The following discussion should be read together with our financial statements and related notes appearing elsewhere in this report. This discussion contains forward-looking statements based upon current expectations that involve numerous risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including but not limited to those described under "Risk Factors" and elsewhere in this report. Except as otherwise required by law, we do not intend to update any information contained in these forward-looking statements.

OVERVIEW

General

We are a full-service residential real estate brokerage firm and operator of a leading website and other online services focused on residential real estate. We use our user-friendly website and local real estate agents to provide homebuyers and sellers with high-quality service and value. Our website provides users with access to comprehensive local Multiple Listing Services home listings data, as well as other relevant market and neighborhood information. Our proprietary business management system and technology platform help to improve agent productivity and reduce costs, allowing us to pass on significant savings to consumers as permitted by law.

We typically share a portion of our commissions with our buyer clients in the form of a cash rebate, and typically represent our seller clients at fees below those offered by most traditional brokerage companies in our markets. Generally, our seller clients pay a

total brokerage fee of 4.5% to 5.0% of the transaction value, of which 2.5% to 3.0% is paid to agents representing buyers. In two of the states in which we operate, New Jersey and Oregon, the payment of cash rebates is not currently permitted by law. In lieu of offering a cash rebate to our buyers in New Jersey, prior to April 1, 2009, we made a donation to a local charity through United Way equal to 20% of our commissions. Effective April 1, 2009, we discontinued this practice. In the Portland market, we have adjusted our value proposition for our clients by offering an enhanced client satisfaction guarantee.

Our agents are typically employees. On November 3, 2009, we notified our employee agents in New York that, beginning in February 2009, we intend to cease to employ agents there, and instead intend to engage agents as independent contractors in New York. Through that modified business model, we hope to deliver excellent customer service and enable independent contractor agents to be productive and efficient with minimal management oversight. We currently do not have plans to make a similar change in other markets, although we continually evaluate all aspects of our business and operational model and could make similar or different changes in other markets in the future.

Our net revenues are composed primarily of commissions earned as agents for buyers and sellers in residential real estate transactions. We recognize commission revenues net of any rebate (or, in New Jersey, net of charitable donation until April 1, 2009), commission discount or transaction fee adjustment. Our net revenues are principally driven by the number of transactions we close and the average net revenue per transaction. Average net revenue per transaction is a function of the home sales price and percentage commission we receive on each transaction and varies significantly by market. We also receive revenues from certain marketing arrangements, such as with mortgage lenders to whom we provide access through the mortgage center on our website, who typically pay us a flat monthly fee that is established on a periodic basis, as well as from relationships with advertisers. For example, in the second quarter of 2009 we entered into a marketing agreement with Bank of America and completed the implementation of that agreement in all of our markets during the third quarter of 2009. Generally, non-commission revenues represent less than 5% of our net revenues during any period. We routinely explore our options for entering into additional marketing and other business arrangements for offering other services related to the purchase, sale and ownership of a home.

We believe that customer acquisition is one of our core competencies, and while the difficulty of acquiring a sufficient number of leads online could increase over time, we expect that we can mitigate some of that impact with repeat and referral business, as well as by increasing our visibility and credibility to potential clients over time. Since our aggregate transaction volume market share within our markets has averaged less than 1% historically, we believe that there is an opportunity to increase our market share and grow our business, even if the overall level of sales continue to decline due to macroeconomic conditions.

We were founded in 1999, currently have operations in 36 markets, and as of September 30, 2009 employed 3,463 people, of whom 3,205 were ZipAgents. We commenced operations in the Portland, Oregon market in April 2009, and depending on market conditions and other criteria, we may consider entering additional markets in the future.

Market conditions and trends in our business

Macroeconomic forces. For the past few years, the residential real estate market has been negatively impacted by macroeconomic conditions. We perceive that conditions such as tight lending criteria, record numbers of foreclosures (which, according to RealtyTrac, reached their highest levels of all time during the third quarter of 2009), and high unemployment continue to exert negative pressure on the residential real estate market, and may continue to do so for some time. Although the federal government, state governments and related agencies have acted repeatedly to address the decline in the residential real estate market and the availability of home mortgage credit, there can be no assurance that these activities will have a positive and meaningful impact on stabilizing the banking and financial industries, on the availability of credit, on spurring consumers to purchase homes, or on the overall residential housing market.

