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

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

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

Overview

We are an Internet media company that builds, acquires and enhances branded websites in categories marked by high consumer involvement, strong advertising spending, and significant fragmentation in offline sources of consumer information.

In addition to the vertical categories which we have historically operated, auto, travel and home, we have recently expanded to include categories in careers and shopping. With this expansion, our rapidly growing network of community and ecommerce websites is now grouped into five vertical categories:
automotive, careers, home, shopping and travel and leisure. The websites in our new careers vertical are targeted towards specific industries and address many aspects of career management. These sites include traditional employment listings sites, portfolio sites where jobseekers can upload samples of their work for viewing by potential employers, and career community sites, where users can obtain guidance and advice on various aspects of their careers from industry colleagues. Our value-focused shopping vertical websites provide users with discounts, coupons and special offers from third party manufacturers and retailers on a variety of purchases, both online and offline.

We operate approximately 200 websites, 78 of which each received more than 100,000 unique visitors in the month of September 2008 and which are herein referred to as "principal websites."

In September 2008 all of our websites collectively attracted a total 38.8 million unique visitors (measured by adding the number of unique visitors to each of our websites in that month), an increase of approximately 45% from 26.7 million unique visitors in September 2007 and 638.7 million page views, an increase of approximately 110% from 304.0 million page views in September 2007. Our international audiences accounted for approximately 25% of monthly visitors (defined as the total number of user-initiated sessions with our websites within a month) to our websites in September 2008. We also license our content and Internet technology products and services to major companies and individual website owners around the world.

Throughout this report, we use Google analytics measurement services to report Internet audience metrics. The measurement term "monthly unique visitors" refers to the total number of unique users (a user is defined as a unique IP address) who visit one of our websites in a given month. The term "monthly visitors" is defined as the total number of user-initiated sessions with our websites within a month. "Page views" refers to the number of website pages that are requested by and displayed to our users. Traffic calculations for September 2008 include traffic to websites acquired during September 2008 on a pro formabasis.

During the period from January 1, 2008 through September 30, 2008, we completed 25 website-related acquisitions in our consumer Internet segment for an aggregate purchase price of $59.9 million. We expect to continue to grow our business by acquiring additional websites and improving our existing websites through the application of our operating platform. We have historically been able to deploy capital for acquisitions efficiently, and then integrate acquired websites onto our platform quickly and effectively. Although we believe we will continue to identify, negotiate and purchase websites that meet our operating platform criteria, we cannot predict whether we can continue to purchase websites at the same rate and on similarly favorable terms.

We are dependent on our five vertical website categories for most of our revenues, and are dependent on the automotive category for the largest share of those revenues. Downturns in general economic or market conditions adversely affecting this category, such as is currently ongoing, would negatively impact our business.

In addition to operating websites in our five vertical categories, we license our content and Internet technology products and services to major companies and individual website owners around the world.

Our Revenues

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

Consumer Internet Revenues

Our Consumer Internet segment generates revenues through sales of online advertising and new car and automotive finance brokerage services, in various monetization formats such as cost per lead (CPL), cost per thousand impressions (CPM), cost per click (CPC), cost per action (CPA) and flat fees. Under the CPL model, our advertiser customers pay for leads generated through our websites and accepted by the customer. Under the CPM format, advertisers pay a fee for displays of their graphical advertisements, typically at an incremental rate per thousand displays or "impressions." Under the CPC model, we earn revenue based on "click-throughs" on text-based links displayed on our websites, which occur when a user clicks on an advertiser's listing. We derive revenues on a CPC model through direct sales to advertisers, as well as through various third-party advertising networks, such as Google, Yahoo! and Tribal Fusion, for which we receive a negotiated percentage of their advertising revenues. Under the CPA format, we earn revenue for consumer transactions undertaken through our websites. For example, through CarsDirect.com, we offer new car brokering services and related auto-loan brokering services and aftermarket products to consumers in 32 states, for fees that are negotiated with and paid to us by auto dealers and lenders. Advertisers who purchase our flat-fee formats generally subscribe on a fixed-fee basis for a listing on one of our websites.

