Three months ended                Nine months ended
                                                    September 30,                    September 30,
                                                2008             2007             2008            2007
Sales and marketing                           $     218         $   151        $      692        $   364
General and administrative                          293             168               919            661
Research and development                             67              51               190            183

Total stock-based compensation expense        $     578         $   370        $    1,801        $ 1,208

Basic and diluted net compensation
expense per share                             $    0.04         $  0.03        $     0.13        $  0.11

Results of Operations
The following table sets forth our historical operating results as a percentage
of revenue for the periods indicated and is derived from our unaudited financial
statements, which, in the opinion of our management, reflect all adjustments
that are of a normal recurring nature, necessary to present such information
fairly:

                                             Three months ended          Nine months ended
                                                September 30,              September 30,
                                             2008          2007          2008          2007
Revenue                                        100.0 %       100.0 %       100.0 %      100.0 %

Operating expenses:
Search serving                                  13.0          19.9          14.3         18.5
Sales and marketing                             82.9          94.4          83.6         94.3
General and administrative                      12.5          20.3          14.3         23.4
Research and development                         7.1          11.1           8.2         12.0
Amortization of intangibles                      2.0           5.6           2.9          5.1

Total operating expenses                       117.5         151.3         123.3        153.3

Operating loss                                 (17.5 )       (51.3 )       (23.3 )      (53.3 )

Interest and other income (expense), net         0.7        (114.3 )         1.0        (46.3 )

Loss before income taxes                       (16.8 )      (165.6 )       (22.3 )      (99.6 )

Provision for income taxes                       0.0           0.0           0.0          0.0

Net loss                                      (16.8) %     (165.6) %      (22.3) %     (99.6) %

Revenue
Revenue by business categories was as follows (dollars in thousands):

                                  Three months ended September 30,                  Percent                    Nine months ended September 30,                 Percent
                           2008            (*)          2007           (*)           change            2008           (*)           2007           (*)          change
Local domestic           $   9,799          96.1 %     $ 4,804          85.6 %          104.0 %      $ 26,987          94.1 %     $ 12,900          82.7 %        109.2 %
Local international            228           2.2 %         188           3.3 %           21.3 %           541           1.9 %          313           2.0 %         72.8 %

Total local                 10,027          98.3 %       4,992          88.9 %          100.9 %        27,528          96.0 %       13,213          84.7 %        108.3 %

National                       169           1.7 %         622          11.1 %          (72.8 )%        1,156           4.0 %        2,380          15.3 %        (51.4 )%

Total revenue            $  10,196         100.0 %     $ 5,614         100.0 %           81.6 %      $ 28,684         100.0 %     $ 15,593         100.0 %         84.0 %

(*) - Percent of total revenue.

Domestic local search revenue for the three months ended September 30, 2008 increased $5.0 million, or 104.0%, compared to the same period in 2007. Domestic local search revenue for the nine months ended September 30, 2008 increased $14.1 million, or 109.2%, compared to the same period in 2007. The increases in revenue were primarily due to increased monetization as our revenue per thousand visitors (RKV) increased to $278 for the three months ended September 30, 2008 from $168 for the three months ended September 30, 2007 and increased to $253 for the nine months ended September 30, 2008 from $157. The increase in RKV was a result of additional ad units per page, optimization of search results to improve page yields, greater revenue share received from our advertising partners and improved search engine marketing.

