Edgar Filing: LoopNet, Inc.

e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2008


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 000-52026

LOOPNET, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		77-0463987 (I.R.S. Employer Identification No.)

185 Berry Street, Suite 4000
San Francisco, CA 94107
(Address of principal executive offices)

(415) 243-4200
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act. Yes o No þ

As of October 28, 2008, there were 34,274,468 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS


			Page
PART I — FINANCIAL INFORMATION

	Item 1.	Financial Statements (unaudited):

		Condensed Consolidated Balance Sheets as of December 31, 2007 and September 30, 2008		3

		Condensed Consolidated Statements of Income for the three and nine month periods ended September 30, 2007 and 2008		4

		Condensed Consolidated Statements of Cash Flows for the nine month periods ended September 30, 2007 and 2008		5

		Notes to Condensed Consolidated Financial Statements		6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		18

	Item 4.	Controls and Procedures		18

PART II — OTHER INFORMATION				19

	Item 1.	Legal Proceedings		19

	Item 1A.	Risk Factors		19

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		28

	Item 3.	Defaults Upon Senior Securities		28

	Item 4.	Submission of Matters to a Vote of Security Holders		28

	Item 5.	Other Information		28

	Item 6.	Exhibits		28

SIGNATURES				29

EXHIBIT INDEX				30
EX-31.1
EX-31.2
EX-32.1
EX-32.2

LOOPNET, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


	December 31,			September 30,
	2007			2008
				(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	104,564		$	66,104
Short-term investments		3,325			3,330
Accounts receivable, net of allowance of $105 and $141, respectively		1,190			2,239
Prepaid expenses and other current assets		796			2,576
Deferred income taxes		298			296

Total current assets		110,173			74,545

Property and equipment, net		2,051			2,316
Goodwill		15,233			23,572
Intangibles, net		2,461			5,982
Deferred income taxes		5,196			4,817
Deposits and other noncurrent assets		2,245			3,022

Total assets	$	137,359		$	114,254


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	828		$	912
Accrued compensation and benefits		2,479			2,528
Accrued liabilities		1,964			2,799
Income taxes payable		698			—
Deferred revenue		9,537			11,234

Total current liabilities		15,506			17,473

Commitments and contingencies
Stockholders’ equity:
Common stock, $.001 par value, 125,000,000 shares authorized; 38,908,302 and 39,183,203 shares issued, respectively; and 38,908,302 and 35,333,913 shares outstanding, respectively		39			39
Additional paid in capital		107,866			113,259
Other comprehensive loss		(103	)		(181	)
Treasury stock, at cost, 3,849,290 shares		—			(44,595	)
Retained earnings		14,051			28,259

Total stockholders’ equity		121,853			96,781

Total liabilities and stockholders’ equity	$	137,359		$	114,254

The accompanying notes are an integral part of these unaudited condensed financial statements.

LOOPNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2007		2008		2007		2008
Revenues	$	18,627	$	22,403	$	51,164	$	65,019
Cost of revenue (1)		2,072		2,876		5,725		7,994

Gross margin		16,555		19,527		45,439		57,025


Operating expenses (1):
Sales and marketing		3,916		4,711		10,752		14,375
Technology and product development		1,699		2,301		4,619		6,648
General and administrative		3,211		5,227		8,630		14,232

Total operating expenses		8,826		12,239		24,001		35,255

Income from operations		7,729		7,288		21,438		21,770

Interest and other income, net		1,242		459		3,748		1,914

Income before tax		8,971		7,747		25,186		23,684

Income tax expense		3,193		2,927		9,760		9,476

Net income	$	5,778	$	4,820	$	15,426	$	14,208


Net income per share
Basic	$	0.15	$	0.14	$	0.40	$	0.39

Diluted	$	0.14	$	0.13	$	0.38	$	0.38


Weighted average shares
Basic		38,552		35,503		38,159		36,243

Diluted		40,825		36,787		40,670		37,693



(1) Stock-based compensation is allocated as follows:

Cost of revenue	$	96	$	153	$	257	$	408
Sales and marketing		363		554		953		1,632
Technology and product development		169		347		409		919
General and administrative		365		465		804		1,418

Total	$	993	$	1,519	$	2,423	$	4,377

The accompanying notes are an integral part of these unaudited condensed financial statements.

LOOPNET, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Nine months ended September 30,
	2007			2008
Cash flows from operating activities:
Net income	$	15,426		$	14,208
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense		741			1,584
Stock-based compensation		2,423			4,377
Tax benefits from exercise of stock options		(5,903	)		(689	)
Deferred income tax		(985	)		(938	)
Changes in operating assets and liabilities:
Accounts receivable		(528	)		(652	)
Prepaid expenses and other assets		613			(1,892	)
Income taxes payable		7,470			(9	)
Accounts payable		349			78
Accrued expenses and other current liabilities		44			2,084
Accrued compensation and benefits		(234	)		29
Deferred revenue		2,457			1,314

Net cash provided by operating activities		21,873			19,494

Cash flows from investing activities:
Purchase of property and equipment		(1,506	)		(1,041	)
Purchase of investments		(38,349	)		(750	)
Sale of investments		36,275			—
Acquisitions, net of acquired cash		(14,946	)		(12,584	)

Net cash used in investing activities		(18,526	)		(14,375	)

Cash flows from financing activities:
Net proceeds from exercise of stock options		1,387			327
Repurchase of common stock		—			(44,595	)
Tax benefits from exercise of stock options		5,903			689

Net cash provided by (used in) financing activities		7,290			(43,579	)


Net increase (decrease) in cash and cash equivalents		10,637			(38,460	)

Cash and cash equivalents at beginning of period		85,790			104,564


Cash and cash equivalents at end of period	$	96,427		$	66,104

The accompanying notes are an integral part of these unaudited condensed financial statements.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Background and Basis of Presentation

Basis of Presentation

The accompanying condensed consolidated balance sheet as of September 30, 2008, the statements of income for the three and nine months ended September 30, 2007 and 2008 and the statements of cash flows for the nine months ended September 30, 2007 and 2008 are unaudited. These statements should be read in conjunction with the audited consolidated financial statements and related notes, together with management’s discussion and analysis of financial position and results of operations, contained in the Company’s annual report on Form 10-K for the year ended December 31, 2007.

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements in the Company’s annual report on Form 10-K for the year ended December 31, 2007 and include normal and recurring adjustments necessary for the fair value presentation of the Company’s financial position for the periods presented. The results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2008.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from these estimates.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles, clarifies the definition of fair value and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements. However, the application of SFAS No. 157 may change current practice for some entities. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted this statement effective January 1, 2008 and there has been no significant impact on the Company’s financial statements since its adoption.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No.159) — including an Amendment of FASB No. 151. Under SFAS No. 159, the Company may elect to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 was effective for the Company beginning in the first quarter of 2008. Currently, the Company does not have any instruments eligible for election of the fair value option. Therefore, the adoption of SFAS No. 159 in the first quarter of fiscal 2008 did not impact the Company’s consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations (SFAS No. 141(R)). This Statement provides greater consistency in the accounting and financial reporting of business combinations. It requires the acquiring entity in a business combination to recognize all assets acquired and liabilities assumed in the transaction, establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquiror to disclose the nature and financial effect of the business combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. The Company will adopt SFAS No. 141(R) no later than the first quarter of fiscal 2009 and we are currently assessing the impact the adoption will have on our financial position and results of operations.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (SFAS No.160). This Statement amends Accounting Research Bulletin No. 51, Consolidated Financial Statements, to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008. The Company will adopt SFAS No.160 no later than the first quarter of fiscal 2009 and we are currently assessing the impact the adoption will have on our financial position and results of operations.

Note 2 — Earnings Per Share (EPS)

The share count used to compute basic and diluted net income per share is calculated as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2008		2007		2008
Weighted average common shares outstanding		38,552		35,503		38,159		36,243
Add dilutive common equivalents:
Stock options		2,026		1,223		2,202		1,371
Restricted stock units		—		11		—		11
Unvested restricted stock (1)		247		50		309		68


Shares used to compute diluted net income per share		40,825		36,787		40,670		37,693


(1)		Outstanding unvested restricted common stock purchased by employees is subject to repurchase by the Company and therefore is not included in the calculation of the weighted-average shares outstanding for basic earnings per share.

The following is a summary of the securities outstanding during the respective periods that have been excluded from the calculations because the effect on earnings per share would have been anti-dilutive (in thousands):

Three Months Ended

Nine Months Ended

September 30,

2007

2008

2007

2008

Stock options

218

3,157

366

2,414

The following table sets forth the computation of basic and diluted EPS (in thousands, except in per share data):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2008		2007		2008
Calculation of basic net income per share:

Net income	$	5,778	$	4,820	$	15,426	$	14,208
Weighted average common shares outstanding		38,552		35,503		38,159		36,243

Basic earnings per share	$	0.15	$	0.14	$	0.40	$	0.39


Calculation of diluted net income per share:

Net Income	$	5,778	$	4,820	$	15,426	$	14,208
Weighted average diluted shares outstanding		40,825		36,787		40,670		37,693

Diluted net income per share	$	0.14	$	0.13	$	0.38	$	0.38

Note 3 — Acquisitions

On August 2, 2007, the Company acquired all of the shares of capital stock of Cityfeet.com Inc., a private company incorporated in Delaware (“Cityfeet”), pursuant to a Stock Purchase Agreement dated as of August 2, 2007, by and among the Company, the stockholders of Cityfeet, and Scripps Ventures II, LLC, as Stockholder Representative, for a purchase price of $14.9 million net of acquired cash. In addition, the Company was obligated to make additional cash payments up to $3.0 million if certain performance targets were met, which would be treated as additional consideration for the acquisition. On January 18, 2008, the Company made a $1.3 million cash payment to settle the outstanding contingent payment. The acquisition of Cityfeet was accounted for as a purchase consistent with SFAS No. 141 Business Combinations (see the Company’s 2007 Form 10-K for additional information).

