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. 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; 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 high consumer involvement, strong advertising spending, and significant fragmentation in offline sources of consumer information. We believe that as individuals increasingly use the Internet to pursue and share areas of passion, research topics of interest, and make purchases, both individuals and the advertisers who seek to market to them will demand access to online media in the form of vertical websites like ours. Vertical websites provide highly targeted content focused on specific categories of products and services.

We have continued to expand and diversify our vertical website categories to capture these highly focused audiences and their advertisers. In addition to the six vertical categories which we have historically operated in automotive, careers, home, money and business, shopping and travel & leisure, we have recently added a seventh category in health. Our health-related websites provide news, information and resources to help consumers manage their health, nutrition and fitness and locate health care providers in a variety of specialties. We operate more than 90 websites that received in excess of 100,000 unique visitors during the month of September 2009, which are hereafter referred to as "principal websites." More than 96% of the traffic to our websites is from non-paid sources. Our international audiences account for approximately 25% of total monthly visitors to our websites in September 2009.

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 third quarter of 2009 include websites acquired in September 2009 on a pro forma basis. In the third quarter of 2009, our websites' monthly average was 50 million unique visitors, an increase of approximately 25% from 40 million unique visitors in the third quarter of 2008, and an average of 679 million page views in the third quarter of 2009, an increase of approximately 6% from 639 million page views in the third quarter of 2008. 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.

We also license our content and Internet technology products and services to major companies and individual website owners around the world. Our subsidiaries, Autodata Solutions, Inc. and Autodata Solutions Company, are suppliers of licensed content and technology services to the automotive industry, serving most of the major U.S., Japanese and European automotive manufacturers. Throughout this Report, we refer to the business of Autodata Solutions, Inc. and Autodata Solutions Company as the "Autodata Solutions division." We also own and operate vBulletin software, which allows website owners to offer online community features, such as a bulletin board. The vBulletin product is designed to be easily downloaded and installed by the user, and provides a variety of features that are both secure and scalable. We directly market vBulletin on the Internet and have sold more than 100,000 licenses to date.

During the period from January 1, 2009 through September 30, 2009, we completed eleven website-related acquisitions in our Consumer Internet segment for an aggregate purchase price of $11.8 million. We expect to continue to grow our business by acquiring additional websites and improving and growing 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.

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 revenue 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, Yahoo! and Tribal Fusion, for which we receive a negotiated percentage of their advertising revenues. 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.

As consumer and advertiser preferences continue to evolve and our website audiences grow, we expect to continue to diversify our revenue sources and mix on our websites to address those changing needs and optimize our revenue yields.

Licensing Revenues

We license customized products, services and automotive vehicle marketing data to most major U.S., Japanese and European automotive manufacturers and other online automotive service providers. 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. We also sell and license vBulletin software to U.S. and international website owners. vBulletin revenues are primarily derived from website owners paying an upfront fee for a perpetual software license and twelve months of customer service.

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 represent direct expenses that vary proportionately with revenues and 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. 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.

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 Standard Codification (ASC) 605-10 (Securities and Exchange Commission 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 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 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 dealer or mortgage lender, following the execution of a service agreement and commencement of the services. Service agreements generally have a term of 12 months or less.

· Under the CPA format, we are 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 are 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 license software and content products and to develop customized software; 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) 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 and post-implementation development and enhancement services 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. There are no non-software deliverables and the functionality delivered is specific to a customer's previously-licensed application. Recognition of the revenue and all related costs of these arrangements are deferred until delivery and acceptance of the project, in accordance with the terms of the contract.

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 our best estimate of the amount of probable credit losses in our existing accounts receivables. We determine the allowance based on historical write-off experience and customer economic data. We review our allowance for doubtful accounts monthly. Account balances are charged off against the allowance when we believe that it is probable the receivable will not be recovered.

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. The purchase price has historically included the direct costs of the acquisition. However, beginning in the first quarter of 2009, acquisition-related costs are expensed as incurred, in accordance with ASC 805 (previously SFAS No. 141R, Business Combinations). Amounts allocated to intangible assets are amortized over their estimated useful lives; no amounts are allocated to in-progress research and development. Goodwill represents the excess of consideration paid over the net identifiable business assets acquired.

