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TABLE OF CONTENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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As filed with the Securities and Exchange Commission on October 29, 2010

Registration No. 333-168612

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



Amendment No. 3
to

Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



Demand Media, Inc.
(Exact name of registrant as specified in its charter)

Delaware   7379   20-4731239
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification No.)

1299 Ocean Avenue, Suite 500
Santa Monica, California 90401
(310) 394-6400

(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

Richard M. Rosenblatt
Chairman and Chief Executive Officer
Demand Media, Inc.
1299 Ocean Avenue, Suite 500
Santa Monica, California 90401
(310) 394-6400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)



Copies to:

W. Alex Voxman, Esq.
Robert A. Koenig, Esq.

Latham & Watkins LLP
355 South Grand Avenue
Los Angeles, California 90071-1560
(213) 485-1234

 

Matthew P. Polesetsky, Esq.
David T. Ho, Esq.

Demand Media, Inc.
1299 Ocean Avenue, Suite 500
Santa Monica, California 90401
(310) 394-6400

 

Kevin P. Kennedy, Esq.
Simpson Thacher & Bartlett LLP
2550 Hanover Street
Palo Alto, California 94304
(650) 251-5000



Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

            If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

            If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

            If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

            If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

            Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

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



            The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED OCTOBER 29, 2010

7,500,000 Shares

GRAPHIC

Common Stock



          This is an initial public offering of shares of common stock of Demand Media, Inc.

          Demand Media is offering 4,500,000 of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional 3,000,000 shares. Demand Media will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

          Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $             and $            .

          Application has been made for listing on the New York Stock Exchange under the symbol "DMD."

          See the section entitled "Risk Factors" on page 14 to read about factors you should consider before buying shares of the common stock.



          Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 
  Per share   Total  

Initial public offering price

  $     $    

Underwriting discount

  $     $    

Proceeds, before expenses, to Demand Media

  $     $    

Proceeds, before expenses, to the selling stockholders

  $     $    



          To the extent that the underwriters sell more than 7,500,000 shares of common stock, the underwriters have the option to purchase up to an additional 675,000 shares from Demand Media and 450,000 shares from the selling stockholders at the initial public offering price less the underwriting discount.



          The underwriters expect to deliver the shares against payment in New York, New York on                        , 2010.



  Goldman, Sachs & Co.   Morgan Stanley

  UBS Investment Bank   Allen & Company LLC   Jefferies & Company

  Stifel Nicolaus Weisel   RBC Capital Markets   Pacific Crest Securities

 

Raine Securities   JMP Securities



Prospectus dated                                    , 2010


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TABLE OF CONTENTS

 
  Page

Prospectus Summary

  1

The Offering

  6

Summary Consolidated Financial Information and Other Data

  8

Risk Factors

  14

Special Note Regarding Forward Looking Statements

  47

Use of Proceeds

  48

Dividend Policy

  49

Capitalization

  50

Dilution

  52

Selected Consolidated Financial and Other Data

  56

Management's Discussion and Analysis of Financial Condition and Results of Operations

  60

Business

  101

Management

  125

Executive Compensation

  134

Certain Relationships and Related Party Transactions

  171

Principal and Selling Stockholders

  176

Description of Capital Stock

  184

Description of Indebtedness

  190

Shares Eligible for Future Sale

  191

Material United States Federal Income Tax Consequences to Non-U.S. Holders of Our Common Stock

  194

Underwriting

  198

Conflict of Interest

  204

Legal Matters

  205

Experts

  205

Where You Can Find More Information

  205

Index to Consolidated Financial Statements

  F-1



          You should rely only on the information contained in this prospectus and in any free writing prospectus. We, the underwriters and the selling stockholders have not authorized anyone to provide you with information different from that contained in this prospectus. We, the underwriters and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our common stock.

          Neither we, the selling stockholders, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

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PROSPECTUS SUMMARY

          This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Risk Factors," "Business" and our consolidated financial statements and related notes before deciding whether to purchase shares of our capital stock. Unless the context otherwise requires, the terms "Demand Media," "the Company," "we," "us" and "our" in this prospectus refer to Demand Media, Inc., and its subsidiaries taken as a whole.