Current residential real estate market conditions. The current indications we have concerning the health of the residential real estate market are mixed. Some indicators suggest that the national residential real estate market may be stabilizing after the shocks caused by the banking and financial crises, yet other factors suggest that the housing market may take longer to recover, or even further deteriorate. Despite some signs of stabilization on a national level, local and regional market conditions remain varied, volatile and unpredictable.

Current indicators of national market conditions include the following:

• Volume: According to the National Association of REALTORS®, or NAR, existing home sales for September 2009 rose to their highest level since July 2007 and were 9.2% higher than in September 2008 with sales rising above prior-year levels in all major regions of the country. The demand for housing appears to be bolstered by several factors, including relatively low mortgages interest rates, as well as by tax incentives to first-time homebuyers, which are currently set to expire on November 30, 2009, unless extended or replaced as discussed below.

• Price: According to NAR, although median existing home sales prices in September 2009 were 8.5% lower than in September 2008, the decline in median existing home sales prices continues to slow. We perceive that overall prices continue to be negatively impacted by the tight lending criteria for non-conforming "jumbo" loans and the resulting constriction of the market for higher-priced homes.

• Distressed Properties: Currently, a significant percentage of our sales transaction volume is composed of distressed properties. Distressed properties are homes that are in foreclosure, are bank owned (or REO), or are "short sales," meaning a sale where the sale price is less than the loans or debt secured by the home listed for sale. In the third quarter of 2009, the percentage of our sales transactions composed of distressed properties was approximately 34%, which as less than the 43% result realized in the previous quarter and almost flat to the 35% result realized in the third quarter of 2008. Distressed properties not only tend to sell at reduced prices, but they also tend to put downward pressure on the values of other homes for sale in the same and nearby neighborhoods.

• Shadow Inventory: We expect distressed properties to continue to represent a significant portion of the residential real estate market and of our business in the foreseeable future. While the inventory of homes for sale has recently decreased, there is some evidence that this decrease may have been caused, in part, by changes in foreclosure practices that have resulted in "shadow inventory," meaning distressed and other properties that have not yet been listed for sale, as well as properties that homeowners wish to sell, but will not sell at current market prices. Shadow inventory can occur when lenders put REO properties (properties that have been foreclosed or forfeited to lenders) on the market gradually, rather than all at once, or delay the foreclosure process. They may choose to do so because of regulations and foreclosure moratoriums, because of the additional costs and resources required to process and sell foreclosed properties, or because they want to avoid depressing housing prices further by putting many distressed properties up for sale at the same time. This shadow inventory could dampen and delay the recovery of the residential real estate market as it is introduced into the market in future periods. Although it is difficult to assess the current volume of shadow inventory and its future impact on the residential real estate market, there is some evidence that the volume may be growing, including the increase in foreclosure activity and the decrease in inventory levels discussed above, and could continue to grow or be introduced into the market in the foreseeable future.

Fluctuations in quarterly profitability. We have experienced fluctuations in profitability from period to period. Our profitability has been impacted by various factors including seasonality, new market expansion, legal settlements, and ongoing market challenges, including the tightening in the availability of home mortgage credit. In addition, the federal tax credit of $8,000 for first-time homebuyers is currently scheduled to expire on November 30, 2009, although the federal government is currently considering the extension of this credit or its replacement by an alternative credit. Unless this tax credit is extended or replaced, home buyers may choose to accelerate their home purchases to take advantage of this credit before it expires, which may increase our revenues prior to the end of November 2009 but decrease our revenues in future periods.

Industry seasonality and cyclicality. The residential real estate brokerage market is influenced both by annual seasonality factors, as well as by overall economic cycles. While individual markets vary, transaction volume nationally tends to progressively increase from January through the summer months, then gradually slows over the last three to four months of the calendar year. Revenues in each quarter are significantly affected by activity during the prior quarter, given the typical 30- to 45-day time lag between contract execution and closing for traditional home purchases. For non-traditional sales, the time lag from contract execution to closing can be a few months. We have been, and believe we will continue to be, influenced by overall market activity and seasonal forces. We generally experience the most significant impact in the first and fourth quarters of each year, when our revenues are typically lower relative to the second and third quarters as a result of traditionally slower home sales activity and reduced listings inventory between Thanksgiving and Presidents' Day.

