You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q 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 to effectively re-brand and re-launch our company. A more detailed description of these and other risks that could materially affect our actual results is included under the heading Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008 and in our other Securities and Exchange Commission filings. Given these risks and uncertainties, you should not place undue reliance on our forward looking statements. The forward-looking statements are made as of the date of this report, and we assume no obligation to update any such statements to reflect events or circumstances after the date hereof.

Overview

We provide 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. Our HouseValues and JustListed lead generation products deliver home seller or buyer leads to customers via an online software tool that is generally bundled with the offerings. These products have accounted for the majority of customer relationships and revenue throughout the Company's history and continued to do so in the second quarter of 2009.

In 2008 we began to shift our business model from our original lead generation model toward offerings that combine software-as-a-service with access to industry-leading advertising buying and lead generation services.

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 offerings constitute the new products that support the shift in our business model. These products feature Vision, a personalized website optimized to generate consumer response, a proprietary customer relationship management (CRM) tool for real estate agents that is integrated with the website, and access to industry-leading advertising buying and lead generation services to help real estate professionals attract new clients and promote themselves throughout their community.

Revenue for the second quarter was $5.9 million, down 41% from the same period in 2008. The change in revenue was due primarily to a decline in our customer base.

We believe our revenue trend continues to reflect the broader real estate market conditions, which have been further affected by challenges in the global banking, credit and mortgage-lending markets. U.S existing home sales increased in the second quarter from the first quarter of 2009, based upon research published by the National Association of Realtors. However, research from REAL Trends says that real estate commissions were lower in the second quarter compared to the first quarter. We expect real estate professionals to remain cautious regarding new marketing expenditures as they recover from the industry slowdown. We believe commissions are the better predictor of the level of marketing investments that real estate professionals are willing to make. Despite the market backdrop, our customer retention rate improved in the second quarter to 94.2 percent compared to 92.8 percent in the first quarter of 2009.

We also continued to make progress shifting our business model toward our Vision-based products. While the majority of the $2.1 million in Vision product revenue in the second quarter came from our RealtyGenerator product, we continued to see promising results from our new Growth Leader product as our agent sales team began selling this new product more broadly. Growth Leader also played an important role in our customer retention efforts as we began transitioning some existing customers to this new product, effectively converting some who intended to cancel into advocates of Growth Leader and the Company. At the end of the quarter Growth Leader had approximately 1,064 customers.

We believe that the features of our Vision product set and the success that many of our Vision customers are experiencing despite today's industry downturn enable the testing of new sales methods. In another initiative designed to expand our Vision-based customer base, we announced last quarter a strategic partnership with Realty Executives International, a leading real estate company with more than 700 brokerage company franchisees in its network. Realty Executives is launching a strategy to help each of its franchisees build their Internet presence into a source of lead generation and profits, and they plan to achieve this goal by offering our RealtyGenerator product. To support this initiative, we structured a program to greatly reduce the customers' initial risk by waiving many of the fees that we would normally collect in the initial months of service. Realty Executives also is supporting this program by providing participating franchisees with co-marketing funds. As a result of this promotion, we expect to achieve better penetration into their franchise brokerage network than would otherwise be possible if limited to our traditional sales approaches. At the end of the second quarter of 2009, we had signed over 100 agreements with Realty Executive brokerages. We expect modest revenue contribution and expense as we support these customers through a discounted trial period, with more significant positive contribution in 2010.

Over the past three years, we have adapted to changing market conditions by better aligning expenses with expected revenue in an effort to avoid non-strategic uses of cash. We believe that selective acquisitions, share repurchases and continued investments in our business can all potentially be strategic uses of cash. We were able to reduce a significant non-strategic expense as a result of our successful renegotiation of our Kirkland, Washington facility lease. With this amendment, we eliminated the expense of excess space, avoided fees for early lease termination, and kept the team in our current location focused on building the business. We began to realize these savings in the second quarter, and expect the full impact of these cost savings to be realized during the third quarter of 2009.

Because we cannot be certain of the depth and duration of the downturn amid this uncertainty we are facing in at least the near-term, we believe that cash has significant option value and that 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. We expect to continue to use some cash in operations during the remainder of 2009 to maintain support for our strategic initiatives.