We have entered into earnout agreements which are contingent on the acquired business achieving agreed upon performance milestones. Earnout payments are not based on the seller's on-going service to the Company; when the seller does provide services following the acquisitions, the cost of the seller's services is recorded as compensation expense in the period the services were performed. We have historically accounted for earnout consideration as an addition to goodwill in the period earned. Beginning in the first quarter of 2009, in accordance with ASC 805, for any new acquisitions with an earnout component, we estimate the net present value of expected earnout payments and record such amount as an addition to goodwill and liability or equity, at the time of closing. Subsequent changes of earnout projections are recorded on the statement of operations as other income or expense in the period of remeasurement. If earnout projections are recorded as equity, then no subsequent remeasurement 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 testing goodwill for impairment. The first step is to determine the fair value of our reporting units using 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 revenue and MVIC to Enterprise Value/EBITDA ratio) and then these MVIC multiples are applied to a company's operating results to arrive at an estimate of value. We perform this analysis during December of each fiscal year. No impairment loss was recorded for the years ended December 31, 2008, 2007 or 2006.

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 three 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.

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, 2009 was 41.2%.

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. However, the current macroeconomic environment has overwhelmed the typically stronger automotive sales during the three months ended September 30, 2009. 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,
                                                2009           2008           2009          2008
                                                                  (unaudited)

Revenues                                          100.0 %        100.0 %        100.0 %       100.0 %

Costs and operating expenses

Cost of revenues                                   17.7           24.8           19.0          22.8
Sales and marketing                                18.5           19.2           19.4          21.4
Technology                                         10.5            9.7            9.8           8.3
General and administrative                         14.6           15.0           15.9          16.9
Depreciation and amortization of intangibles       16.6           13.7           16.7          12.7
Total operating expenses                           77.8           82.4           80.8          82.1
Operating income                                   22.2           17.6           19.2          17.9
Investment and other (expense) income                 -           (4.2 )         (0.1 )           -
Income from operations before income taxes         22.2           13.4           19.1          17.9
Provision for income taxes                          9.2            3.8            7.9           6.9
Net income                                         13.0 %          9.6 %         11.2 %        11.0 %

Revenues
                      Three Months Ended           Increase (decrease)           Nine Months Ended           Increase (decrease)
                         September 30,                2009 vs. 2008                September 30,                2009 vs. 2008
                       2009          2008             $              %             2009         2008             $             %
Revenues:
Consumer Internet   $   16,648     $ 18,364     $     (1,716 )       (9.3 )%   $  48,624     $ 52,743     $     (4,119 )       (7.8 )%
Licensing                8,674        8,489              185          2.2 %       23,454       24,315             (861 )       (3.5 )%
Total revenues      $   25,322     $ 26,853     $     (1,531 )       (5.7 )%   $  72,078     $ 77,058     $     (4,980 )       (6.5 )%

Our revenues for the three month period ended September 30, 2009, decreased $1.5 million, or 6%, from our revenues in the three month period ended September 30, 2008.

Consumer Internet advertising revenues from our websites increased $2.0 million, or 21%, on a year-over-year basis, with organic growth from websites owned more than one year contributing significantly to this growth. However this increase was offset by a $3.7 million, or 43%, decrease in automotive e-commerce revenues due to continued weakness in consumer demand for automobiles resulting from the current economic climate. Consequently, overall Consumer Internet revenues decreased $1.7 million, or 9%, during the three month period ended September 30, 2009 compared to the prior year period.

Licensing revenues increased by $0.2 million, or 2%, during the three month period ended September 30, 2009 compared to the prior year period.

Our revenues for the nine month period ended September 30, 2009, decreased $5.0 million, or 7%, from our revenues in the nine month period ended September 30, 2008.

Consumer Internet advertising revenues from our non-auto e-commerce websites increased $5.9 million, or 22% on a year-over-year basis as a result of both organic growth of our websites and acquisitions. However, this growth was offset by a $10.0 million, or 38%, decrease in automotive e-commerce revenues for the same period. As noted above, the decrease was due to continued weakness in consumer demand for automobiles resulting from the current economic climate. Therefore, total Consumer Internet revenues decreased $4.1 million, or 8%, during the nine month period ended September 30, 2009 compared to the prior year period.

Licensing revenues decreased by $0.9 million, or 4%, during the nine month period ended September 30, 2009 compared to the prior year period due to foreign currency exchange fluctuations. If the Company used a fixed year-over-year exchange rate, licensing revenues for the nine month period ended September 30, 2009 would have been approximately $1.1 million higher than reported.

Cost of revenues and operating expenses

Three Months Ended Increase (decrease) Nine Months Ended Increase (decrease) September 30, 2009 vs. 2008 September 30, 2009 vs. 2008 2009 2008 $ % 2009 2008 $ % Cost of revenues $ 4,470 $ 6,658 $ (2,188 ) (32.9 )% $ 13,659 $ 17,603 $ (3,944 ) (22.4 )% Percentage of revenues 17.7 % 24.8 % 19.0 % 22.8 %

. . .