On April 7, 2008, the Company acquired all of the shares of capital stock of REApplications, Inc., a private company incorporated in Delaware (“REApps”) pursuant to a Stock Purchase Agreement dated as of April 7, 2008, by and among the Company and the shareholders of REApps for a purchase price of $9.2 million net of acquired cash.

The acquisition of REApps was accounted for as a purchase consistent with SFAS No. 141 Business Combinations, and accordingly, the purchase price has been allocated to the tangible assets, liabilities assumed, and identifiable intangible assets acquired based on their estimated fair values on the acquisition date. The excess of the purchase price over the aggregate fair values was recorded as goodwill. Our purchase price was allocated as follows (in thousands):


Customer relationships	$	120
Domain name		480
Developed technology		2,490
Net assets acquired		100
Deferred Tax Liability		(1,302	)
Goodwill		7,287

	$	9,175

Customer relationships, developed technology and the domain name have a weighted average useful life of 6.3 years.

The results of operations of REApps have been included in the Company’s condensed consolidated statements of income for the period subsequent to our acquisition of REApps. REApps’s results of operations for the periods prior to this acquisition were not material to our condensed consolidated statement of income and, accordingly, pro forma financial information has not been presented.

On July 29, 2008, the Company acquired all of the shares of capital stock of RPB Media, Inc., a private company incorporated in Delaware pursuant to a Stock Purchase Agreement dated as of July 29, 2008, by and among the Company and the sole shareholder of RPB Media, Inc. for a purchase price of $2.1 million net of acquired cash. On August 19, 2008, Articles of Amendment were filed with The Commonwealth of Massachusetts to amend the exact name of the corporation from RPB Media, Inc. to LandAndFarm.com, Inc. (LandAndFarm).

The acquisition of LandAndFarm was accounted for as a purchase consistent with SFAS No. 141 Business Combinations, and accordingly, the purchase price has been allocated to the tangible assets, liabilities assumed, and identifiable intangible assets acquired based on their estimated fair values on the acquisition date. The excess of the purchase price over the aggregate fair values was recorded as goodwill. Our purchase price was allocated as follows (in thousands):


Customer relationships	$	497
Trade names / Trademarks		254
Developed technology		279
Non-competition Agreements		63
Net assets (liabilities) acquired		(19	)
Deferred Tax Liability		(445	)
Goodwill		1,481

	$	2,110

Customer relationships, developed technology and the non-competition agreement have a weighted average useful life of 4.26 years.

The results of operations of LandAndFarm have been included in the Company’s condensed consolidated statements of income for the period subsequent to our acquisition of LandAndFarm. LandAndFarm’s results of operations for the periods prior to this acquisition were not material to our condensed consolidated statement of income and, accordingly, pro forma financial information has not been presented.

Note 4 — Stock-Based Compensation

In the first quarter of 2006, the Company adopted SFAS No. 123R, Share-Based Payment (SFAS 123R), which revises SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123) and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS 123R requires that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period. Prior to SFAS 123R, the Company disclosed the pro forma effects of SFAS 123 under the minimum value method. The Company adopted SFAS 123R effective January 1, 2006, prospectively for new equity awards issued subsequent to January 1, 2006.

In connection with the adoption of SFAS 123R, the Company reviewed and updated, among other things, its forfeiture rate, expected term and volatility assumptions. The weighted average expected lives of the options for the three and nine month periods ended September 30, 2008 reflects the application of the simplified method set out in SEC Staff Accounting Bulletin No. 107 (SAB 107), which was issued in March 2005. The simplified method defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. Estimated volatility for the three and nine month periods ended September 30, 2008 also reflects the application of SAB 107 interpretive guidance and, accordingly, incorporates historical volatility of similar companies whose share price is publicly available.

The fair value of each option is estimated on the date of grant using the Black-Scholes method with the following assumptions:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2008			2007			2008
Risk-free interest rate		4.50	%		3.11	%		4.64	%		3.00	%
Expected volatility		43	%		42	%		45	%		42	%
Expected life	4.6 years			4.6 years			4.6 years			4.6 years
Dividend yield		0	%		0	%		0	%		0	%

The weighted-average fair value of options granted during the three month periods ended September 30, 2007 and 2008 was $9.20 and $4.23, respectively, and during the nine month periods ended September 30, 2007 and 2008 was $7.81 and $4.50, respectively, using the Black-Scholes option-pricing model.

Total stock-based compensation has been allocated as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2008		2007		2008
Cost of revenue	$	96	$	153	$	257	$	408
Sales and marketing		363		554		953		1,632
Technology and product development		169		347		409		919
General and administrative		365		465		804		1,418


Total	$	993	$	1,519	$	2,423	$	4,377

Stock Plan Activity

Stock options and other equity awards are granted by the Company under its 2006 Equity Incentive Plan. The 2006 Equity Incentive Plan became effective on June 9, 2006. Prior to that date, stock options were granted under the Company’s 2001 Stock Option Plan, which terminated on June 9, 2006.

A summary of the Company’s stock option activity is as follows:


	Options outstanding							Options exercisable
						Weighted						Weighted
				Weighted		Average				Weighted		Average
				Average		Remaining				Average		Remaining
	Number of			Exercise		Contractual		Number of		Exercise		Contractual
	shares			Price		Life (Years)		shares		Price		Life (Years)
Outstanding at December 31, 2007		3,638,382		$	8.93		6.51		1,339,128	$	4.59		6.15
Granted		1,574,996		$	11.68
Exercised		(274,895	)	$	1.19
Cancelled		(259,078	)	$	13.54


Outstanding at September 30, 2008		4,679,405		$	10.06		5.97		1,931,310	$	7.50		5.66

A summary of the Company’s unvested restricted stock unit activity is as follows:


	Unvested Restricted Stock Units
					Weighted
			Weighted		Average
			Average		Remaining
	Number of		Grant Date		Contractual
	shares		Fair Value		Life (Years)
Balance at December 31, 2007		—	$	—		—
Granted		195,000	$	11.47
Vested		—	$	—
Cancelled		—	$	—


Outstanding at September 30, 2008		195,000	$	11.47		1.99

Note 5 — Income Taxes

The Company recorded a provision for income taxes of $9.5 million for the nine month period ended September 30, 2008, based upon a 40.0% effective tax rate. The effective tax rate is based upon the Company’s estimated fiscal 2008 income before the provision for income taxes. To the extent the estimate of fiscal 2008 income before the provision for income taxes changes, the Company’s provision for income taxes will change as well.

Note 6 — Stock Repurchases

On January 31, 2008, LoopNet’s Board of Directors authorized the repurchase of up to $50.0 million of the Company’s common stock. The stock repurchase program was announced on February 5, 2008. On July 30, 2008, the Company announced that the board of directors of the Company authorized the repurchase of up to an additional $50 million of the Company’s common stock. As of September 30, 2008, the Company repurchased approximately 3.8 million shares at an average price of $11.59 per share and $55.4 million remained available for further purchases under the program.

These repurchased shares are recorded as treasury stock and are accounted for under the cost method.

The stock repurchase program may be limited or terminated at any time without prior notice. Stock repurchases under this program may be made through open market and privately negotiated transactions at times and in such amounts as management deems appropriate and will be funded using the Company’s working capital. The timing and actual number of shares repurchased will depend on a variety of factors including corporate and regulatory requirements, price and other market conditions. The program is intended to comply with the volume, timing and other limitations set forth in Rule 10b-18 under the Securities Exchange Act of 1934.

Note 7 — Litigation and Other Contingencies

Litigation and Other Legal Matters

There have been no material developments in our pending legal proceedings. Although the results of litigation cannot be predicted with certainty, we believe that the resolution of our current pending matters will not have a material adverse effect on our business, consolidated financial position and results of operations.

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

You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our 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 that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1A of Part II, “Risk Factors.”

Overview

We are a leading online marketplace for commercial real estate in the United States, based on the number of monthly unique visitors to our marketplace, which averaged approximately 500,000 unique visitors per month during 2005, approximately 800,000 per month during 2006, approximately 900,000 per month during 2007, and approximately 900,000 per month during the third quarter of 2008 as reported by comScore Media Metrix. comScore Media Metrix defines a unique visitor as an individual who visited any content of a website, a category, a channel, or an application. Our online marketplace, available at www.LoopNet.com , enables commercial real estate agents, working on behalf of property owners and landlords, to list properties for sale or for lease and submit detailed information on property listings including qualitative descriptions, financial and tenant information, photographs and key property characteristics in order to find a buyer or tenant. We offer two types of memberships on the LoopNet online marketplace. Basic membership is available free-of-charge, and enables members to experience some of the benefits of the LoopNet offering, with limited functionality. LoopNet premium membership is available for a monthly subscription fee and provides enhanced marketing exposure for property listings and full access to LoopNet property listings, as well as numerous other features. The minimum term of a premium membership subscription is one month.