Our Mission

          Our mission is to fulfill the world's demand for commercially valuable content.

Our Company

          We are a leader in a new Internet-based model for the professional creation of high-quality, commercially valuable content at scale. While traditional media companies create content based on anticipated consumer interest, we create content that responds to actual consumer demand. Our approach is driven by consumers' desire to search for and discover increasingly specific information across the Internet. By listening to consumers, we are able to create and deliver accurate and precise content that fulfills their needs. Through our innovative platform—which combines a studio of freelance content creators with proprietary algorithms and processes—we identify, create, distribute and monetize in-demand content. We believe continued advancements in search, social media, mobile computing and targeted monetization will continue to be growth catalysts for our business.

          Our business is comprised of two distinct and complementary service offerings: Content & Media and Registrar. Our Content & Media service offering includes the following components:

    Content creation studio that identifies, creates and distributes online text articles and videos, utilizing our proprietary algorithms, editorial processes and community of freelance content creators;

    Enterprise-class social media applications that enable websites to offer features such as user profiles, comments, forums, reviews, blogs and photo and video sharing; and

    A system of monetization tools that are designed to match targeted advertisements with content in a manner that optimizes advertising revenue and end-user experience.

          We deploy our proprietary Content & Media platform both to our owned and operated websites, such as eHow.com, and to websites operated by our customers, such as USATODAY.com. As a result, our platform serves a large and growing audience. According to comScore, for the month ended September 30, 2010, our owned and operated websites comprised the 17th largest web property in the United States and we attracted over 94 million unique visitors with over 621 million page views globally. Our reach is further extended through over 375 websites operated by our customers where we deploy one or more features of our platform. These customer websites generated over 1 billion page views to our platform during the month ended September 30, 2010, according to our internal data. As of September 30, 2010, our content studio had over 13,000 freelance content creators, who generated a daily average of over 6,300 text articles and videos during the quarter ended September 30, 2010. We believe the output from our content studio makes us one of the world's most prolific producers of professional online content.

          Our Registrar, with over 10 million Internet domain names under management, is the world's largest wholesale registrar and the world's second largest registrar overall. As a wholesaler, we provide domain name registration services and offer value-added services to over 7,000 active resellers,

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including small businesses, large e-commerce websites, Internet service providers and web-hosting companies. Our Registrar complements our Content & Media service offering by providing us with a recurring base of subscription revenue, a valuable source of data regarding Internet users' online interests, expanded third-party distribution opportunities and proprietary access to commercially valuable domain names that we selectively add to our owned and operated websites.

          We generate substantially all of our revenue through the sale of advertising in our Content & Media service offering and through domain name registrations in our Registrar service offering. For the year ended December 31, 2009 and the nine months ended September 30, 2010, we reported revenue of $198 million and $179 million, respectively. For these same periods, we reported net losses of $22 million and $6 million, respectively, operating loss of $18 million and $3 million, respectively, and adjusted operating income before depreciation and amortization, or Adjusted OIBDA, of $37 million and $42 million, respectively. See "Summary Consolidated Financial Information and Other Data—Non-GAAP Financial Measures" for a reconciliation of Adjusted OIBDA to the closest comparable measures calculated in accordance with GAAP.

Industry Background

          Over the last decade, the Internet has challenged traditional media business models by reshaping how content is consumed, created, distributed and monetized. Consumers today spend more of their time online, venturing beyond major Internet portals and visiting an increasing number of websites to find specific content for their personal needs and interests. In addition, consumers are changing the way they discover content online, primarily through advancements in web search technology and the popularity of social media. However, consumers are often unable to find the precise content that they are seeking because the demand for highly specific, pertinent information outpaces the supply of thoughtfully researched, trusted content.

          The increased specificity of consumer demand for online content strains many existing content creation business models. Traditional models focus on producing content with sufficiently broad audiences to justify elevated production costs. This traditional approach is less effective for fulfilling at scale the increasingly fragmenting consumer demand for content. Meanwhile, the widespread adoption of social media and other publishing tools has enabled a large number of individuals to more easily create and publish content on the Internet. However, the difficulty in constructing profitable business models has limited such individual endeavors largely to bloggers and passionate enthusiasts who, while often knowledgeable, may lack recognized credibility, production scale and broad distribution and monetization capabilities.