Licensing Revenues

We license customized products, services and automotive vehicle marketing data to most major U.S., Japanese and European automotive manufacturers and other online automotive service providers. Customers typically enter into multi-year licensing and technology development agreements for these products and services, which include market analytics, product planning, vehicle configuration, management and order placement, in-dealership retail systems and consumer-facing websites. We also sell and license vBulletin Internet software to U.S. and international website owners. vBulletin revenues are primarily derived from software license purchases and leasing for a flat fee as well as annual maintenance fees for customer support and software updates.

Expenses

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

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of

these financial statements requires us to make estimates, assumptions and judgments that affect the amounts reported in our financial statements and the accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. We believe the following accounting policies to be the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

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

Consumer Internet

† The bulk of our Consumer Internet segment revenue is earned from online advertising sales. The remainder is earned through new and used car and auto-finance brokerage services on a CPM, CPC, CPL, CPA or flat-fee basis and consumer subscription services. †
† We recognize revenue from the display of graphical advertisements delivered on a CPM basis as impressions are delivered. An impression is delivered when an advertisement appears in pages viewed by users. Advertisements are billed on a flat-rate basis and revenue is recognized ratably over the contracted time period, which generally varies from one to twelve months. A reserve is calculated to accrue for the under-delivery of guaranteed minimum impressions and credits. †
† Revenue from the display of text-based links to the websites of our advertisers on a CPC basis, and search advertising, is recognized as "click-throughs" occur. A "click-through" occurs when a user clicks on an advertiser's link. †
† Revenue from advertisers on a CPL basis is recognized in the period the leads are accepted by the dealer or mortgage lender, following the execution of a service agreement and commencement of the services. Service agreements generally have a term of twelve months or less. †
† New car brokerage revenue and the related auto-financing brokerage revenue and after-market sales revenue are recognized on a CPA basis. Similar to a sales commission, this brokerage revenue is recognized on a net basis in accordance with Emerging Issue Task Force (EITF) Issue No. 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent." As contrasted to the gross revenue a car dealership would typically report, we report brokerage revenue on a net basis as we do not bear inventory or credit risk, are not involved in the specification of the product and do not change the product or perform part of the services. †
† Revenue from flat-fee, listings-based services are based on a customer's subscription to the service for up to twelve months and are recognized on a straight-line basis over the term of the subscription.

Licensing

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

Software-related revenue is accounted for in accordance with the American Institute of Certified Public Accountants' (AICPA) Statement of Position (SOP) No. 97-2, "Software Revenue Recognition," and interpretations thereof. Revenue is recognized ratably over the term of the license.

Fees for stand-alone and post-implementation development and enhancement services are fixed-bid and determined based on estimated effort and client billing rates since we can reasonably estimate the required effort to complete each project or each milestone within the project. There are no non-software deliverables and the functionality delivered is specific to a customer's previously licensed application. Post-implementation development and enhancement services are not sold separately. Recognition of the revenue and all related costs of these arrangements are deferred until the commencement of the applicable license period; revenue is recognized ratably over the term of the license.

Business Combinations

We use the purchase method of accounting for business combinations and the results of the acquired businesses are included in the income statement from the date of acquisition. The purchase price includes the direct costs of the acquisition. Amounts allocated to intangible assets are amortized over their estimated useful lives; no amounts are allocated to in-progress research and development. Goodwill represents the excess of consideration paid over the net identifiable business assets acquired.

We have entered into earnout agreements which are contingent on the acquired business achieving agreed upon performance milestones. Earnout payments are not based on the seller's on-going service to the Company; when the seller does provide services following the acquisitions, the cost of the seller's services is recorded as compensation expense in the period the services were performed. We account for earnout consideration as an addition to goodwill in the period earned.