We believe that the key metrics that are material to an analysis of our business are the number of our registered members, the number of our premium members, the rate of conversion of our basic members to premium members, the average monthly subscription price paid by our premium members and the cancellation rate of our premium members. We also believe that the number of listings on our marketplace and the number of property profiles viewed by our registered members are key metrics, as they affect the attractiveness of our website to current and potential customers. Our registered members has grown from approximately 1.1 million registered members as of December 31, 2005, to over 1.7 million registered members as of December 31, 2006, to over 2.5 million registered members as of December 31, 2007, and to over 3.1 million registered members as of September 30, 2008. Our base of premium members has grown from over 57,000 premium members as of December 31, 2005, to over 78,000 premium members as of December 31, 2006, to over 88,000 premium members as of December 31, 2007 and is currently over 83,000 premium members as of September 30, 2008. Historically, our average monthly rate of conversion of basic members to premium members has been approximately five percent, and our average monthly cancellation rate for premium members has ranged between three and five percent. We believe that a decline in the third quarter of 2008 in our average monthly conversion rate to approximately 2.7% is attributable to an increasing proportion of principals (i.e. investors and tenants) in our membership base, who convert to premium membership at a lower rate than the professional agents and brokers in the market, the impact of a slowdown in commercial real estate transaction activity, and an approximately 22% increase in the average monthly subscription prices which we charge our premium members. Sale and Leasing activity in the Commercial Real Estate market that we serve has slowed, due to deteriorating economic conditions and due to the “credit crunch” impacting the availability and cost of debt capital for real estate transactions. In the third quarter of 2008 our cancellation rate exceeded our historical levels and we believe the increase is attributable to the credit tightening that the commercial real estate industry experienced, the slowdown in overall transaction activity in the industry, and the increase in the average subscription prices which we charge our premium members. The average monthly subscription price paid by our premium members has increased from $44.96 in the fourth quarter of 2005, to $47.26 in the fourth quarter of 2006, to $56.00 in the fourth quarter of 2007 and to $64.51 in the third quarter of 2008. We anticipate that the average subscription price for our premium members will continue to rise, which may in turn drive slower acquisition of new premium members and increased cancellations of existing premium memberships. Premium membership fees have driven the majority of our growth in revenues since 2001 and were the source of approximately 80% of our revenues in 2005 and 2006, 77% of our revenue in 2007, and 75% of our revenue in the nine month period ended September 30, 2008. The number of listings on our marketplace has grown from approximately 335,000 as of December 31, 2005, to approximately 460,000 as of December 31, 2006, to approximately 560,000 as of December 31, 2007, and to approximately 642,000 as of September 30, 2008. The number of property profiles that were viewed by our registered members increased from 40.0 million in the third quarter of 2007 to 44.4 million in the third quarter of 2008.

Our Revenues and Expenses

Our primary sources of revenues are:

	•		LoopNet premium membership fees;

	•		BizBuySell BrokerWorks membership fees and paid listings;

	•		advertising on, and lead generation from, our marketplaces,

	•		LoopLink product license fees; and

•

LoopNet RecentSales membership fees.

Our revenues have grown significantly in the past three years from $31.0 million in 2005, to $48.4 million in 2006, and to $70.7 million in 2007. We had revenues of $22.4 million and $65.0 million in the three and nine month periods ended September 30, 2008, respectively. We have been profitable and cash flow positive each quarter since the second quarter of 2003. The key factors influencing our growth in revenues are:

	•		the increased adoption of our premium membership services by the commercial real estate industry;

	•		increases in the average monthly subscription price of our premium membership product;

	•		the increased adoption of our RecentSales services by the commercial real estate industry; and

	•		our acquisition of BizBuySell in October, 2004, and the increased adoption of our services by the operating business for sale industry.

Our ability to continue to grow our revenues will largely depend on our ability to expand the number of users of www.LoopNet.com and www.BizBuySell.com and to convince those users to upgrade to our paid services, especially premium membership. As noted below, we anticipate that revenues will not increase in the future at the same percentage rate as in previous periods.

We derive the substantial majority of our revenues from customers that pay monthly fees for a suite of services to market and search for commercial real estate and operating businesses. The fee for our LoopNet premium membership averaged $64.51 per month during the third quarter of 2008. The minimum term of a premium membership subscription is one month. We also offer quarterly and annual memberships which are priced and discounted accordingly, and paid in advance for the subscription period. A customer choosing to cancel a discounted annual or quarterly membership will receive a refund based on the number of months the membership was used and charging the customer at the monthly rate rather than at the discounted quarterly or annual rates. We also license our LoopLink product to commercial real estate brokerage firms who pay a monthly, quarterly or annual fee. For our BrokerWorks product at BizBuySell, we charge $49.95 per month. We also charge fees associated with marketing individual businesses listed on BizBuySell. For our RecentSales product, we charge $29.95 per month or $1.95 to $3.95 for an individual transaction.

Revenues from other sources include advertising and lead generation revenues from both our LoopNet and BizBuySell marketplaces, which are recognized ratably over the period in which the advertisement is displayed, provided that no significant obligations remain and collection of the resulting receivable is probable. Advertising rates are dependent on the services provided and the placement of the advertisements. To date, the duration of our advertising commitments has generally averaged two to three months.

The largest component of our expenses is personnel costs. Personnel costs consist of salaries, benefits and incentive compensation for our employees, including commissions for salespeople. These expenses are categorized in our statements of operations based on each employee’s principal function.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Accordingly, our actual results may differ from these estimates under different assumptions or conditions.

Our significant accounting policies are described in Note 1 to the consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2007.

Seasonality and Cyclicality

The commercial real estate market is influenced by annual seasonality factors, as well as by overall economic cycles. The market is large and fragmented, and different segments of the industry are influenced differently by various factors. Broadly speaking, the commercial real estate industry has two major components: tenants leasing space from owners or landlords, and the investment market for buying and selling properties.

We have experienced seasonality in our business in the past, and expect to continue to experience it in the future. While individual geographic markets vary, commercial real estate transaction activity is fairly consistent throughout the year, with the exception of a slow-down during the end-of-year holiday period. The impact that this has had on our business is that the growth rate in the fourth quarter of each year, has been slower than in the first three quarters of each year. We expect this pattern to continue.

The commercial real estate industry has historically experienced cyclicality. The different segments of the industry, such as office, industrial, retail, multi-family, and others, are influenced differently by different factors, and have historically moved through cycles with different timing. The “for lease” and “for sale” components of the market also do not necessarily move on the same timing cycle. During the second half of 2007 and the first nine months of 2008 the commercial real estate credit markets experienced tightening as a result of the

subprime issues affecting the residential real estate credit markets. We believe the credit tightening caused our premium membership cancellation rates to exceed our historical levels during the third quarter of 2008.

Results of Operations

The following table presents our historical operating results as a percentage of revenues for the periods indicated:


	Three months ended September 30,						Nine months ended September 30,
	2007			2008			2007			2008
(unaudited)
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Cost of revenue		11.1			12.8			11.2			12.3


Gross margin		88.9			87.2			88.8			87.7


Operating expenses
Sales and marketing		21.0			21.0			21.0			22.1
Technology and product development		9.1			10.3			9.0			10.2
General and administrative		17.2			23.3			16.9			21.9


Total operating expenses		47.4			54.6			46.9			54.2


Income from operations		41.5			32.5			41.9			33.5
Interest and other income, net		6.7			2.0			7.3			2.9


Income before tax		48.2			34.6			49.2			36.4
Income tax expense		17.1			13.1			19.1			14.6


Net income		31.0	%		21.5	%		30.2	%		21.9	%

Comparison of Three Months Ended September 30, 2007 and 2008

Revenues


	Three Months Ended September 30,
					Increase/			Percent
	2007		2008		(Decrease)			Change
	(dollars in thousands)
Revenues	$	18,627	$	22,403	$	3,776			20.3	%
Premium members at September 30		90,186		83,803		(6,383	)		(7.1	)%

The increase in revenues was due largely to an increase of approximately 22.0% in the average monthly price of a premium membership.

We anticipate that revenues will not increase in the future at the same percentage rate as in previous periods, as a result of the larger revenue base and the current market conditions we are experiencing.

Cost of Revenues


	Three Months Ended September 30,
									Percent
	2007			2008			Increase		Change
	(dollars in thousands)
Cost of revenues	$	2,072		$	2,876		$	804		38.8	%
Percentage of revenues		11.1	%		12.8	%

Cost of revenues consists of the expenses associated with the operation of our website, including depreciation of network infrastructure equipment, salaries and benefits of network operations personnel, Internet connectivity and hosting costs. Cost of revenues also includes salaries and benefits expenses associated with our data quality, data import and customer support personnel and credit card and other transaction fees relating to processing customer transactions.