          The demand for highly specific content also presents new opportunities for advertisers seeking to effectively reach targeted audiences. Finding better ways to reach this fragmented consumer base remains a priority for advertisers, a trend that is likely to accelerate as online advertising growth outpaces that of offline advertising growth, and as advertising dollars follow audiences from offline to online media. From 2009 to 2012, online advertising in the United States is projected to grow to $31 billion, reflecting a compound annual growth rate of 16%. However, over that same period, total media advertising is only expected to grow at a compound annual growth rate of less than 1%, according to ZenithOptimedia.

          These trends present new and complex challenges for consuming, creating, distributing and monetizing online content that traditional and even new online business models have struggled to address. These challenges have had a profound impact on consumers, content creators, website publishers and advertisers who are in need of a solution that connects this disparate media ecosystem.

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Our Solution

          Our solution is based on the following key elements:

    Content.  We create highly relevant and specific online text and video content that we believe will have commercial value over a long useful life. We employ a rigorous process to select the subject matter of our content, including the use of automated algorithms with third-party and proprietary data along with several levels of editorial input. The objective of this process is to determine what content consumers are seeking, if it is likely to be valuable to advertisers and whether it can be cost-effectively produced. To produce professional content at scale, we engage our robust community of over 13,000 highly-qualified freelance content creators. Our technology and innovative processes allow us to produce articles and videos in a cost-effective manner while ensuring high quality output.

    Social Media.  Our enterprise-class social media tools allow websites to add feature-rich applications, such as user profiles, comments, forums, reviews, blogs and photo and video sharing. These social media applications facilitate social media interactions and allow websites to better engage their users, as well as ensure interoperability with popular social destinations such as Facebook and Twitter.

    Monetization.  The system of monetization tools in our platform includes contextual matching algorithms that place advertisements based on website content, yield optimization systems that continuously evaluate the performance of online advertisements to maximize revenue, and ad management infrastructures to manage multiple ad formats and control ad inventory.

    Distribution.  We deploy some or all of the components of our platform to our owned and operated websites, such as eHow and LIVESTRONG.com, as well as to over 375 websites operated by our customers, such as the online version of the San Francisco Chronicle and the National Football League website. We also deploy the monetization features of our platform by placing advertising on a portfolio of over 500,000 undeveloped websites that we own. We have also begun to expand the distribution of our content by offering our Registrar customers the ability to add contextually relevant content from our extensive wholly-owned content library to their sites.

          Through our platform, we are able to deliver significant value to consumers, advertisers, customers and freelance content creators. We make the Internet a more useful resource to the millions of users searching for information online by analyzing consumer demand to create and deliver commercially valuable, high-quality content. Our advertisers benefit from gaining access to targeted audiences by matching their advertisements with our highly specific content delivered to both our owned and operated websites and our network of customer websites. Our customers benefit from the more engaging experience they are able to provide to their visitors by using our platform. Our freelance content creators benefit from the ready supply of work assignments available to them which allow them to earn income that is paid twice-weekly and to gain recognition by creating valuable content that reaches an audience of millions.

Our Competitive Advantages

    Proprietary Technologies and Processes.  We have well-developed proprietary technologies and processes that underlie our Content & Media and Registrar service offerings. We continue to refine our algorithms and processes, incorporating the substantial data we are able to collect as a result of the significant scale of our operations.

    Extensive Freelance Content Creator Community.  Our freelance content creator community consists of more than 13,000 individuals who have satisfied our rigorous qualification standards. A significant majority of our community has had prior journalism experience, and includes

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      Associated Press and Society of Professional Journalists award-winning authors and Emmy award-winning filmmakers.