The impact of seasonality can be masked by the general health of the residential real estate market at any given point in time, whether affected by macroeconomic events, periodic business cycles or other factors. Generally, when economic times are fair or good, the housing market tends to perform well. If the economy is weak, if interest rates dramatically increase, if mortgage lending standards tighten, or if there are disturbances such as terrorist attacks or threats, the outbreak of war or geopolitical uncertainties, the housing market likely would be negatively impacted.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial statements are prepared in accordance with accounting principles generally accepted 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 of the Notes to Consolidated Financial Statements contained in our 10-K for the year ended December 31, 2008, and of those policies, we believe that the following accounting policies are the most critical to understand and evaluate our financial condition and results of operations.

Revenue recognition

We derive the majority of our revenues from commissions earned as agents for buyers and sellers in residential real estate transactions. We recognize commission revenues upon closing of a sale and purchase transaction, net of any rebate, commission discount or transaction fee adjustment, as evidenced when the escrow or similar account has closed and funds have been disbursed to all appropriate parties. We recognize non-commission revenues from our other business relationships, such as lender marketing relationships, as the fees are earned from the other party typically on a monthly basis.

Internal-use software and website development costs

We account for internal-use software and website development costs, including the development of our ZipAgent Platform ("ZAP") in accordance with the guidance set forth in the related accounting standards. We capitalize internal costs consisting of payroll and direct payroll-related costs of employees who devote time to the development of internal-use software, as well as any external direct costs. We amortize these costs over their estimated useful lives, which typically range between 15 to 24 months. Our judgment is required in determining the point at which various projects enter the stages at which costs may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining the estimated useful lives over which the costs are amortized. The estimated life is based on management's judgment as to the product life cycle.

Stock-based compensation

We follow the provisions of accounting standards for share-based payments, which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors, including employee stock options and employee stock purchases, based on estimated fair values. Under the fair value recognition provisions of the accounting standards, stock-based compensation cost is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense using the straight-line method over the requisite service period of the award.

We estimate the fair value of stock options using the Black-Scholes option pricing model, which incorporates various assumptions including volatility, expected life and interest rates. The expected volatility is based on the historical volatility of our common stock and consideration of other relevant factors such as the volatility of guideline companies. The expected life of options is estimated by taking the average of the vesting term and the contractual term of the option. We estimate expected forfeitures based on various factors including employee class and historical experience. The estimation of stock awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period the estimates are revised.

Income taxes

Deferred tax assets and liabilities arise from the differences between the tax basis of an asset or liability and its reported amount in the financial statements as well as from net operating loss and tax credit carry forwards. Deferred tax amounts are determined by using the tax rates expected to be in effect when the taxes will actually be paid or refunds received, as provided under current tax law. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable, respectively, for the period plus or minus the change during the period in deferred tax assets and liabilities.

The accounting standard for income taxes requires that deferred tax assets be evaluated for future realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent historical results and our expectations for the future. Historically, we have recorded a valuation allowance on our deferred tax assets, the majority of which relate to net operating loss carryforwards and we maintain that a full valuation allowance should be accounted for against our net deferred tax assets at September 30, 2009.

Recently issued accounting pronouncements

See Note 2 titled "Recent Accounting Pronouncements" of our Notes to Unaudited Condensed Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption.

RESULTS OF OPERATIONS

The following table summarizes certain financial data related to our operations
for the periods indicated:



                                                     Three Months Ended            Nine Months Ended
                                                        September 30,                September 30,
Statements of operations data (unaudited)            2009           2008          2009           2008
                                                           (In thousands, except per share data)
Net transaction revenues                           $  34,647      $ 30,769      $  87,701      $  80,760
Referral and other revenues                              712           583          1,504          1,640

Net revenues                                          35,359        31,352         89,205         82,400

Operating expenses:
Cost of revenues                                      20,273        17,911         53,016         47,409
Product development                                    2,239         2,217          6,895          6,487
Sales and marketing                                   10,435        10,341         30,616         30,895
General and administrative                             3,315         3,124         10,072          9,744
Litigation                                                -             -              -             625

Total operating expenses                              36,262        33,593        100,599         95,160

Loss from operations                                    (903 )      (2,241 )      (11,394 )      (12,760 )

Other income (expense):
Interest income                                          124           546            633          2,061
Other income, net                                         -              1              1             75

Total other income (expense), net                        124           547            634          2,136

Loss before income taxes                                (779 )      (1,694 )      (10,760 )      (10,624 )
Provision for income taxes                                -             -              -              -

Net loss                                           $    (779 )    $ (1,694 )    $ (10,760 )    $ (10,624 )