The increase in cost of revenues was due to an increase in salaries and benefit costs related to an increase in the number of data quality, data import and customer support personnel, which was required in order to support our increased property listing and user activity coupled with higher credit card fees due to the growth in revenues. Also contributing to the increase in cost of revenues were customer support costs related to the REApplications business.

We expect cost of revenues to increase in absolute dollar amounts and potentially as a percentage of revenues, as we continue to expand our business and absorb the recent acquisition of REApplications, Inc. (see Note 3 to our condensed consolidated financial statements for a description of this acquisition).

Sales and Marketing


	Three Months Ended September 30,
									Percent
	2007			2008			Increase		Change
	(dollars in thousands)
Sales and marketing	$	3,916		$	4,711		$	795		20.3	%
Percentage of revenues		21.0	%		21.0	%

Sales and marketing expenses consist of the compensation and associated costs for sales and marketing personnel, advertising, public relations and other promotional activities.

The increase in sales and marketing expenses was due largely to an increase in the number of sales personnel and increased commissions paid as a result of growth in our revenues. Additionally, advertising costs were higher, primarily to attract new members to our online marketplace. Also contributing to the increase was higher stock-based compensation, which increased to $554,000 in the third quarter of 2008 compared to $363,000 in the third quarter of 2007.

We expect sales and marketing expenses to increase in absolute dollar amounts, and potentially as a percentage of revenues, as we continue to expand our marketing programs to attract and retain premium members and launch and support new products and services.

Technology and Product Development


	Three Months Ended September 30,
									Percent
	2007			2008			Increase		Change
	(dollars in thousands)
Technology and product development	$	1,699		$	2,301		$	602		35.4	%
Percentage of revenues		9.1	%		10.3	%

Technology and product development costs include expenses for the research and development of new product enhancements and services, as well as improvements to and maintenance of existing products and services.

The increase in technology and product development expenses was due primarily to increases in salaries and related costs associated with an increase in headcount to assist in the launch of new product enhancements and services and the maintenance of our existing services. Also contributing to the increase was higher stock-based compensation, which increased to $347,000 in the third quarter of 2008 compared to $169,000 in the third quarter of 2007.

We expect technology and product development expenses to increase in absolute dollar amounts and potentially as a percentage of revenues as we hire more personnel and continue to build the infrastructure required to support the development of new products and services.

General and Administrative


	Three Months Ended September 30,
									Percent
	2007			2008			Increase		Change
	(dollars in thousands)
General and administrative	$	3,211		$	5,227		$	2,016		62.8	%
Percentage of revenues		17.2	%		23.3	%

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

The increase in general and administrative expenses was due primarily to higher office rent associated with our growth in personnel, increased salaries and higher legal fees associated with litigation related matters. Also contributing to the increase was higher stock-based compensation, which increased to $465,000 in the third quarter of 2008 compared to $365,000 in the third quarter of 2007.

We expect general and administrative expenses to increase in absolute dollar amounts and potentially as a percentage of revenues as we continue to incur additional litigation related costs.

Interest Income

Interest and other income decreased by $783,000 to $459,000 in the three months ended September 30, 2008, from $1.2 million in the three months ended September 30, 2007. This decrease was due to lower cash equivalents and short-term investments and lower interest rates. As of September 30, 2008, we held $69.4 million in cash, cash equivalents and short-term investments, compared to $101.0 million in cash, cash equivalents and short-term investments as of September 30, 2007.

Income Taxes

We recorded a provision for income taxes of $2.9 million for the three month period ended September 30, 2008, based upon a 40.0% effective tax rate for the full year of 2008. The effective tax rate is based upon our estimated fiscal 2008 income before the provision for income taxes. To the extent the estimate of fiscal 2008 income before the provision for income taxes changes, our provision for income taxes will change as well.

Comparison of Nine Months Ended September 30, 2007 and 2008

Revenues


	Nine Months Ended September 30,
					Increase /			Percent
	2007		2008		(Decrease)			Change
	(dollars in thousands)
Revenues	$	51,164	$	65,019	$	13,855			27.1	%
Premium members at September 30		90,186		83,803		(6,383	)		(7.1	)%

The increase in revenues was due largely to an increase of approximately 20.0% in the average monthly price of a premium membership.

Cost of Revenues


	Nine Months Ended September 30,
									Percent
	2007			2008			Increase		Change
	(dollars in thousands)
Cost of revenues	$	5,725		$	7,994		$	2,269		39.6	%
Percentage of revenues		11.2	%		12.3	%

Sales and Marketing


	Nine Months Ended September 30,
									Percent
	2007			2008			Increase		Change
	(dollars in thousands)
Sales and marketing	$	10,752		$	14,375		$	3,623		33.7	%
Percentage of revenues		21.0	%		22.1	%

Sales and marketing expenses consist of the compensation and associated costs for sales and marketing personnel, advertising, public relations and other promotional activities.

The increase in sales and marketing expenses was due largely to an increase in the number of sales personnel and increased commissions paid as a result of growth in our revenues. Additionally, advertising costs were higher, primarily to attract new members to our online marketplace. Also contributing to the increase was higher stock-based compensation, which increased to $1,632,000 in the nine months ended September 30, 2008 compared to $953,000 in the nine months ended September 30, 2007.

Technology and Product Development


	Nine Months Ended September 30,
									Percent
	2007			2008			Increase		Change
	(dollars in thousands)
Technology and product development	$	4,619		$	6,648		$	2,029		43.9	%
Percentage of revenues		9.0	%		10.2	%

The increase in technology and product development expenses was due primarily to increases in salaries and related costs associated with an increase in headcount to assist in the launch of new product enhancements and services and the maintenance of our existing services. Also contributing to the increase was higher stock-based compensation, which increased to $919,000 in the nine months ended September 30, 2008 compared to $409,000 in the nine months ended September 30, 2007.

General and Administrative


	Nine Months Ended September 30,
									Percent
	2007			2008			Increase		Change
	(dollars in thousands)
General and administrative	$	8,630		$	14,232		$	5,602		64.9	%
Percentage of revenues		16.9	%		21.9	%

The increase in general and administrative expenses was due primarily to higher office rent associated with our growth in personnel, increased salaries and higher legal fees associated with litigation related matters. Also contributing to the increase was higher stock-based compensation, which increased to $1,418,000 in the nine months ended September 30, 2008 compared to $804,000 in the nine months ended September 30, 2007.

Interest Income

Interest and other income decreased by $1.8 million to $1.9 million in the nine months ended September 30, 2008, from $3.7 million in the nine months ended September 30, 2007. This decrease was due to lower cash equivalents and short-term investments and lower interest rates. As of September 30, 2008, we held $69.4 million in cash, cash equivalents and short-term investments, compared to $101.0 million in cash, cash equivalents and short-term investments as of September 30, 2007.

Income Taxes

We recorded a provision for income taxes of $9.5 million for the nine month period ended September 30, 2008, based upon a 40.0% effective tax rate for the full year of 2008. The effective tax rate is based upon our estimated fiscal 2008 income before the provision for income taxes. To the extent the estimate of fiscal 2008 income before the provision for income taxes changes, our provision for income taxes will change as well.

Liquidity and Capital Resources

The following table summarizes our cash flows:


	Nine Months Ended
	September 30,
	2007			2008
	(unaudited)
	(in thousands)
Cash flow data:
Cash provided by operating activities	$	21,873		$	19,494
Cash used in investing activities		(18,526	)		(14,375	)
Cash provided by (used in) financing activities		7,290			(43,579	)

From our incorporation in 1997 until the first quarter of 2003, we financed our operations through private placements of our capital stock and cash acquired in the July, 2001 merger with PropertyFirst.com, Inc. Since the first quarter of 2003, we have financed our operations

through cash flow that we generate from our operations. On June 12, 2006, we completed the initial public offering of our stock, resulting in net proceeds of $42.3 million.

As of September 30, 2008, our cash, cash equivalents and short-term investments totaled $69.4 million, compared to $101.0 million in cash, cash equivalents and short-term investments as of September 30, 2007.

Cash equivalents and short-term investments consist of money market funds, and debt securities that we classify as available for sale. Our principal sources of liquidity are our cash, cash equivalents and short-term investments, as well as the cash flow that we generate from our operations. We do not currently have any commercial debt or posted letters of credit.

Operating Activities

Net cash provided by operating activities primarily consists of net income adjusted for certain non-cash items, including depreciation, amortization, stock-based compensation, and the effect of changes in working capital. Net cash provided by operating activities was $21.9 million and $19.5 million in the nine months ended September 30, 2007 and 2008, respectively.

Investing Activities

Cash used in investing activities in the nine months ended September 30, 2008 of $14.4 million was attributable to the July 29, 2008 acquisition of LandAndFarm of $2.1 million, the April 7, 2008 acquisition of REApplications, Inc. of $9.2 million, a $1.3 million contingent purchase price payment related to the August 2007 acquisition of CityFeet.com, the purchase of investments of $750,000, and capital expenditures of $1.0 million for the purchase of computer equipment, office equipment and furniture and leasehold improvements.

Cash used in investing activities in the nine months ended September 30, 2007 of $18.5 million was primarily attributable to the August 2, 2007 acquisition of Cityfeet of $14.9 million (net of cash acquired), the purchase of other investments of $38.4 million, the sale of investments of $36.3 million and capital expenditures of $1.5 million for the purchase of computer equipment, office equipment and furniture, and leasehold improvements.