International local search revenue for the three months ended September 30, 2008 increased $40,000, or 21.3%, compared to the same period in 2007. International local search revenue for the nine months ended September 30, 2008 increased $228,000, or 72.8%, compared to the same period in 2007. The increases in revenue were primarily due to an increase in revenue-generating click-throughs from an increase in traffic to our uk.local.com web site.
National revenue for the three months ended September 30, 2008 decreased $453,000, or 72.8%, compared to the same period in 2007. National revenue for the nine months ended September 30, 2008 decreased $1.2 million, or 51.4%, compared to the same period in 2007. The decrease in revenue was primarily due to a decrease in revenue- generating click-throughs as we have transitioned away from national search to focus our business efforts on local search. Total revenue for the three months ended September 30, 2008 increased $4.6 million, or 81.6%, compared to the same period in 2007. Total revenue for the nine months ended September 30, 2008 increased $13.1 million, or 84.0%, compared to the same period in 2007.
The following table identified our major customers that represented greater than 10% of our total revenue in any of the period presented:

                                           Percentage of total revenue
                                  Three months ended          Nine months ended
                                     September 30,              September 30,
           Customer                2008           2007        2008           2007
           Yahoo! Inc.                43.9 %       45.6 %        45.1 %       47.4 %
           Idearc Media Corp.         15.1 %       15.0 %        16.7 %       14.2 %

Operating expenses:
Operating expenses were as follows (dollars in thousands):

                                  Three months ended September 30,                 Percent                   Nine months ended September 30,                  Percent
                           2008            (*)          2007           (*)          change           2008           (*)           2007           (*)          change
Search serving           $   1,331          13.0 %     $ 1,116          19.9 %         19.3 %      $  4,104          14.3 %     $  2,884          18.5 %          42.3 %
Sales and marketing          8,455          82.9 %       5,298          94.4 %         59.6 %        23,997          83.6 %       14,698          94.3 %          63.3 %
General and
administrative               1,271          12.5 %       1,143          20.3 %         11.2 %         4,113          14.3 %        3,654          23.4 %          12.6 %
Research and
development                    725           7.1 %         621          11.1 %         16.7 %         2,358           8.2 %        1,871          12.0 %          26.0 %
Amortization of
intangibles                    200           2.0 %         315           5.6 %        (36.5 )%          798           2.9 %          796           5.1 %           0.3 %

Total operating
expenses                 $  11,982         117.5 %     $ 8,493         151.3 %         41.1 %      $ 35,370         123.3 %     $ 23,903         153.3 %          48.0 %

(*) - Percent of total revenue.

Search serving
Search serving expenses for the three months ended September 30, 2008 increased $215,000, or 19.3%, compared to the same period in 2007. Search serving expenses for the nine months ended September 30, 2008 increased $1.2 million, or 42.3%, compared to the same period in 2007. The increases were primarily due to an increase in payments to our private label partners associated with the business we acquired from PremierGuide, Inc. We expect search serving expense to increase slightly as a result of an increase in business with our private label partners. Search serving expenses were 13.0% and 19.9% of total revenue for the three months ended September 30, 2008 and 2007, respectively. Search serving expenses were 14.3% and 18.5% of total revenue for the nine months ended September 30, 2008 and 2007, respectively.
Sales and marketing
Sales and marketing expenses for the three months ended September 30, 2008 increased $3.2 million, or 59.6%, compared to the same period in 2007. Sales and marketing expenses for the nine months ended September 30, 2008 increased $9.3 million, or 63.3%, compared to the same period in 2007. The increases were primarily due to an