Net loss per share:
Basic and diluted                                  $   (0.04 )    $  (0.08 )    $   (0.53 )    $   (0.50 )
Weighted average common shares outstanding:
Basic and diluted                                     20,206        20,007         20,196         21,185

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

                                                          Three Months Ended          Nine Months Ended
                                                             September 30,              September 30,
Consolidated statements of operations data (unaudited)    2009           2008         2009          2008
Net transaction revenues                                    98.0 %        98.1 %        98.3 %       98.0 %
Referral and other revenues                                  2.0           1.9           1.7          2.0

Net revenues                                               100.0         100.0         100.0        100.0


Operating expenses:
Cost of revenues                                            57.3          57.1          59.4         57.5
Product development                                          6.3           7.1           7.7          7.9
Sales and marketing                                         29.5          33.0          34.3         37.5
General and administrative                                   9.4          10.0          11.3         11.8
Litigation                                                    -             -             -           0.8

Total operating expenses                                   102.5         107.2         112.7        115.5

Loss from operations                                        (2.5 )        (7.2 )       (12.7 )      (15.5 )


Other income (expense), net
Interest income                                              0.4           1.7           0.7          2.5
Other income, net                                             -             -             -           0.1

Total other income (expense), net                            0.4           1.7           0.7          2.6

Loss before income taxes                                    (2.1 )        (5.5 )       (12.0 )      (12.9 )
Provision for income taxes                                    -             -             -            -

Net loss                                                    (2.1 )%       (5.5 )%      (12.0 )%     (12.9 )%

Comparison of the three months ended September 30, 2009 and 2008

Other operating data

                                                  Three Months Ended
                                                    September 30,          Increase        Percent
                                                   2009         2008      (Decrease)       Change
Number of markets (1)
Comparable existing markets                             23          23             -
New markets                                             13          12              1

Total                                                   36          35              1

Number of transactions closed during the
period (2)
Comparable existing markets
Buyer representation                                 4,883       4,076            807         19.8 %
Seller representation                                  420         277            143         51.6 %

Total existing markets                               5,303       4,353            950         21.8 %

New markets
Buyer representation                                 1,143         623            520         83.5 %
Seller representation                                  111          43             68        158.1 %

Total new markets                                    1,254         666            588         88.3 %

Total                                                6,557       5,019          1,538         30.6 %

Average net revenue per transaction (3)
Comparable existing markets                     $    5,495    $  6,352   $       (857 )      (13.5 )%
New markets                                          4,389       4,684           (295 )       (6.3 )%
All markets                                     $    5,284    $  6,130   $       (846 )      (13.8 )%
Number of ZipAgents at end of the period
Comparable existing markets                          2,494       2,273            221          9.7 %
New markets                                            711         541            170         31.4 %

All markets                                          3,205       2,814            391         13.9 %

(1) Beginning with our Form 10-Q for the three months ended March 31, 2009, new markets are transferred to existing markets on January 1st following the completion of their first full two calendar years of operation. In our reports filed prior to that Form 10-Q, new markets were transferred to existing markets on January 1st following the completion of their first full calendar year of operation. Our Tampa, Orlando, Minneapolis, Austin, Palm Beach and the Greater Philadelphia Area markets opened during 2006 and, therefore, completed their first two full calendar years as of the end of 2008. Accordingly, these markets were moved to existing markets as of January 1, 2009 and are included in comparable existing markets for all periods presented.

 Comparable existing markets:

 Atlanta, GA                         Houston, TX         Phoenix, AZ
 Austin, TX                          Las Vegas, NV       Sacramento, CA
 Baltimore, MD                       Los Angeles, CA     San Diego, CA
 Boston, MD                          Miami, FL           San Francisco Bay Area, CA
 Chicago, IL                         Minneapolis, MN     Seattle, WA
 Dallas, TX                          Orange County, CA   Tampa, FL
 Fresno/Central Valley, CA           Orlando, FL         Washington, DC
 Greater Philadelphia Area, PA       Palm Beach, FL

 New markets and the month opened:

 Naples, FL                                              March 2007
 Tucson, AZ                                              March 2007
 Denver, CO                                              April 2007
 Jacksonville, FL                                        May 2007
 Salt Lake City, UT                                      July 2007
 Richmond, VA                                            July 2007
 Virginia Beach, VA                                      August 2007
 Charlotte, NC                                           August 2007
 Raleigh-Durham, NC                                      September 2007
. . .