Financing Activities

Cash used in financing activities in the nine months ended September 30, 2008 of $43.6 million was primarily attributable to the Company’s stock repurchases in the amount of $44.6 million partially offset by $327,000 of proceeds from the exercise of stock options and a $689,000 tax benefit from the exercise of stock options.

Cash provided by financing activities in the nine months ended September 30, 2007 of $7.3 million consisted of $1.4 million of proceeds from the exercise of stock options and a $5.9 million tax benefit from the exercise of stock options.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest in short-term, high- quality, interest-bearing securities. Our investments in debt securities are subject to interest rate risk. To minimize our exposure to an adverse shift in interest rates, we invest in short-term securities and maintain an average maturity of one year or less. If interest rates were to instantaneously increase or decrease by 100 basis points, the change in the fair market value of our short-term investment would not be a material amount to our financial statements. There have not been any material changes during the period covered by this Quarterly Report on Form 10-Q to our primary market risk exposures, or how these exposures are managed.

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risk Factors.

Because of the following factors, as well as other variables affecting our operating results and financial condition, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.

Risks Related to Our Business

The ongoing decline in the commercial real estate market and overall economy could negatively affect our revenues, expenses and operating results.

Our business is sensitive to trends in the general economy and trends in commercial real estate markets, which are unpredictable. Currently, the credit crisis and turbulence in the debt markets continue to affect the investment sales market, contributing to a general slow down in our industry, which we anticipate will continue through 2009. These negative general economic conditions could further reduce the overall amount of sale and leasing activity in the commercial real estate industry, and hence the demand for our services. Conditions such as recent tightening in credit markets and negative trends in consumer confidence in global and domestic markets could also further negatively affect the general economy, and our business. While we believe the increase in the number of distressed sales and resulting decrease in asset prices will eventually translate to greater market activity, the current overall reduction in sales transaction volume continues to impact our business. Therefore, our operating results, to the extent they reflect changes in the broader commercial real estate industry, may be subject to significant fluctuations. Factors that are affecting and could further affect the commercial real estate industry include:

	•		periods of economic slowdown or recession globally, in the United States or locally;

	•		inflation;

	•		flows of capital into or out of real estate investment in the United States or various regions of the United States;

	•		rates of unemployment;

	•		interest rates;

	•		the availability and cost of capital;

	•		wage and salary levels; or

	•		concerns about any of the foregoing.

We believe that the commercial real estate industry is composed of many submarkets, each of which is influenced differently, and often in opposite ways, by various economic factors. We believe that commercial real estate submarkets can be differentiated based on factors such as geographic location, value of properties, whether properties are sold or leased, and other factors. Each such submarket may be affected differently by, among other things:

	•		economic slowdown or recession;

	•		changes in levels of rent or appreciation of asset values;

	•		changing interest rates;

	•		tax and accounting policies;

	•		the availability and cost of capital;

	•		costs of construction;

	•		increased unemployment;

	•		lower consumer confidence;

	•		lower wage and salary levels;

	•		war, terrorist attacks or natural disasters; or

	•		the public perception that any of these conditions may occur.

For example, as of September 30, 2008, approximately 27% of our premium members were based in California and approximately 12% were based in Florida. Negative conditions in these or other significant commercial real estate submarkets could disproportionately affect our business as compared to competitors who have less or different geographic concentrations of their customers. Events such as a war or a significant terrorist attack are also likely to affect the general economy, and could cause a slowdown in the commercial real estate industry and therefore reduce utilization of our marketplace, which could reduce our revenue from premium members. The occurrence of any of the events listed above could increase our need to make significant expenditures to continue to attract customers to our marketplace.

Our business is largely based on a subscription model, and accordingly, any failure to increase the number of our customers or retain existing customers could cause our revenues to decline.

Our customers include premium members of our LoopNet marketplace, LoopLink users, users of our Cityfeet and BizBuySell marketplaces, RecentSales subscribers, REApplications users and advertising and lead generation customers. Most of our revenues are generated by subscription fees paid by our premium members. Our growth depends in large part on increasing the number of our free basic members and then converting them into paying premium members, as well as retaining existing premium members. Either category of members may decide not to continue to use our services in favor of alternate services or because of budgetary constraints or other reasons. Historically, the overall conversion ratio of premium members to basic members on LoopNet has been approximately five percent, and our average monthly cancellation rate for premium members has ranged between three and five percent. We believe that a decline in the third quarter of 2008 in our basic to premium conversion rate to approximately 2.7% is attributable to an increasing proportion of principals (i.e., investors and tenants) in our membership base, who convert to premium membership at a lower rate than the professional agents and brokers in the market, the impact of a slowdown in commercial real estate transaction activity and an approximately 22% increase in the average subscription prices which we charge our premium members. During the current quarter the commercial real estate credit markets experienced further tightening as a result of the subprime issues affecting the residential real estate credit markets. In the third quarter of 2008 our cancellation rate exceeded our historical levels and we believe the increase is attributable to the credit tightening that the commercial real estate industry experienced and the increase in the average subscription prices which we charge our premium members.

We anticipate that the average subscription price for our premium members will continue to rise, which may in turn drive slower acquisition of new premium members and increased cancellations of existing premium memberships. If our existing members choose not to use our services, decrease their use of our services, or change from being premium members to basic members, or we are unable to attract new members, listings on our site could be reduced, search activity on our website could decline, the usefulness of our services could be diminished, and we could incur significant expenses and/or experience declining revenues.

The value of our marketplace to our customers is dependent on increasing the number of property listings provided by and searches conducted by our members. To grow our marketplace, we must convince prospective members to use our services. Prospective members may not be familiar with our services and may be accustomed to using traditional methods of listing, searching, marketing and advertising commercial real estate. We cannot assure you that we will be successful in continuing to acquire more members, in continuing to convert free basic members into paying premium members or that our future sales efforts in general will be effective. Further, it is difficult to estimate the total number of active commercial real estate agents, property owners, landlords, buyers and tenants in the United States during any given period. As a result, we do not know the extent to which we have penetrated this market. If we reach the point at which we have attempted to sell our services to a significant majority of commercial real estate transaction participants in the United States, we will need to seek additional products and markets in order to maintain our rate of growth of revenues and profitability.

We rely on our marketing efforts to generate new registered members. If our marketing efforts are ineffective, we could fail to attract new registered members, which could reduce the attractiveness of our marketplace to current and potential customers and lead to a reduction in our revenues.

We believe that the attractiveness of our services and products to our current and potential customers increases as we attract additional members who provide additional property listings or conduct searches on our marketplace. This is because an increase in the number of our members and the number of listings on our website increases the utility of our website and of its associated search, listing and marketing services. In order to attract new registered members, we rely on our marketing efforts, such as word-of-mouth referrals, direct marketing,online and traditional advertising, sponsoring and attending local industry association events, and attending and exhibiting at industry trade shows and conferences. There is no guarantee that our marketing efforts will be effective. If we are unable to effectively market our products and services

to new customers, or convert existing basic members into premium members, and we are not able to offset any decline in our rate of conversion of basic members to premium members with higher average subscription prices, our revenues and operating results could decline as a result of current premium members failing to renew their premium memberships and potential premium members failing to become premium members.

We may be unable to compete successfully with our current or future competitors.

The market to provide listing, searching and marketing services to the commercial real estate industry is highly competitive and fragmented, with limited barriers to entry. Our current or new competitors may adopt certain aspects of our business model, which could reduce our ability to differentiate our services. All of the services which we provide to our customers, including property and business listing, searching, and marketing services, are provided separately or in combination to our current or potential customers by other companies that compete with us. These companies, or new market entrants, will continue to compete with us. Listings in the commercial real estate industry are not marketed exclusively through any single channel, and accordingly our competition could aggregate a set of listings similar to ours. Increased competition could result in a reduction in our revenues or our rate of acquisition of new customers, or loss of existing customers or market share, any of which would harm our business, operating results and financial condition.

We compete with CoStar Group, Inc., a provider of information and research services to the commercial real estate market. Some of the services that CoStar offers directly compete with our product offering. For example, CoStar provides commercial real estate for sale and for lease property listings which compete directly with our online commercial real estate marketplace. CoStar also recently introduced a marketing service which will compete directly with our marketing services geared toward the general public.

Several companies, such as Property Line International, Inc., have created online property listing services that compete with us. These companies aggregate property listings obtained through various sources, including from commercial real estate agents. In addition, newspapers typically include on their websites listings of commercial real estate for sale and for lease. If our current or potential customers choose to use these services rather than ours, demand for our services could decline.

Additionally, the National Association of REALTORS ®, or NAR, its local boards of REALTORS ®, its various affiliates, and other third parties have in the past created, and they or others may in the future create, commercial real estate information and listing services. These services could provide commercial real estate for sale and for lease property listings which compete directly with our online commercial real estate marketplace. If they succeed in attracting a significant number of commercial real estate transaction participants, demand for our services may decrease.

Large Internet companies that have large user bases and significantly greater financial, technical and marketing resources than we do, such as eBay Inc. and craigslist, Inc., provide commercial real estate listing or advertising services in addition to a wide variety of other products or services. eBay and craigslist operate real estate listing services which include commercial real estate and operating businesses. Other large Internet companies, such as Google, Yahoo! and Microsoft, have classified listing services which could be used to market and search for commercial real estate property listings. Competition by these companies could reduce demand for our services or require us to make additional expenditures, either of which could reduce our profitability.

