You should read the following discussion and analysis by our management of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q contain forward looking statements relating to our anticipated plans, products, services, and financial performance. The words "believe," "expect," "anticipate," "intend" and similar expressions identify forward-looking statements, but their absence does not mean the statement is not forward looking. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that could cause actual results to differ materially from those anticipated in the forward-looking statements. Factors that could affect our actual results include, but are not limited to, our ability to retain and increase our customer base, to respond to competitive threats and real estate market conditions, to manage lead generation and other costs, to develop new products, to expand into new lines of business, and to effectively re-brand and re-launch our company. A more detailed description of these and other risks that could materially affect our actual results is included under the heading Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008 and in our other Securities and Exchange Commission filings. Given these risks and uncertainties, you should not place undue reliance on our forward looking statements. The forward-looking statements are made as of the date of this report, and we assume no obligation to update any such statements to reflect events or circumstances after the date hereof.

Overview

Our Business

We provide real estate professionals with the tools and services they need to manage and grow their real estate businesses. We have been an innovator of internet-based marketing services for real estate professionals since the Company's inception in 1999.

Our traditional HouseValues and JustListed lead generation products deliver home seller or buyer leads to customers via an online software tool that is bundled with the offerings. In 2008 we began to shift our business model from our original lead generation model toward offerings that combine software-as-a-service with access to advertising buying and lead generation services.

In November 2008 we introduced Growth Leader, a personalized website and proprietary customer relationship management tool for real estate agents, as well as a related product for agent teams, Team Leader. Together with RealtyGenerator, a turnkey lead generation and lead management system for real estate brokerage companies that we acquired in 2007, these offerings constitute the new products that support the shift in our business model. These products feature Vision, a personalized website optimized to generate consumer response, a proprietary customer relationship management (CRM) tool for real estate agents that is integrated with the website, and industry-leading advertising buying and lead generation services to help real estate professionals attract new clients and promote themselves throughout their community. The Vision-based products have represented an increased portion of our sales in 2009, growing to 46 percent of revenue in the third quarter.

Review of Third Quarter 2009

Revenue for the third quarter was $5.8 million, down 37% from the same period in 2008, primarily as a result of the decline in our customer base. We have experienced several quarterly revenue declines although more recently, the sequential quarterly revenue declines have moderated. A combination of factors - the increased portion of revenue from Vision-based products, a smaller overall customer base, as well as the increased portion of customers that are now at least two-year tenured and demonstrating above-average retention - leads us to believe that the company has achieved relative revenue stability. While we expect continued fluctuations in the coming quarters, we believe that any sequential quarterly revenue declines will be modest compared to those seen in recent years.

We believe our revenue trend continues to reflect the broader real estate market conditions, which have been further affected by challenges in the global banking, credit and mortgage-lending markets over the past year. U.S existing home sales in the third quarter have improved 5 percent over the third quarter a year ago based upon research published by the National Association of Realtors. However, research from REAL Trends shows that third quarter real estate commissions were 13 percent less than in the comparable quarter of 2008. We believe this most directly impacts the investment that real estate professionals are able to make in marketing services such as ours. As real estate commissions improve, Market Leader expects real estate professionals to continue to remain cautious regarding new marketing expenditures for at least a couple of quarters as they recover from what has been a prolonged and significant downturn.

We continued to make progress shifting our business model toward our Vision-based products. While the majority of the $2.7 million in Vision product revenue in the third quarter came from our RealtyGenerator product, we continued to see promising results from our new Growth Leader product as our agent sales team began selling this new product more broadly. Growth Leader also played a role in our customer retention efforts as certain customers of our traditional lead generation products that intended to cancel have switched to the Growth Leader product, effectively extending the life of those customers. At the end of the third quarter we had 1,357 Growth Leader customers as compared to approximately 1,064 and 450 customers at the end of the second and first quarter, respectively.