increase in advertising and traffic acquisition costs (TAC) for our Local.com web site. We expect sales and marketing expenses to increase as we increase our TAC and marketing efforts for our Local.com web site.
Sales and marketing expenses were 82.9% and 94.4% of total revenue for the three months ended September 30, 2008 and 2007, respectively. Sales and marketing expenses were 83.6% and 94.3% of total revenue for the nine months ended September 30, 2008 and 2007, respectively. General and administrative
General and administrative expenses for the three months ended September 30, 2008 increased $128,000, or 11.2%, compared to the same period in 2007. General and administrative expenses for the nine months ended September 30, 2008 increased $459,000, or 12.6%, compared to the same period in 2007. The increase was primarily due to an increase payroll and non-cash stock based compensation expense. We expect general and administrative expenses to increase slightly due to fees for LEC processing of our telesales orders.
General and administrative expenses were 12.5% and 20.3% of total revenue for the three months ended September 30, 2008 and 2007, respectively. General and administrative expenses were 14.3% and 23.4% of total revenue for the nine months ended September 30, 2008 and 2007, respectively. Research and development
Research and development expenses for the three months ended September 30, 2008 increased $104,000, or 16.7%, compared to the same period in 2007. Research and development expenses for the nine months ended September 30, 2008 increased $487,000, or 26.0%, compared to the same period in 2007. The increases were primarily due to a decrease in capitalized research and development expenses and an increase in amortized web site development expense. We expect research and development expenses to increase due to consulting fees for additional resources to support our initiatives. During the three and nine months ended September 30, 2008, we capitalized an additional $130,000 for web site development and we amortized $123,000 and $263,000 during the three and nine months ended September 30, 2008, respectively. During the three and nine months ended September 30, 2007, we capitalized an additional $90,000 and $311,000, respectively, for web site development and we amortized $49,000 and $134,000 during the three and nine months ended September 30, 2007, respectively. Research and development expenses were 7.1% and 16.7% of total revenue for the three months ended September 30, 2008 and 2007, respectively. Research and development expenses were 8.2% and 12.0% of total revenue for the nine months ended September 30, 2008 and 2007, respectively. Amortization of intangibles
Amortization of intangibles expense was $200,000 and $315,000 for the three months ended September 30, 2008 and 2007, respectively. Amortization of intangibles expense was $798,000 and $796,000 for the nine months ended September 30, 2008 and 2007, respectively. This includes the amortization of developed technology and non-compete agreements associated with the Inspire acquisition, the amortization of purchased technology associated with the Atlocal asset purchase and the amortization of non-compete agreement. Amortization of intangibles also includes the amortization of customer-related intangibles and non-compete agreement associated with the PremierGuide acquisition for the three and nine months ended September 30, 2008. Interest and other income (expense)
Interest and other income (expense) consisted of the following (in thousands):

                                                   Three months ended                Nine months ended
                                                     September 30,                     September 30,
                                               2008               2007             2008             2007
Interest income                               $    72         $        175        $   290         $    342
Interest expense                                    -                 (526 )            -             (887 )
Interest expense - non-cash                         -               (6,067 )            -           (6,679 )

Interest and other income (expense), net      $    72         $     (6,418 )      $   290         $ (7,224 )

Interest and other income (expense) was $72,000 and $(6.4 million) for the three months ended September 30, 2008 and 2007, respectively, representing an increase of $6.5 million. Interest and other income (expense) was $290,000 and $(7.2 million) for the nine months ended September 30, 2008 and 2007, respectively, representing an increase of $7.5 million. The increases were due to higher interest income as a result of more cash to invest and the elimination of interest expense related to the senior secured convertible notes which were converted into equity in 2007.
Provision for income taxes
There was no provision for income taxes during the three months ended September 30, 2008 or 2007. Provision for income taxes was $1,000 for the nine months ended September 30, 2008 and 2007 respectively. This amount represents the minimum amounts required for state income taxes.

Liquidity and Capital Resources
Liquidity and capital resources highlights (in thousands):

                                                                   September 30,          December 31,
                                                                       2008                   2007
Cash and cash equivalents                                         $        12,926        $       14,258
Marketable securities                                                           -                 1,999

Total cash, cash equivalents and marketable securities            $        12,926        $       16,257


Working capital                                                   $        12,199        $       15,002

Cash flow highlights (in thousands):

                                                                      Nine months ended September 30,
                                                                       2008                    2007
Net cash used in operating activities                             $        (3,612 )       $        (6,204 )
Net cash provided by (used in) investing activities               $         1,717         $        (2,488 )
Net cash provided by financing activities                         $           563         $        21,542