Results of Operations

Revenues

Revenues decreased 41% and 42% for the quarter and year-to-date periods ended June 30, 2009, respectively, compared to the same periods in 2008. This decrease is primarily due to a 35% decline in our average customer base and a 10% decline in our average revenue per customer over the past twelve months. We believe the cyclical downturn in the real estate industry has negatively impacted the ability of real estate professionals to pay for marketing services and other lead generation costs, which is reflected in our decreased customer base and our lower average revenue per customer.

Revenue in the second quarter of 2009 decreased 9% from the first quarter of 2009. On a sequential quarterly basis, we experienced a 10% decrease in average customer count, which was offset by a modest increase in average revenue per customer of 2%. More information about the sequential change in revenue and customers is included under the heading "Key Operational Metrics" in Management's Discussion and Analysis of Financial Condition and Results of Operations.

Our new Vision products - RealtyGenerator, Team Leader and Growth Leader - provided 35% of second quarter revenue and we anticipate that they will represent a majority of revenue by year-end. 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. A combination of factors - the expected shift in our product mix, a smaller customer base, as well as the increased portion of customers that are now at least two-year tenured and demonstrating above-average retention - lead us to expect that the sequential declines in quarterly revenue will significantly moderate starting in the third quarter, and that 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



                                                          Three months ended             Six months ended
                                                               June 30,                      June 30,
                                                         2009            2008          2009           2008
Total sales and marketing expense (in thousands)       $   4,676        $ 6,242       $ 9,418       $ 13,672

Total sales and marketing expense as a % of revenue           79 %           62 %          75 %           64 %

Sales and marketing expense decreased for the three and six month periods ended June 30, 2009 when compared to the same periods in 2008, primarily due to reduced advertising costs and customer acquisition expenses. The decreases in advertising costs were driven primarily by the decrease in revenues for the three and six month periods ended June 30, 2009 compared to the same periods in 2008. Advertising costs increased slightly as a percentage of revenue due to the shift in our product mix to our Vision-based products for which advertising represents a higher percentage of related revenue. We have reduced our customer acquisition expenses in response to the current business environment by reducing staffing costs as well as acquisition marketing efforts. Headcount at June 30, 2009 for our sales and marketing groups decreased 20% to 103, compared to 129 at June 30, 2008. While we have managed a lower overall expense level, sales and marketing expense has increased relative to revenue on the lower revenue base.

Sales and marketing expense in the second quarter of 2009 was comparable to the first quarter of 2009.

Given the expected shift in our product mix to our Vision-based products, we expect to support sales initiatives for our Vision-based products and also anticipate advertising costs will become an increasing percentage of revenue, driving an overall increase in sales and marketing expenses as a percentage of revenue during the remainder of 2009.

Technology and Product Development



                                                     Three months ended             Six months ended
                                                          June 30,                      June 30,
                                                    2009            2008           2009          2008
Total technology and product development
expense (in thousands)                            $   1,278        $ 1,491       $  2,685       $ 3,449

Total technology and product development
expense as a % of revenue                                21 %           15 %           22 %          16 %

Technology and product development expense decreased for the three and six month periods ended June 30, 2009 when compared to the same periods in 2008, as we reduced our business expenses in recognition of our lower revenues. We believe we have maintained resources required to deliver new products and enhancements, as well as to support our products and infrastructure. While we have managed a lower overall expense level, technology and product development expense has increased relative to our lower revenue base.

Technology and product development expense decreased 9% in the second quarter of 2009 when compared to the first quarter of 2009 primarily due to reduced consulting and licensing expenses.

For the remainder of 2009, we expect the level of technology and product development expenses to remain fairly consistent as we continue to enhance our new Vision-based products and to develop new product offerings on the Vision platform.

General and Administrative



                                                     Three months ended             Six months ended
                                                          June 30,                      June 30,
                                                    2009            2008           2009          2008
Total general and administrative expense (in
thousands)                                        $   1,744        $ 2,232       $  3,713       $ 4,938

Total general and administrative expense as a
% of revenue                                             29 %           22 %           30 %          23 %

General and administrative expense decreased primarily due to reduced staffing and occupancy expenses. Staffing costs declined even though headcount remained consistent due to lower stock compensation charges, changes in the staffing mix and lower incentive earnings. Lower occupancy expenses reflect the terms of our amended lease. General and administrative expenses increased as a percentage of revenues for the three and six month periods ended June 30, 2009 when compared to the same periods last year due to our lower revenue base.