Our longer term goal is to once again be a growing, profitable company, and we believe that to do so will require resurgence in customer acquisition. Towards that goal, we continue to test new sales methods, such as the strategic partnership with Realty Executives International. More than one hundred and forty of this firm's franchised brokerages signed agreements through a special RealtyGenerator trial program that was created for this franchise network and ends for the majority of these customers in the fourth quarter and is expected to end for the remainder in the first quarter of 2010. Early experience with the limited number of brokerages for whom the trial has ended is positive, with the majority retained as customers. This experience, in addition to a prior smaller but successful initiative with Exit Realty, supports the Company's belief that enterprise-level partnerships can effectively accelerate customer acquisition. A partnership with the Leading Real Estate Companies of the World network announced in the third quarter is just getting underway and will unfold over several quarters.

Over the past three years, we have adapted to changing market conditions by better aligning expenses with expected revenue in an effort to avoid non-strategic uses of cash. We reduced a significant non-strategic expense as a result of our successful renegotiation of our Kirkland, Washington facility lease in the second quarter, the first full cost savings benefit was realized in the third quarter. The lease amendment eliminated the expense of excess space, avoided fees for early lease termination, and kept the team in our current location focused on building the business.

We believe that cash has significant option value in today's economic climate that is best preserved for strategic purposes. These purposes could potentially include selective acquisitions, share repurchases and continued investments in our business. We believe that the strategic value of investment in our business has been significantly enhanced by our recent introduction of innovative products. We used cash in operations in the first nine months of 2009 as part of a strategy to better present our new solutions and to gain share of mind and market ahead of the inflection point in real estate commissions.

Results of Operations

Revenues

Revenues decreased 37% and 40% for the three and nine month periods ended September 30, 2009, respectively, compared to the same periods in 2008. This decrease is primarily due to a 34% decline in our average customer base and a 10% decline in our average revenue per customer over the past nine months when compared to the prior year. We believe the cyclical downturn in the real estate industry has negatively impacted the ability of real estate professionals to pay for marketing services and other lead generation costs, which is reflected in our decreased customer base and our lower average revenue per customer.

Revenue in the third quarter of 2009 decreased 2% from the second quarter of 2009. On a sequential quarterly basis, we experienced a 7% decrease in average customer count, which was offset by an increase in average revenue per customer. While our customer retention rate declined slightly in the third quarter to 93.7 percent compared to 94.2 percent in the second quarter of 2009, this rate remains stronger than most quarters since 2007. More information about the sequential change in revenue and customers is included under the heading "Key Operational Metrics" below.

Our new Vision products - RealtyGenerator, Team Leader and Growth Leader - provided 46% of third quarter revenue and we anticipate that they will represent a majority of revenue by year-end. Based on our experience with the RealtyGenerator product, as well as early and limited experience that shows Growth Leader retaining customers better than our traditional products, we believe that our Vision product offerings will help us to achieve and maintain better overall customer retention rates and improved operating results over time. A combination of factors - the increased portion of revenue from Vision-based products, a smaller overall customer base, as well as the increased portion of customers that are now at least two-year tenured and demonstrating above-average retention - lead us to believe that the company has achieved relative revenue stability. While we expect continued fluctuations in the coming quarters, we believe that any sequential quarterly revenue declines will be modest compared to those seen in recent years.

The Company expects seasonal and other business factors to result in fourth quarter revenue that is modestly lower than in the third quarter, and during the first half of 2010, the Company expects that continued momentum and growth from its Vision products will largely offset any attrition from its traditional products. As a result, the Company does not expect significant revenue declines during the first half of next year, even if market conditions do not improve from current levels. Should real estate commissions improve, Market Leader expects real estate professionals to continue to remain cautious regarding new marketing expenditures for at least a couple of quarters as they recover from what has been a prolonged and significant downturn.