    Valuable and Growing Content Library.  Our wholly-owned content library, consisting of over 2.5 million articles and approximately 200,000 videos as of September 30, 2010, forms the foundation of our growing and recurring revenue base. We strive to create content with positive growth characteristics over a long useful life. Our content library also provides other benefits to us, including generating strategic data regarding user behavior and preferences, building brand recognition by attracting significant traffic to our owned and operated websites and facilitating strategic revenue-sharing relationships with customers.

    Substantial and Growing Audience.  We believe that the significant audience reach across our owned and operated websites and our network of customer websites increases our advertising opportunities, provides valuable feedback data that we utilize to refine our platform, enhances monetization and end-user experience and delivers economic benefits to our customers through our revenue-sharing program. For the month ended September 30, 2010, our owned and operated websites attracted over 94 million unique visitors who generated over 621 million page views globally according to comScore, and our network of customer websites generated over 1 billion page views to our platform during the same period according to our internal data.

    Large, Complementary Registrar Service Offering.  We own and operate the world's second largest domain name registrar, with over 10 million domain names under management, which provides us with proprietary and valuable data, access to new sources of traffic and valuable websites as well as expanded third-party distribution opportunities for our platform.

    Highly Scalable Operating Platform.  We have built an extensive operating infrastructure that is designed to scale with our growing services. Additionally, our systems have been customized to meet our unique service needs and provide us both the scale and flexibility that we need to manage our highly dynamic and growing service.

Our Strategy

          Key elements of our strategy are to:

    Grow Our Audiences.  We aim to grow our online audience reach and build passionate, online user communities. We intend to specifically target high-value vertical market segments, expand partnerships with brands and leading publishers and increase the scope of our relationships with our current Registrar customers.

    Improve Monetization.  We intend to increase monetization opportunities by improving ad-serving algorithms, growing our advertising base and expanding our direct sales force.

    Enhance Our Value Proposition to our Content Creators, Website Publishers and Advertisers.  We intend to continuously deliver outstanding service, scale of audience and feedback to our freelance content creators, customers and advertisers in a manner that enhances our leadership position in the professional creation of original content at scale.

    Increase Our Production Scale of High-Quality, Commercially Valuable Content.  We intend to build on our success as one of the world's largest creators of professional online content by utilizing our proprietary technologies, algorithms and processes to increase the scale at which we identify, produce and deliver high-quality, commercially valuable content.

    Expand Internationally.  We believe our model is scalable and readily transferrable to international markets. We intend to capitalize on the growing breadth of skills of our freelance creator community and the versatility of our evergreen content that can often transcend geographies and cultures to target certain foreign, including non-English speaking, countries.

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    Embrace New Content Distribution Channels.  We intend to leverage and expand our existing distribution network to emerging and alternative channels, including complementary social media platforms, custom applications for mobile platforms and new types of devices used to access the Internet.

    Grow Our Registrar.  We intend to continue to increase the number of domain names under management on our Registrar by offering registration services at attractive price points, increasing customer loyalty through the sale of reliable and affordable value-added services and offering turnkey solutions to help new and existing resellers manage and grow their customer bases.

Risk Factors

          There are numerous risks and uncertainties that may affect our financial and operating performance and our growth. You should carefully consider all of the risks discussed in "Risk Factors," which begins on page 14, before investing in our common stock. These risks include the following:

    our history of operating losses and the limited operating history in our market, which makes evaluating our business and future prospects difficult;

    the possibility that we may not be able to maintain or improve our competitive position or market share with respect to our Content & Media and Registrar service offerings;

    the possibility that our relationship with Google from which a significant portion of our revenue is generated may be terminated or renewed on less favorable terms;

    the possibility that our future internal rates of return on content may be less than our historic internal rates of return on content;

    the current dependence of our Content & Media service offering on the success of eHow.com; and

    the possibility that our customers may not renew their domain name registrations or may transfer their existing registrations to our competitors and we fail to replace their business.

Corporate Information

          We are incorporated in Delaware and headquartered in Santa Monica, California. We commenced operations in April 2006 with the acquisitions of eHow.com, a leading "how-to" content-oriented website, and eNom, a provider of Internet domain name registration services. Our principal executive offices are located at 1299 Ocean Ave, Suite 500, Santa Monica, California 90401, and our telephone number is (310) 394-6400. Our corporate website is www.demandmedia.com. Information contained on our website is not a part of this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only. Unless the context requires otherwise, the words "Demand Media," "we," "company," "us" and "our" refer to Demand Media, Inc. and our wholly owned subsidiaries.