If we are unable to obtain or retain listings from commercial real estate brokers, agents, and property owners, our marketplace could be less attractive to current or potential customers, which could result in a reduction in our revenues.

Our success depends substantially on the number of commercial real estate property listings submitted by brokers, agents and property owners to our online marketplace. The number of listings on our marketplace has grown from approximately 224,000 as of December 31, 2003, to approximately 460,000 as of December 31, 2006, to approximately 560,000 as of December 31, 2007, and as of September 30, 2008 we had approximately 642,000 listings. If agents marketing large numbers of property listings, such as large brokers in key real estate markets, choose not to continue their listings with us, or choose to list them with a competitor, our website would be less attractive to other real estate industry transaction participants, thus resulting in cancelled premium memberships, failure to attract and retain new members, or failure to attract advertising and lead generation revenues.

Our operating results and revenues are subject to fluctuations that may cause our stock price to decline, and our quarterly financial results may be subject to seasonality, each of which could cause our stock price to decline.

Our revenues, expenses and operating results have fluctuated in the past and are likely to continue to do so in the future. Our revenues, expenses and operating results may fluctuate from quarter to quarter due to factors including those described below and elsewhere in this Quarterly Report on Form 10-Q:

	•		rates of member adoption and retention;

	•		changes in our pricing strategy and timing of changes;

	•		changes in our marketing or other corporate strategies;

	•		our introduction of new products and services or changes to existing products and services;

	•		the amount and timing of our operating expenses and capital expenditures;

	•		the amount and timing of non-cash stock-based charges;

	•		the amount and timing of litigation related expenses;

	•		costs related to acquisitions of businesses or technologies; and

	•		other factors outside of our control.

Our results of operations could vary significantly from quarter to quarter due to the seasonal nature of the commercial real estate industry. The timing of widely observed holidays and vacation periods, particularly slow downs during the end-of-year holiday period, and availability of real estate agents and related service providers during these periods, could significantly affect our quarterly operating results during that period. For example, we have historically experienced a significant decline in the rate of growth of both new memberships and revenues during the fourth quarter.

These fluctuations or seasonality effects could negatively affect our results of operations during the period in question and/or future periods or cause our stock price to decline.

If we are unable to introduce new or upgraded services or products that our customers recognize as valuable, we may fail to attract new customers or retain existing customers. Our efforts to develop new and upgraded products and services could require us to incur significant costs.

To continue to attract new members to our online marketplace, we may need to continue to introduce new products or services. We may choose to develop new products and services independently or choose to license or otherwise integrate content and data from third parties. For example, in early 2006 we introduced our RecentSales product and aerial imagery MapSearch feature to address perceived customer needs and to add additional searching enhancements, both of which utilize content and technology licensed from third parties. The introduction of these improvements imposed costs on our business and required the use of our resources, and there is no guarantee that we will continue to be able to access these technologies and content on commercially reasonable terms or at all. If customers or potential customers do not recognize the value of our new services or enhancements to existing services, they might choose not to become premium members or to otherwise utilize our marketplace.

Developing and delivering these new or upgraded services or products may impose costs and require the attention of our product and technology department and management. This process is costly, and we may experience difficulties in developing and delivering these new or upgraded services or products. In addition, successfully launching and selling a new service or product will require the use of our sales and marketing resources. Efforts to enhance and improve the ease of use, responsiveness, functionality and features of our existing products and services have inherent risks, and we may not be able to manage these product developments and enhancements successfully. If we are unable to continue to develop new or upgraded services or products, then our customers may choose not to use our products or services.

We could face liability for information on our website or general litigation claims.

We provide information on our website, including commercial real estate listings, that is submitted by our customers and third parties. We also allow third parties to advertise their products and services on our website and include links to third-party websites. We could be exposed to liability with respect to this information. Customers could assert that information concerning them on our website contains errors or omissions and third parties could seek damages for losses incurred if they rely upon incorrect information provided by our customers or advertisers. We could also be subject to claims that the persons posting information on our website do not have the right to post such information or are infringing the rights of third parties. For example, in 1999 CoStar sued us, claiming that we had directly and indirectly infringed their copyrights in photographs by permitting our members to post those photographs on our website. Although the court issued rulings that were favorable to us in that litigation, other persons might assert similar or other claims in the future. Among other things, we might be subject to claims that by directly or indirectly providing links to websites operated by third parties, we would be liable for wrongful actions by the third parties operating those websites. Even if these claims do not result in liability to us, we could incur significant costs in investigating and defending against these claims.

From time to time, we are involved in other disputes that arise in the ordinary course of business. The number and significance of these claims may increase as our business expands and our company grows larger. Any claims or actions against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time, and result in the diversion of significant operational resources.

The Digital Millennium Copyright Act, or DMCA, allows copyright owners to obtain subpoenas compelling disclosure by an Internet service provider of the names of customers of that Internet service provider. We have been served with such subpoenas in the past, and may in the future be served with additional such subpoenas. Compliance with subpoenas under the DMCA may divert our resources, including the attention of our management, which could impede our ability to operate our business.

Our potential liability for information on our websites or distributed by us to others could require us to implement additional measures to reduce our exposure to such liability, which may require us to expend substantial resources and limit the attractiveness of our online

marketplace to users. Our general liability insurance may not cover all potential claims to which we are exposed and may not be adequate to indemnify us for all liability that may be imposed.

If we are unable to convince commercial real estate brokers and other commercial real estate professionals that our services and products are superior to traditional methods of listing, searching, and marketing commercial real estate, they could choose not to use our marketplace, which could reduce our revenues or increase our expenses.

A primary source of new customers for us is the commercial real estate professional community. Many commercial real estate professionals are used to listing, searching and marketing real estate in traditional ways, such as through the distribution of print brochures, sharing of written lists, placing signs on properties, word-of-mouth, and newspaper advertisements. Commercial real estate professionals may prefer to continue to use traditional methods or may be slow to adopt our products and services. If we are not able to continue to persuade commercial real estate professionals of the efficacy of our products and services, they may choose not to use our marketplace, which could reduce our revenues. In addition, we could be required to increase our marketing and other expenditures to continue our efforts to attract these potential customers.

Our business depends on retaining and attracting capable management and operating personnel.

Our success depends in large part on our ability to retain and attract high-quality management and operating personnel, including our Chief Executive Officer and Chairman of the Board of Directors, Richard J. Boyle, Jr.; our President and Chief Operating Officer, Thomas Byrne; our Chief Financial Officer and Senior Vice President, Finance and Administration, Brent Stumme; our Chief Strategy Officer and Senior Vice President, Corporate Development, Jason Greenman; and our Chief Technology Officer and Senior Vice President, Information Technology, Wayne Warthen. Our business plan was developed in large part by our senior-level officers, and its implementation requires their skills and knowledge. We may not be able to offset the impact on our business of the loss of the services of Mr. Boyle or other key officers or employees. We have no employment agreements that prevent any of our key personnel from terminating their employment at any time, and we do not maintain any “key-person” life insurance for any of our personnel.

Furthermore, our business requires skilled technical, management, product and technology, and sales and marketing personnel, who are in high demand and are often subject to competing offers. Competition for qualified employees is intense in our industry, and the loss of a substantial number of qualified employees, or an inability to attract, retain and motivate additional highly skilled employees required for the expansion of our activities, could harm our business. To retain and attract key personnel, we use various measures, including an equity incentive program and incentive bonuses for key executive officers and other employees. These measures may not be enough to attract and retain the personnel we require to execute our business plan.

If we fail to protect confidential information against security breaches, or if our members or potential members are reluctant to use our marketplace because of privacy concerns, we might face additional costs, and activity in our marketplace could decline.

As part of our membership registration process, we collect, use and disclose personally identifiable information, including names, addresses, phone numbers, credit card numbers and email addresses. Our policies concerning the collection, use and disclosure of personally identifiable information are described on our websites. While we believe that our policies are appropriate and that we are in compliance with our policies, we could be subject to legal claims, government action or harm to our reputation if actual practices fail to comply or are seen as failing to comply with our policies or with local, state or federal laws concerning personally identifiable information or if our policies are inadequate to protect the personally identifiable information that we collect.

Concern among prospective customers regarding our use of the personal information collected on our websites could keep prospective customers from using our marketplace. Industry-wide incidents or incidents with respect to our websites, including misappropriation of third-party information, security breaches, or changes in industry standards, regulations or laws could deter people from using the Internet or our website to conduct transactions that involve the transmission of confidential information, which could harm our business. For example, in the first quarter of 2008, our subsidiary, Cityfeet.com, was informed that there may have been a security breach to its credit card database and that some personally identifiable information of individuals contained in that database may have been misappropriated. Under California law and the laws of a number of other states, if there is a breach of our computer systems and we know or suspect that unencrypted personal customer data has been stolen, we are required to inform any customers whose data was stolen, which could harm our reputation and business.