General and administrative expenses decreased 11% in the second quarter of 2009 compared to the first quarter of 2009 primarily due to reduced professional fees and staffing costs, as well as reduced occupancy expenses associated with the amended lease.

We expect quarterly general and administrative expenses to decrease modestly for the remainder of 2009, primarily as a result of the lower cost negotiated for our corporate headquarters, and to remain fairly consistent as a percentage of revenue on lower expected revenue.

Gain on sale of fixed assets

During the first quarter of 2008, we terminated our lease for the Yakima facility. We did not pay a fee to terminate the lease. In a related transaction, we assigned our purchase option for the Yakima facility and transferred all remaining assets in the facility to a third party for net cash of $1.2 million, resulting in a gain of $0.8 million.

Depreciation and Amortization of Property and Equipment

Depreciation and amortization of property and equipment decreased for the three and six months ended June 30, 2009 compared to the same periods in 2008 because many assets became fully depreciated during 2008 and early 2009. This decrease was offset, in part, by the acceleration of depreciation related to leasehold improvements in office space that we vacated in conjunction with our renegotiated office lease.

Equity in Loss of Investee

Our equity in the losses of ActiveRain Real Estate Network, a company in which we own 33.3%, decreased for the three and six months ended June 30, 2009 compared to the same period in 2008 due to decreased net losses as ActiveRain continued to grow their revenue base. We believe ActiveRain continues to have strategic value to Market Leader, and that the fair value of our investment is not less than the carrying value at June 30, 2009 of $0.4 million. However, as ActiveRain is still in the early stages of developing its business model there is continued risk associated with the value of our investment. Therefore we will continue to monitor events that could indicate we need to evaluate that asset for impairment.

Interest Income and expense, net

Interest income decreased for the three and six month periods ended June 30, 2009 when compared with the same periods in 2008 primarily due to decreased rates of return on investments as well as a lower investment balance. Early in 2008, we modified our investment strategy to preserve the security and liquidity of our funds, which has resulted in significantly lower rates of return. At June 30, 2009, we held $55.2 million in cash, cash equivalents and short-term investments, compared to $62.7 million at June 30, 2008.

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We include a discussion of our critical accounting policies and estimates in our Annual Report on Form 10-K for the year ended December 31, 2008.

The following table presents unaudited operational data pertaining to our operations for the six quarters ended June 30, 2009. This quarterly information has been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflects all adjustments necessary for a fair representation of the information for the periods presented. This data should be read in conjunction with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2008. Operating results for any quarter apply to that quarter only and are not necessarily indicative of results for any future period.

                                      June 30,       Mar. 31,       Dec. 31,        Sept. 30,       June 30,       Mar. 31,
                                        2009           2009           2008            2008            2008           2008
                                                                          (in thousands)
Operations Data:
Revenues                              $   5,947      $   6,529      $   7,783      $     9,258      $  10,131      $  11,196
Expenses:
Sales and marketing                       4,676          4,742          5,464            5,842          6,242          7,430
Technology and product development        1,278          1,407          1,536            1,424          1,491          1,958
General and administrative                1,744          1,969          1,987            2,320          2,232          2,706
Impairment of goodwill and
long-lived assets                            -              -           4,883               -              -              -
Gain on sale of fixed assets                 -              -              -                -              -            (791 )
Depreciation and amortization of
property and equipment                      780            803          1,032            1,040          1,015            959
Amortization of acquired intangible
assets                                      480            482            454              491            492            492

Total expenses                            8,958          9,403         15,356           11,117         11,472         12,754

Loss from operations                     (3,011 )       (2,874 )       (7,573 )         (1,859 )       (1,341 )       (1,558 )
Impairment of and equity in loss of
investee                                    (61 )          (94 )       (1,461 )           (207 )         (185 )         (151 )
Interest income and expense, net             59             95            128              289            289            519

Loss before income tax                   (3,013 )       (2,873 )       (8,906 )         (1,777 )       (1,237 )       (1,190 )
Income tax expense (benefit)                  2              2            (58 )             31             34              2

Net loss                              $  (3,015 )    $  (2,875 )    $  (8,848 )    $    (1,808 )    $  (1,271 )    $  (1,192 )

Key Operational Metrics

The following table presents key operational data and metrics for the six
quarters ended June 30, 2009.