We have funded our business, to date, primarily from issuances of equity and debt securities. Cash, cash equivalents and marketable securities were $12.9 million as of September 30, 2008 and $16.3 million as of December 31, 2007. We had working capital of $12.2 million as of September 30, 2008 and $15.0 million as of December 31, 2007.
Net cash used in operations was $3.6 million and $6.2 million for the nine months ended September 30, 2008 and 2007, respectively. The decrease in cash used in operations was due to a lower operating loss and an increase in accounts payable partially offset by an increase in accounts receivable as a result of higher revenue.
Net cash provided by (used in) investing activities was $1.7 million and $(2.5 million) for the nine months ended September 30, 2008 and 2007, respectively. Investing activity for the nine months ended September 30, 2008 consisted of proceeds from the sale of marketable securities of $2.0 million, a decrease in restricted cash of $30,000 and capital expenditures of $315,000. Investing activity for the nine months ended September 30, 2007 included capital expenditures of $495,000, a decrease in restricted cash of $41,000 and $2.0 million related to the acquisition of PremierGuide, Inc. Net cash provided by financing activities was $563,000 and $21.5 million for the nine months ended September 30, 2008 and 2007, respectively. During the nine months ended September 30, 2008, we raised gross proceeds of $397,000 from the exercise of stock options, $188,000 from the exercise of warrants and $3,000 from swing-sale profits. During the nine months ended September 30, 2007, we raised gross proceeds of $8.0 million from the issuance of senior secured convertible notes, $13.0 million from the issuance of common stock in a private placement, $324,000 from the exercise of stock options, $1.3 million from the exercise of warrants and $5,000 from swing-sale profits.

Management believes, based upon projected operating needs, that our working capital is sufficient to fund our operations for at least the next 12 months. Stock repurchase program
On October 8, 2008, our Board of Directors approved a stock repurchase program of up to $2 million dollars of our common stock. The share repurchase program authorizes us to repurchase shares over the next 18 months, from time to time, through open market or privately negotiated transactions. A Rule 10b5-1 repurchase plan will allow the company to purchase its shares at times when it ordinarily would not be in the market because of self-imposed trading blackout periods. The number of shares to be purchased and the timing of the purchases will be based on market conditions, share price and other factors. The stock repurchase program does not require us to repurchase any specific dollar value or number of shares and may be modified, extended or terminated by the Board of Directors at any time.
Stockholder rights plan
On October 14, 2008, our Board of Directors adopted a Stockholder Rights Plan (Rights Plan). Under the Rights Plan, a right to purchase 1/1000th of a share of our Series A Participating Preferred Stock, at an exercise price of $10.00, will be distributed for each share of common stock held of record as of the close of business on October 22, 2008. The rights will automatically trade with our underlying common stock and no separate preferred stock purchase rights certificates will be distributed. The right to acquire preferred stock is not immediately exercisable and will become exercisable only if a person or group acquires 15 percent or more of our common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15 percent or more of the common stock. If any person becomes a 15 percent or more stockholder of the Company, each right (subject to certain limitations) will entitle its holder to purchase, at the rights' then-current exercise price, a number of our common shares or of the acquirer having a market value at the time of twice the right's per share exercise price. If the exercise price is not adjusted, such holders would be able to purchase $20 worth of common stock for $10.
The Board of Directors may redeem the rights for $0.01 per right at any time on or before the fifth day following the acquisition by a person becoming a 15 percent stockholder. Unless the rights are redeemed, exchanged or terminated earlier, they will expire on October 15, 2018. Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors. Item 3. Quantitative and Qualitative Disclosures About Market Risk. As of September 30, 2008, we have no exposure to market risk relating to interest rate changes or foreign currency exchange rates, commodity prices, equity prices, or other changes that affect market risk sensitive instruments. Item 4T. Controls and Procedures
Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's 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.
In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired

control objectives, and that our management was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of September 30, 2008. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based upon its assessment, management concluded that, as of September 30, 2008, our internal control over financial reporting was effective. Changes in Internal Control over Financial Reporting There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.