In addition, another California law requires businesses that maintain personal information about California residents in electronic databases to implement reasonable measures to keep that information secure. Our practice is to encrypt all personal information, but we do not know whether our current practice will continue to be deemed sufficient under the California law. Other states have enacted different and sometimes contradictory requirements for protecting personal information collected and maintained electronically. Compliance with numerous and contradictory requirements of the different states is particularly difficult for an online business such as ours which collects personal information from customers in multiple jurisdictions.

Another consequence of failure to comply is the possibility of adverse publicity and loss of consumer confidence were it known that we did not take adequate measures to assure the confidentiality of the personally identifiable information that our customers had given to us. This could result in a loss of customers and revenue that could jeopardize our success. While we intend to comply fully with all relevant laws and regulations, we cannot assure you that we will be successful in avoiding all potential liability or disruption of business in the event that we do not comply in every instance or in the event that the security of the customer data that we collect is compromised, regardless of whether our practices comply or not. If we were required to pay any significant amount of money in satisfaction of claims under these laws or if we were forced to cease our business operations for any length of time as a result of our inability to comply fully with any such laws, our business,

operating results and financial condition could be adversely affected. Further, complying with the applicable notice requirements in the event of a security breach could result in significant costs.

Our services may infringe the intellectual property rights of others and we may be subject to claims of intellectual property rights infringement.

We may be subject to claims against us alleging infringement of the intellectual property rights of others, including our competitors. Any intellectual property claims, regardless of merit, could be expensive to litigate or settle and could significantly divert our management’s attention from other business concerns. For example, on or about April 8, 2008, Real Estate Alliance Ltd. filed a lawsuit against the Company and its subsidiary, Cityfeet.com Inc., in the U.S. District Court for the Central District of California, Western Division, alleging that the Company and Cityfeet.com Inc. have infringed upon certain patents of Real Estate Alliance Ltd.

Our technologies and content may not be able to withstand third-party claims of infringement. If we were unable to successfully defend against such claims, we might have to pay damages, stop using the technology or content found to be in violation of a third party’s rights, seek a license for the infringing technology or content, or develop alternative noninfringing technology or content. Licenses for the infringing technology or content may not be available on reasonable terms, if at all. In addition, developing alternative noninfringing technology or content could require significant effort and expense. If we cannot license or develop technology or content for any infringing aspects of our business, we may be forced to limit our service offerings. Any of these results could reduce our ability to compete effectively and harm our business.

Our trademarks are important to our business. Other companies may own, obtain or claim trademarks that could prevent, limit or interfere with our use of trademarks. If we were unable to use our trademarks, we would need to devote substantial resources toward developing different brand identities.

If we are unable to enforce or defend our ownership and use of intellectual property, our business, competitive position and operating results could be harmed.

The success of our business depends in large part on our intellectual property, and our intellectual property rights, including existing and future trademarks, trade secrets, and copyrights, are and will continue to be valuable and important assets of our business. Our business could be significantly harmed if we are not able to protect the content of our databases and our other intellectual property.

We have taken measures to protect our intellectual property, such as requiring our employees and consultants with access to our proprietary information to execute confidentiality agreements. We also have taken action, and in the future may take additional action, against competitors or other parties who we believe to be infringing our intellectual property. For example, on November 15, 2007 the Company filed a lawsuit against CoStar Group, Inc. and CoStar Realty Information, Inc. in the Superior Court for the State of California, County of Los Angeles, asserting claims for breach of contract and unfair business practices arising out of CoStar’s alleged unlawful use of data from the Company’s Web site for competitive purposes. We may in the future find it necessary to assert claims regarding our intellectual property. These measures may not be sufficient or effective to protect our intellectual property. These measures could also be expensive and could significantly divert our management’s attention from other business concerns.

We also rely on laws, including those regarding patents, copyrights, and trade secrets, to protect our intellectual property rights. Current laws may not adequately protect our intellectual property or our databases and the data contained in them. In addition, legal standards relating to the validity, enforceability and scope of protection of proprietary rights in Internet-related businesses are uncertain and evolving, and we cannot assure you of the future viability or value of any of our proprietary rights.

Others may develop technologies that are similar or superior to our technology. Any significant impairment of our intellectual property rights could require us to develop alternative intellectual property, incur licensing or other expenses, or limit our product and service offerings.

We may be unable to effectively manage our growth.

As our operations have expanded, and as the result of acquisitions of other companies, we have experienced rapid growth in our headcount. Our overall employee base has grown from 71 employees as of December 31, 2003 to 266 employees as of December 31, 2007, and we had 307 employees as of September 30, 2008. We expect to continue to increase headcount in the future. Our rapid growth has demanded, and will continue to demand, substantial resources and attention from our management. We will need to continue to hire additional qualified software engineers, client and account services personnel, and sales and marketing staff, and improve and maintain our technology to properly manage our growth. If we do not effectively manage our growth, our customer service and responsiveness could suffer and our costs could increase, which could harm our brand, increase our expenses, and reduce our profitability. Restructuring costs could also be required if we do not effectively manage our growth.

If we are not able to successfully identify or integrate acquisitions, our management’s attention could be diverted, and efforts to integrate acquisitions could consume significant resources.

We have made recent acquisitions of, and investments in, other companies, and we may in the future further expand our markets and services in part through additional acquisitions of, or investments in, other complementary businesses, services, databases and technologies. For example, in October, 2004, we acquired BizBuySell, an online marketplace for operating businesses for sale, in June, 2007, we acquired a minority position in Xceligent, Inc., on August 2, 2007, we acquired Cityfeet.com Inc., on April 7, 2008, we acquired REApplications, Inc., and on July 29, 2008, we acquired LandAndFarm.com. Mergers and acquisitions are inherently risky, and we cannot assure you that our acquisitions will be successful. The successful execution of any acquisition strategy will depend on our ability to identify, negotiate, complete

and integrate such acquisitions and, if necessary, obtain satisfactory debt or equity financing to fund those acquisitions. Failure to manage and successfully integrate acquired businesses could harm our business. Acquisitions involve numerous risks, including the following:

	•		difficulties in integrating the operations, technologies, and products of the acquired companies;

	•		diversion of management’s attention from the normal daily operations of our business;

	•		inability to maintain the key business relationships and the reputations of acquired businesses;

	•		entry into markets in which we have limited or no prior experience and in which competitors have stronger market positions;

	•		dependence on unfamiliar affiliates and partners;

	•		insufficient revenues to offset increased expenses associated with acquisitions;

	•		reduction or replacement of the sales of existing services by sales of products or services from acquired lines of business;

	•		responsibility for the liabilities of acquired businesses;

	•		inability to maintain our internal standards, controls, procedures and policies; and

	•		potential loss of key employees of the acquired companies.

We may also incur costs, and divert our management’s attention from our business, by pursuing potential acquisitions or other investments which are never consummated.

Although we undertake a due diligence investigation of each business that we acquire, there may be liabilities of the acquired companies that we fail to or are unable to discover during the due diligence investigation and for which we, as a successor owner, may be responsible. In connection with acquisitions, we generally seek to minimize the impact of these types of potential liabilities through indemnities and warranties from the seller, which may in some instances be supported by deferring payment of a portion of the purchase price. However, these indemnities and warranties, if obtained, may not fully cover the liabilities due to limitations in scope, amount or duration, financial limitations of the indemnitor or warrantor or other reasons.

In addition, if we finance or otherwise complete acquisitions or other investments by issuing equity or convertible debt securities, our existing stockholders may be diluted.

Unless we develop, maintain and protect our brand identity, our business may not grow and our financial results may suffer.

In an effort to obtain additional registered members and increase use of our online marketplace by commercial real estate transaction participants, we intend to continue to pursue a strategy of enhancing our brand both through online advertising and through traditional print media and to increase our marketing and business development expenditures to maintain and enhance our brand in the future. These efforts can involve significant expense and may not have a material positive impact on our brand identity. In addition, maintaining our brand will depend on our ability to provide products and services that are perceived as being high-value, which we may not be able to implement successfully. If we are unable to maintain and enhance our brand, our ability to attract and retain customers or successfully expand our operations will be harmed.

If we are unable to effectively implement enhanced systems and internal controls, we may incur increased general and administrative costs, which could reduce our profitability, and investor confidence in us may decrease, which could cause our stock price to decline.

As we grow, our success will depend on our ability to continue to implement and improve our operational, financial and management information and control systems on a timely basis, together with maintaining effective cost controls, in order to comply with the more stringent requirements of being a public company, such as the requirements of Sections 302 and 404 of the Sarbanes-Oxley Act of 2002, which require management to evaluate and assess the effectiveness of our internal controls and our disclosure controls and procedures. We are continuing to evaluate and, where appropriate, enhance our systems, procedures and internal controls. If our systems, procedures or controls are not adequate to support our operations and reliable, accurate and timely financial and other reporting, we may not be able to successfully satisfy regulatory and investor scrutiny, offer our services and implement our business plan. The implementation of these new systems, procedures and controls has increased our general and administrative costs in 2007 and the nine month period ended September 30, 2008 and is likely to do so in the future. If we fail to effectively implement these new systems, procedures and controls, investors may choose not to invest in us, which could cause our stock price to decline.

Changes in or interpretations of accounting rules and regulations, such as expensing of stock options, could result in unfavorable accounting charges or require us to change our compensation policies.