                                       June 30,        Mar. 31,        Dec. 31,        Sept. 30,       June 30,       Mar. 31,
                                         2009            2009            2008            2008            2008           2008
Operational Data:
Components of revenue (in
thousands):
Real estate professional
revenues (1)                          $    5,909      $    6,481      $    7,732      $     9,181      $  10,063      $  11,118
Other revenues (2)                            38              48              51               77             68             78

Total revenues                        $    5,947      $    6,529      $    7,783      $     9,258      $  10,131      $  11,196
Real estate professional customers,
end of period (3)                          5,842           6,361           7,245            8,381          9,078          9,550
Average monthly retention rate (4)          94.2 %          92.8 %          92.2 %           93.6 %         93.6 %         92.5 %
Average real estate professional
customers in the quarter (5)               6,102           6,803           7,813            8,730          9,314         10,008
Average monthly revenue per
customer (6)                          $      323      $      318      $      330      $       351      $     360      $     370

(1) Real estate professional revenues consist of all revenue generated from our real estate professional customers, primarily for our HouseValues, JustListed, Growth Leader, Team Leader, RealtyGenerator, HomePages, and Market Leader CRM products.

(2) Other revenues consist primarily of miscellaneous revenue streams that are not core to our product offerings.

(3) Real estate professional customers consist of real estate agents subscribing to our HouseValues, JustListed, Growth Leader, Team Leader, HomePages, and Market Leader CRM products and real estate brokers subscribing to our RealtyGenerator product. Customers are included in our key operating metrics when their service is active and are paying monthly service or advertising fees.

(5) Average real estate professional customers in the quarter are calculated as the average of customers at the beginning and at the end of the quarter.

(6) Average monthly revenue per customer is calculated as real estate professional revenue for the quarter divided by the average number of customers in the quarter, divided by the number of months in the quarter.

At the end of the second quarter of 2009, we had 5,842 customers. On a sequential quarter basis, our customer count decreased by 519 customers during the second quarter of 2009, compared to a decrease of 884 and 1,136 customers in the first quarter of 2009 and the fourth quarter of 2008, respectively.

It continued to be a challenging real estate market in the second quarter of 2009. While the National Association of Realtors reported that existing home sales improved in the second quarter to the best seasonally-adjusted annualized rate since October of 2008, research from REAL Trends, Inc. shows that real estate commissions were lower in the second quarter due to lower average home sale prices. We believe commissions are the better predictor of the level of marketing investments that real estate professionals are willing to make.

Our average monthly customer retention rate improved to 94.2% for the second quarter of 2009 from 92.8% in the first quarter of 2009. Our new Growth Leader product contributed to this improvement in retention as we began transitioning some existing customers to this new product, effectively saving as customers some who intended to cancel. Due to the continued volatility of the real estate market and broader economic concerns, we expect to experience fluctuations in our customer retention rate from quarter to quarter.

Average monthly revenue per customer for the second quarter of 2009 increased slightly compared to the first quarter of 2009 primarily as a result of the shift in our product mix. Average revenue per customer will fluctuate from quarter to quarter based on the mix of sales for products priced differently across lower and higher priced geographies, pricing adjustments we may make in response to the market conditions, the demand for existing services and the acceptance of new product offerings.

Liquidity and Capital Resources

Currently, our principal source of liquidity is our cash, cash equivalents and short-term investments, as well as the cash flow that we may generate from our operations. At June 30, 2009, our cash, cash equivalents and short-term investments totaled $55.2 million as compared to $58.6 million at December 31, 2008.

Early in 2008, we modified our investment strategy to preserve the security and liquidity of our funds, which has resulted in significantly lower rates of return. As of June 30, 2009, we have invested in cash equivalents consisting of the money market funds that hold high quality short-term U.S. Government . . .