets during 2007 and the closure of our Yakima facility during the third quarter of 2007.

We expect a net decrease in depreciation expense in 2009 because a portion of our asset base becomes fully depreciated, which is expected to more than offset depreciation for new additions.

Amortization of Acquired Intangible Assets

Amortization of intangible assets increased for 2008 when compared to 2007, due to the new intangible assets related to the Realty Generator acquisition in the fourth quarter of 2007.

Equity in Loss of Unconsolidated Subsidiary

Our equity in the losses of ActiveRain increased in 2008 when compared to 2007, primarily due to the partial year of ownership in 2007, as well as an impairment charge of $1.3 million that was recorded in 2008. The other-than-temporary impairment was the result of an evaluation of the estimated fair value of our investment at December 31, 2008 that indicated a fair value that was less than its carrying value, and that the impairment was other than temporary.

Interest Income and expense, net

Interest income decreased in 2008 when compared to 2007 due to decreased rates of return on investments as well as a reduction in the amount of cash, cash . . .