In the first quarter of 2006, we adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R), which revises SFAS 123, Accounting for Stock-Based Compensation and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS 123R requires that share-based payment transactions with employees be recognized in the financial statements based on their value and recognized as compensation expense over the vesting period. Prior to SFAS 123R we disclosed the pro forma effects of SFAS 123 under the minimum value method. We adopted SFAS 123R effective January 1, 2006, prospectively for new equity awards issued subsequent to January 1, 2006. As a result of SFAS 123R, we may choose to reduce our reliance on stock options as a compensation tool. If we reduce our use of stock options and do not adopt other forms of compensation, it may be more difficult for us to attract and retain qualified employees. If we do not reduce our reliance on stock options, our operating expenses would increase. We currently rely on stock options to retain existing employees and attract new employees. Although we believe that our accounting practices are consistent with current accounting pronouncements, changes to or interpretations of accounting methods or policies in the future may require us to adversely revise how our consolidated financial statements are prepared.

If our operating results do not meet the expectations of investors or equity research analysts, our market price may decline and we may be subject to class action litigation.

It is possible that in the future our operating results will not meet the expectations of investors or equity research analysts, causing the market price of our common stock to decline. In the past, companies that have experienced decreases in the market price of their stock have been subject to securities class action litigation. A securities class action lawsuit against us could result in substantial costs and divert our management’s attention from other business concerns.

If our website or our other services experience system failures, our customers may be dissatisfied and our operations could be impaired.

Our business depends upon the satisfactory performance, reliability and availability of our website. Problems with our website could result in reduced demand for our services. Furthermore, the software underlying our services is complex and may contain undetected errors. Despite testing, we cannot be certain that errors will not be found in our software. Any errors could result in adverse publicity, impaired use of our services, loss of revenues, cost increases or legal claims by customers.

Additionally, our services substantially depend on systems provided by third parties, over whom we have little control. Interruptions in our services could result from the failure of data providers, telecommunications providers, or other third parties. We depend on these third-party providers of Internet communication services to provide continuous and uninterrupted service. We also depend on Internet service providers that provide access to our services. Any disruption in the Internet access provided by third-party providers or any failure of third-party providers to handle higher volumes of user traffic could harm our business.

Our internal network infrastructure could be disrupted or penetrated, which could materially impact our ability to provide our services and our customers’ confidence in our services.

Our operations depend upon our ability to maintain and protect our computer systems, most of which are located in redundant and independent systems in Los Angeles, California and San Francisco, California. In addition, our BizBuySell website is hosted at a co-location facility in Virginia. While we believe that our systems are adequate to support our operations, our systems may be vulnerable to damage from break-ins, unauthorized access, vandalism, fire, floods, earthquakes, power loss, telecommunications failures and similar events. Although we maintain insurance against fires, floods, and general business interruptions, the amount of coverage may not be adequate in any particular case. Furthermore, any damage or disruption could materially impair or prohibit our ability to provide our services, which could significantly impact our business.

Experienced computer programmers, or hackers, may attempt to penetrate our network security from time to time. For example, in the first quarter of 2008, our subsidiary, Cityfeet.com, was informed that there may have been a security breach to its credit card database, and that some personally identifiable information of individuals contained in that database may have been misappropriated. The potential breach has not affected any personally identifiable information with respect to LoopNet members, which information is maintained on separate servers. Although we maintain a firewall, and will continue to enhance and review our databases to prevent unauthorized and unlawful intrusions, a hacker who penetrates our network security could misappropriate proprietary information or cause interruptions in our services. We might be required to expend significant capital and resources to protect against, or to alleviate, problems caused by hackers. We also may not have a timely remedy against a hacker who is able to penetrate our network security. In addition to purposeful security breaches, the inadvertent transmission of computer viruses could expose us to litigation or to a material risk of loss. Any of these incidents could materially impact our ability to provide our services as well as materially impact the confidence of our customers in our services, either of which could significantly impact our business.

We may be subject to regulation of our advertising and customer solicitation or other newly-adopted laws and regulations.

As part of our membership registration process, our customers agree to receive emails and other communications from us. However, we may be subject to restrictions on our ability to communicate with our customers through email and phone calls. Several jurisdictions have proposed or adopted privacy-related laws that restrict or prohibit unsolicited email or “spam.” These laws may impose significant monetary penalties for violations. For example, the CAN-SPAM Act of 2003, or CAN-SPAM, imposes complex and often burdensome requirements in connection with sending commercial email. Key provisions of CAN-SPAM have yet to be interpreted by the courts. Depending on how it is interpreted, CAN-SPAM may impose burdens on our email marketing practices or services we offer or may offer. Although CAN-SPAM is

thought to have pre-empted state laws governing unsolicited email, the effectiveness of that preemption is likely to be tested in court challenges. If any of those challenges are successful, our business may also be subject to state laws and regulations that may further restrict our email marketing practices and the services we may offer. The scope of those regulations is unpredictable. Compliance with laws and regulations of different jurisdictions imposing different standards and requirements is very burdensome for an online business. Our business, like most online businesses, offers products and services to customers in multiple state jurisdictions. Our business efficiencies and economies of scale depend on generally uniform service offerings and uniform treatment of customers. Compliance requirements that vary significantly from jurisdiction to jurisdiction impose an added cost to our business and increased liability for compliance deficiencies. In addition, laws or regulations that could harm our business could be adopted, or reinterpreted so as to affect our activities, by the government of the United States, state governments, regulatory agencies or by foreign governments or agencies. This could include, for example, laws regulating the source, content or form of information or listings provided on our websites, the information or services we provide or our transmissions over the Internet. Violations or new interpretations of these laws or regulations may result in penalties or damage our reputation or could increase our costs or make our services less attractive.

An important aspect of the new Internet-focused laws is that where federal legislation is absent, states have begun to enact consumer-protective laws of their own and these vary significantly from state to state. Thus, it is difficult for any company to be sufficiently aware of the requirements of all applicable state laws, and it is further difficult or impossible for any company to fully comply with their inconsistent standards and requirements. In addition to the consequences that could result from violating one or another state’s laws, the cost of attempting to comply will be considerable. Also, as our business grows to be world-wide, we will be required to comply with the laws of foreign countries, and the costs of that compliance effort will be considerable.

Our stock price may be volatile and you may be unable to sell your shares at or above the purchase price.

The market price of our common stock could be subject to wide fluctuations in response to, among other things, the risk factors described in this section of this Quarterly Report on Form 10-Q, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us.

Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock.

In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

Our amended and restated certificate of incorporation and our bylaws contain provisions that could delay or prevent a change in control of our company. These provisions could also make it more difficult for stockholders to elect directors and take other corporate actions. These provisions include:

	•		providing for a classified board of directors with staggered, three-year terms;

	•		not providing for cumulative voting in the election of directors;

	•		authorizing the board to issue, without stockholder approval, preferred stock rights senior to those of common stock;

	•		prohibiting stockholder action by written consent;

	•		limiting the persons who may call special meetings of stockholders; and

	•		requiring advance notification of stockholder nominations and proposals.

In addition, the provisions of Section 203 of the Delaware General Corporate Law govern us. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us for a certain period of time.

These and other provisions in our amended and restated certificate of incorporation, our bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions.

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

We had no issuance of unregistered securities during the three months ended September 30, 2008.

Issuer Purchases of Equity Securities

Stock repurchase activity during the three months ended September 30, 2008 was as follows (dollars in thousands except per share amounts):


							(d) Approximate
							Dollar
					(c) Total Number of		Value of Shares that
					Purchased as Part		May Yet Be
	(a) Total Number		(b) Average		of Publicly		Purchased
	of Shares		Price Paid per		Announced Plans or		Under the Plans or
Period	Purchased (#) (1)		Share ($)		Programs (#)		Programs ($) (1)
July 1 - July 31, 2008		240,967	$	10.15		240,967	$	58,410
August 1 - August 31, 2008		0		N/A		0	$	58,410
September 1 - September 30, 2008		302,160	$	9.94		302,160	$	55,405
Total shares		543,127	$	10.03		543,127


(1)		The shares repurchased were under our stock repurchase program that was announced on February 5, 2008 with an authorized level of $50 million. An additional authorized level of $50 million was announced on July 30, 2008. This program is subject to business and market conditions, and may be suspended or discontinued at any time. Repurchases may also be made under a Rule 10b5-1 plan, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under securities laws.

Item 3. Defaults Upon Senior Securities.

None.

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

None.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibits:

31.1		Rule 13a-14(a) Certification (CEO)

31.2		Rule 13a-14(a) Certification (CFO)

32.1		Section 1350 Certification (CEO)

32.2		Section 1350 Certification (CFO)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	LOOPNET, INC.
Date: October 31, 2008	By:	/s/ Richard J. Boyle, Jr.
		Richard J. Boyle, Jr.
		Chief Executive Officer, and Chairman of the Board of Directors Principal Executive Officer


Date: October 31, 2008	By:	/s/ Brent Stumme
		Brent Stumme
		Chief Financial Officer and Senior Vice President, Finance and Administration Principal Financial or Accounting Officer

EXHIBIT INDEX

Exhibits:

31.1		Rule 13a-14(a) Certification (CEO)

31.2		Rule 13a-14(a) Certification (CFO)

32.1		Section 1350 Certification (CEO)

32.2		Section 1350 Certification (CFO)

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