Sales and Marketing



                                                    Three months ended             Nine months ended
                                                      September 30,                  September 30,
                                                   2009            2008           2009           2008
Sales and marketing expense (in thousands)       $   4,922        $ 5,842       $ 14,340       $ 19,514

Sales and marketing expense as a % of revenue           85 %           63 %           78 %           64 %

Sales and marketing expense decreased for the three and nine month periods ended September 30, 2009 when compared to the same periods in 2008, primarily due to reduced advertising costs and customer acquisition expenses. The decreases in advertising costs were driven primarily by the decrease in revenues for the three and nine month periods ended September 30, 2009 compared to the same periods in 2008. Advertising costs increased slightly as a percentage of revenue due to the shift in our product mix to our Vision-based products for which advertising represents a higher percentage of related revenue. We have reduced our customer acquisition expenses in response to the current business environment by reducing staffing costs as well as acquisition marketing efforts. Headcount at September 30, 2009 for our sales and marketing groups decreased 18% to 96, compared to 117 at September 30, 2008. While we have managed a lower overall expense level, sales and marketing expense has increased relative to revenue on the lower revenue base.

Sales and marketing expense increased 5% in the third quarter of 2009 when compared to the second quarter of 2009 primarily due to increased advertising costs. Advertising costs increased primarily due to the increase in revenue from Vision-based products for which advertising represents a higher percentage of related revenue.

We expect sales and marketing expense to remain relatively stable in the fourth quarter of 2009 as compared to the third quarter, and to increase slightly as a percentage of lower revenue.

Technology and Product Development



                                                  Three months ended             Nine months ended
                                                    September 30,                  September 30,
                                                 2009            2008           2009           2008
Technology and product development expense
(in thousands)                                 $   1,211        $ 1,424       $   3,896       $ 4,873

Technology and product development expense
as a % of revenue                                     21 %           15 %            21 %          16 %

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

Technology and product development expense decreased 5% in the third quarter of 2009 when compared to the second quarter of 2009 primarily due to reduced staffing expenses.

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

General and Administrative



                                                  Three months ended             Nine months ended
                                                    September 30,                  September 30,
                                                 2009            2008           2009           2008
Total general and administrative expense
(in thousands)                                 $   1,733        $ 2,320       $   5,446       $ 7,258

Total general and administrative expense as
a % of revenue                                        30 %           25 %            30 %          24 %

General and administrative expense decreased for the three and nine month periods ended September 30, 2009 when compared to the same periods in 2008 primarily due to reduced staffing and occupancy expenses. Staffing costs declined due to lower stock compensation charges, changes in the staffing mix and lower incentive compensation. Lower occupancy expenses reflect the terms of our amended lease. General and administrative expenses increased as a percentage of revenues for the three and nine month periods ended September 30, 2009 when compared to the same periods in 2008 due to our lower revenue base.

General and administrative expense in the third quarter of 2009 was comparable to the second quarter of 2009.

We expect quarterly general and administrative expenses to remain fairly consistent for the remainder of 2009.

Gain on Sale of Fixed Assets

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

Depreciation and Amortization of Property and Equipment

Depreciation and amortization of property and equipment decreased for the three and nine month periods ended September 30, 2009 compared to the same periods in 2008 because many assets became fully depreciated during 2008 and the first half of 2009.

Equity in Loss of Investee

Our equity in the losses of ActiveRain Real Estate Network, a company in which we own 33.3%, decreased for the three and nine month periods ended September 30, 2009 compared to the same period in 2008 due to decreased net losses as ActiveRain continued to grow their revenue base. We believe ActiveRain continues to have strategic value to Market Leader, and that the fair value of our investment is not less than the carrying value at September 30, 2009 of $0.3 million. However, as ActiveRain is still in the early stages of developing its business model there is continued risk associated with the value of our investment. Therefore we will continue to monitor events that could indicate we need to evaluate that asset for impairment.

Interest Income and Expense, Net

Interest income decreased for the three and nine month periods ended September 30, 2009 when compared with the same periods in 2008 primarily due to decreased rates of return on investments as well as a lower investment balance. Early in 2008, we modified our investment strategy to preserve the security and liquidity of our funds, which has resulted in significantly lower rates of return. At September 30, 2009, we held $53.4 million in cash, cash equivalents and short-term investments, compared to $62.0 million at September 30, 2008.