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

We assess the recoverability of the carrying value of long-lived assets. If circumstances suggest that long-lived assets may be impaired, and a review indicates that the carrying value will not be recoverable, as determined based on the projected undiscounted future cash flows, the carrying value is reduced to its estimated fair value. The determination of cash flows is based upon assumptions and forecasts that may not occur. In addition, we assess goodwill and indefinite-lived intangible assets for impairment annually, or more frequently if circumstances indicate impairment may have occurred.

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

Stock-Based Compensation and Stock-Based Charges

Effective January 1, 2006, we adopted the provisions of the Statement of Financial Accounting Standards No. 123(R), "Share-Based Payments," (SFAS 123(R)), using the prospective approach. As a result, we recognize stock-based compensation expense for only those awards that are granted subsequent to December 31, 2005 and any previously existing awards that are subject to variable accounting, including certain stock options that were exercised with notes in 2003, until the awards are exercised, forfeited, or contractually expire in accordance with the prospective method and the transition rules of SFAS 123(R). Under SFAS 123(R), stock-based awards granted after December 31, 2005, are recorded at fair value as of the grant date and recognized as expense over the employee's requisite service period (the vesting period, generally four years), which we have elected to amortize on a straight-line basis. Options exercised with a note receivable in 2003 continue to be accounted for under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25).

Provision for Income Taxes and Deferred Income Tax Assets

Deferred income tax assets and liabilities are periodically computed for temporary differences between the financial statement and income tax bases of assets and liabilities. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to years in which the differences are expected to reverse. A valuation allowance is established, when necessary, to reduce deferred income tax assets to the amount expected to be realized. Significant judgment is necessary in determining valuation allowances necessary for our deferred tax assets. Our effective income tax rate for the nine months ended September 30, 2008 was 38.4%.

Seasonality and Cyclicality

The automotive and home mortgage industries in which we provide consumer Internet products and services have historically experienced seasonality with relatively stronger sales in the second and third quarters and weaker sales in the fourth quarter. These industries are also subject to longer-term cycles that are driven by factors such as credit markets, interest rates, inflation rates, fuel prices and consumer spending. These industries experienced a general economic downturn beginning in the second half of 2006. This downward trend negatively affected our revenues beginning approximately in the fourth quarter of 2006 as automotive category advertisers tightened budgets. We cannot predict when these industry downturns will reverse, whether they will worsen, or the magnitude of any recovery.

Results of Operations



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



                                          Three months ended       Nine months ended
                                            September 30,            September 30,
                                          2008         2007         2008        2007
                                                         (unaudited)

Revenues                                    100.0 %      100.0 %     100.0 %     100.0 %

Costs and operating expenses

Cost of revenues                             24.8         24.5        22.8        26.6
Sales and marketing                          19.2         23.4        21.4        21.2
Technology                                    9.7          6.3         8.3         9.6
General and administrative                   15.0         15.4        16.9        33.9
Depreciation and amortization of
intangibles                                  13.7         10.0        12.7         8.5
Total operating expenses                     82.4         79.6        82.1        99.8
Operating income                             17.6         20.4        17.9         0.2
Investment and other income                  (4.2 )        8.9           -         8.8
Income from operations before income
taxes                                        13.4         29.3        17.9         9.0
Provision for income taxes                   (3.9 )      (12.0 )      (6.9 )     (12.8 )
Net income                                    9.5 %       17.3 %      11.0 %      (3.8 )%

Revenues

Our revenues for the three-month period ended September 30, 2008, increased $2.4 million, or 10%, over our revenues in the three-month period ended September 30, 2007, reflecting growth in both of our operating segments. Consumer Internet revenues, which represents 68% of our total revenues in the three-month period ended September 30, 2008, grew $1.5 million, or 9%, over Consumer Internet revenues in the prior year period. Advertising revenues grew $3.1 million as a result of growth from existing websites and the effect of acquisitions completed during the eighteen months ended September 30, 2008. Partially offsetting this growth and primarily reflecting the continuing weakness in the automotive industry, our ecommerce CPA and CPL revenues from automotive dealers declined $1.3 million during the three-month period ended September 30, 2008 compared to the same period in the prior year.