          Demand Media®, the Demand Media logo and other trademarks or service marks of Demand Media appearing in this prospectus are the property of Demand Media. Trade names, trademarks, and service marks of other companies appearing in this prospectus are the property of the respective holders.

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The Offering

Common stock offered by us

  4,500,000 shares

Common stock offered by the selling stockholders

 

3,000,000 shares

Common stock outstanding after this offering

 

                  shares

Use of proceeds

 

We expect to receive net proceeds from this offering of approximately $       million, based upon an assumed initial public offering price of $        per share, which is the mid-point of the range set forth on the cover of this prospectus, and after deducting underwriting discounts and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares in this offering by the selling stockholders, including upon the sale of shares if the underwriters exercise their option to purchase additional shares from certain of the selling stockholders in this offering. We intend to use the net proceeds from this offering for investments in content, working capital, product development, sales and marketing activities, general and administrative matters, capital expenditures and international expansion. We currently anticipate that our aggregate investments in content during the year ending December 31, 2011 will range from $50 million to $75 million. See "Use of Proceeds."

Directed share program

 

The underwriters have reserved for sale, at the initial public offering price, up to            shares of our common stock being offered for sale to business associates and Demand Media customers. We will offer these shares to the extent permitted under applicable regulations in the United States and in various countries. The number of shares available for sale to the general public in this offering will be reduced to the extent these persons purchase reserved shares. Any reserved shares not purchased will be offered by the underwriters to the general public on the same terms as the other shares.

Proposed New York Stock Exchange symbol

 

DMD

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Conflict of interest

 

Entities affiliated with Goldman, Sachs & Co. beneficially owned as of September 30, 2010, 11,666,667 shares of Series D Preferred Stock. Because Goldman, Sachs & Co. is an underwriter, Goldman, Sachs & Co. is deemed to have a "conflict of interest" under Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc., which is overseen by the Financial Industry Regulatory Authority. Accordingly, this offering will be made in compliance with the applicable provisions of Rule 2720. Rule 2720 requires that a "qualified independent underwriter" meeting certain standards participate in the preparation of the registration statement and prospectus and exercise the usual standards of due diligence with respect thereto. Morgan Stanley & Co. Incorporated has agreed to act as a "qualified independent underwriter" within the meaning of Rule 2720 in connection with this offering. See "Conflict of Interest" for a more detailed discussion of potential conflicts of interest.

          The number of shares of common stock to be outstanding after this offering is based on                  shares outstanding as of September 30, 2010 and excludes:

    19,024,633 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2010 to purchase our common stock at a weighted average exercise price of $11.72 per share;

    131,000 shares of common stock issuable upon the exercise of options granted on October 27, 2010 pursuant to our 2010 Incentive Award Plan at a weighted average exercise price of $15.36 per share;

    12,500 restricted stock units granted on October 27, 2010 pursuant to our 2010 Incentive Award Plan;

    15,500,000 shares of common stock reserved for issuance under our 2010 Incentive Award Plan and 10,000,000 shares of our common stock reserved for issuance under our 2010 Employee Stock Purchase Plan, as well as shares that become available under the 2010 Incentive Award Plan due to shares subject to awards under our Amended and Restated 2006 Equity Incentive Plan that terminate, expire or lapse for any reason and pursuant to provisions in the 2010 Incentive Award Plan that automatically increase the share reserve under the plan each year, as more fully described in "Executive Compensation—Equity Incentive Plans"; and

    The issuance of 375,000 shares of common stock upon the exercise of a common stock warrant that does not expire upon the completion of this offering.