Critical Accounting Policies and Estimates

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

Quarterly Consolidated Statements of Income and Operational Data

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

                                          Sept. 30,       June 30,       Mar. 31,       Dec. 31,        Sept. 30,       June 30,       Mar. 31,
                                            2009            2009           2009           2008            2008            2008           2008
                                                                                     (in thousands)
Operations Data:
Revenues                                 $     5,816      $   5,947      $   6,529      $   7,783      $     9,258      $  10,131      $  11,196
Expenses:
Sales and marketing                            4,922          4,676          4,742          5,464            5,842          6,242          7,430
Technology and product development             1,211          1,278          1,407          1,536            1,424          1,491          1,958
General and administrative                     1,733          1,744          1,969          1,987            2,320          2,232          2,706
Impairment of goodwill and long-lived
assets                                            -              -              -           4,883               -              -              -
Gain on sale of fixed assets                      -              -              -              -                -              -            (791 )
Depreciation and amortization of
property and equipment                           593            780            803          1,032            1,040          1,015            959
Amortization of acquired intangible
assets                                           481            480            482            454              491            492            492

Total expenses                                 8,940          8,958          9,403         15,356           11,117         11,472         12,754

Loss from operations                          (3,124 )       (3,011 )       (2,874 )       (7,573 )         (1,859 )       (1,341 )       (1,558 )
Impairment of and equity in loss of
investee                                         (97 )          (61 )          (94 )       (1,461 )           (207 )         (185 )         (151 )
Interest income and expense, net                  45             59             95            128              289            289            519

Loss before income tax                        (3,176 )       (3,013 )       (2,873 )       (8,906 )         (1,777 )       (1,237 )       (1,190 )
Income tax expense (benefit)                       2              2              2            (58 )             31             34              2

Net loss                                 $    (3,178 )    $  (3,015 )    $  (2,875 )    $  (8,848 )    $    (1,808 )    $  (1,271 )    $  (1,192 )

Key Operational Metrics

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



                                          Sept. 30,        June 30,        Mar. 31,        Dec. 31,        Sept. 30,       June 30,       Mar. 31,
                                            2009             2009            2009            2008            2008            2008           2008
Operational Data:
Components of revenue (in thousands):
Real estate professional revenues (1)    $     5,789      $    5,909      $    6,481      $    7,732      $     9,181      $  10,063      $  11,118
Other revenues (2)                                27              38              48              51               77             68             78

Total revenues                           $     5,816      $    5,947      $    6,529      $    7,783      $     9,258      $  10,131      $  11,196
Real estate professional customers,
end of period (3)                              5,551           5,842           6,361           7,245            8,381          9,078          9,550
Average monthly retention rate (4)              93.7 %          94.2 %          92.8 %          92.2 %           93.6 %         93.6 %         92.5 %
Average real estate professional
customers in the quarter (5)                   5,697           6,102           6,803           7,813            8,730          9,314         10,008
Average monthly revenue per
customer (6)                             $       339      $      323      $      318      $      330      $       351      $     360      $     370

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

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

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

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

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

At the end of the third quarter of 2009, we had 5,551 customers. On a sequential quarter basis, our customer count decreased by 291 customers during the third quarter of 2009, compared to a decrease of 519 and 884 customers in the second quarter of 2009 and the first quarter of 2009, respectively.

Our average monthly customer retention rate was 93.7% for the third quarter of 2009, a decrease from 94.2% in the second quarter of 2009. While lower than the recent historic high retention rate of the second quarter, the third quarter rate continues a stronger retention trend that we believe can be attributed to a combination of factors - the increased portion of revenue from Vision-based products, a smaller overall customer base, as well as the increased portion of customers that are now at least two-year tenured and demonstrating above-average retention. However, due to the continued volatility of the real estate market and broader economic concerns, we expect to experience fluctuations in our customer retention rate from quarter to quarter.

Average monthly revenue per customer for the third quarter of 2009 increased slightly compared to the second quarter of 2009 primarily as a result of the shift in our product mix towards our broker products. Average revenue per customer will fluctuate from quarter to quarter based on the mix of sales for . . .