Licensing revenues, which represents 32% of total revenue in the three-month period ended September 30, 2008, grew $0.9 million, or 11%, over the three-month period ended September 30, 2007. This growth was driven primarily by the development of new client contracts and the sale of additional services to existing Autodata client accounts, and continued organic growth from Jelsoft's vBulletin software.

Our revenues for the nine-month period ended September 30, 2008, increased $12.1 million, or 19%, over our revenues in the prior year period, reflecting growth in both of our operating segments. Consumer Internet revenues, which represents 68% of our total revenues in the nine-month period ended September 30, 2008, grew $6.1 million, or 13%, over Consumer Internet revenues in the prior year period. Advertising revenues grew $10.9 million as a result of growth from existing websites and the effect of acquisitions completed during the eighteen months ended September 30, 2008. Partially offsetting this growth and primarily reflecting the continuing weakness in the automotive industry, our ecommerce CPA and CPL revenues from automotive dealers declined $4.2 million during the nine-month period ended September 30, 2008 compared to the same period in the prior year.

Licensing revenues, which represents 32% of total revenues in the nine-month period ended September 30, 2008, grew $6.0 million, or 33%, over the prior year period. This growth was driven by the development of new client accounts and the sale of additional services to existing Autodata client accounts, and by organic growth from vBulletin, which was acquired in June 2007.

Cost of revenues

Our cost of revenues increased $0.7 million, or 11%, in the three-month period ended September 30, 2008 over the prior year period. The higher cost of revenues is primarily driven by the overall increase in licensing revenues and partially due to higher co-location and ad-serving expenses, a result of the increase in website traffic from organic and acquisition growth.

Our cost of revenues increased $0.3 million, or 2%, in the nine-month period ended September 30, 2008 over the prior year period. Development costs related to our licensing business increased $1.0 million, consistent with the growth from our licensing revenues. Co-location and ad-serving expense increased $0.4 million reflecting the growth in website traffic. These increases were offset by a $1.1 million decrease in fulfillment costs associated with specific advertiser orders, consistent with the decline in revenues from our automotive-related e-commerce CPA and CPL revenues.

Operating expenses

Stock-Based Compensation Expense

The largest single component influencing the changes in operating expenses for the nine-month period ended September 30, 2008, when compared with the comparable period in the prior year, is the decline in stock-based compensation expense. In the first half of 2007, a significant number of employee stock options were subject to the variable accounting of Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to Employees," which required that the cost of certain options be adjusted in each accounting period based on changes in the common stock price. Subsequent to July 2007, these options were no longer subject to variable accounting. In the first nine months of 2008, stock-based compensation expense was accounted for according to SFAS 123R.

Stock-based compensation expense increased $0.5 million in the three-month period ended September 30, 2008 over the three-month period ended September 30, 2007, and declined $13.0 million, or 87%, in the nine-month period ended September 30, 2008 over the nine-month period ended September 30, 2007. The increase in the three-month period ended September 30, 2008 resulted from restricted stock being granted subsequent to the third quarter of 2007. The decline in the nine-month period ended September 30, 2008, and as mentioned above, resulted from certain options subject to variable accounting no longer being subject to such accounting; the promissory notes, which had been used to early exercise these options, were repaid in 2007 and the related options were exercised.

Sales and Marketing

Sales and marketing expenses declined $0.6 million or 10%, in the three-month period ended September 30, 2008 over the prior year period; excluding the effect of the decline in the stock-based compensation expense, sales and marketing expenses declined $0.6 million, or 11% in the three-month period ended September 30, 2008 over the prior year period. The decline primarily reflects an approximate $0.3 million decrease in online marketing expense.

Sales and marketing expenses increased $2.7 million, or 20%, in the nine-month period ended September 30, 2008 over the prior year period; excluding the effect of the decline in the stock-based compensation expense, sales and marketing expenses increased $3.7 million, or 29% in the nine-month period ended September 30, 2008 over the prior year period. The higher costs primarily reflect increased compensation for additional sales and customer support staff . . .