          Unless otherwise indicated, all information in this prospectus assumes:

    A 1-for-2 reverse stock split of our common stock and a corresponding adjustment to the conversion price of all outstanding convertible preferred stock to be effected prior to the effectiveness of this offering;

    The automatic conversion of all outstanding shares of our preferred stock into an aggregate of 61,672,256 shares of common stock effective immediately prior to the closing of this offering;

    The issuance of            shares of common stock upon the net exercise of common stock warrants and a convertible preferred stock warrant, respectively, that would otherwise expire upon the completion of this offering based upon an assumed initial public offering price of $        per share, which is the mid-point of the range set forth on the cover of this prospectus;

    The filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the closing of this offering; and

    No exercise by the underwriters of their right to purchase up to an additional                        shares of common stock from us and the selling stockholders.

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Summary Consolidated Financial Information and Other Data

          The following summary consolidated financial information and other data for the nine months ended December 31, 2007 and the years ended December 31, 2008 and 2009 are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The summary unaudited consolidated financial information and other data as of September 30, 2010 and for the nine months ended September 30, 2009 and 2010 are derived from our unaudited consolidated financial statements, which are included elsewhere in this prospectus. The unaudited consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in the opinion of management, all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the financial information contained in those statements. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods.

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          Prospective investors should read these summary consolidated financial data together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 
  Nine Months
ended
December 31,
  Year ended
December 31,
  Nine Months
ended
September 30,
 
 
  2007   2008   2009   2009   2010  
 
  (in thousands, except per share data)
 

Consolidated Statements of Operations:

                               

Revenue

  $ 102,295   $ 170,250   $ 198,452   $ 142,965   $ 179,357  

Operating expenses(1)(2)

                               
 

Service costs (exclusive of amortization of intangible assets)

    57,833     98,238     114,482     82,941     95,209  
 

Sales and marketing

    3,601     15,360     19,994     14,324     16,805  
 

Product development

    10,965     14,407     21,502     15,253     19,136  
 

General and administrative

    19,584     28,191     28,358     21,076     27,035  
 

Amortization of intangible assets

    17,393     33,204     32,152     24,254     24,482  
                       
   

Total operating expenses

    109,376     189,400     216,488     157,848     182,667  
                       

Loss from operations

    (7,081 )   (19,150 )   (18,036 )   (14,883 )   (3,310 )
                       

Other income (expense)

                               
 

Interest income

    1,415     1,636     494     285     19  
 

Interest expense

    (1,245 )   (2,131 )   (1,759 )   (1,508 )   (517 )
 

Other income (expense), net

    (999 )   (250 )   (19 )   (2 )   (164 )
                       
   

Total other expense

    (829 )   (745 )   (1,284 )   (1,225 )   (662 )
                       

Loss before income taxes

    (7,910 )   (19,895 )   (19,320 )   (16,108 )   (3,972 )

Income tax (benefit) provision

    (2,293 )   (5,736 )   2,663     1,990     2,382  
                       

Net loss

    (5,617 )   (14,159 )   (21,983 )   (18,098 )   (6,354 )

Cumulative preferred stock dividends

    (14,059 )   (28,209 )   (30,848 )   (22,858 )   (24,649 )
                       

Net loss attributable to common stockholders

  $ (19,676 ) $ (42,368 ) $ (52,831 ) $ (40,956 ) $ (31,003 )
                       

Net loss per share: Basic and diluted(3)

  $ (4.25 ) $ (5.18 ) $ (4.73 ) $ (3.78 ) $ (2.32 )
                       

Weighted average number of shares

    4,631     8,184     11,159     10,823     13,350  

Pro forma net loss per share
Basic and diluted(4)(5)

              $ (0.30 )       $ (0.08 )
                             

Weighted average number of shares used in computing pro forma net loss per share
Basic and diluted(4)

                72,831           75,022  

(1)      Depreciation expense included in the above line items:

                               

                Service costs

  $ 2,581   $ 8,158   $ 11,882   $ 8,435   $ 10,424  

                Sales and marketing

    42     94     184     137     128  

                Product development

    509     1,094     1,434     1,033     996  

                General and administrative

    458     1,160     1,463     1,032     1,415  
                       

                    Total depreciation expense

  $ 3,590   $ 10,506   $ 14,963   $ 10,637   $ 12,963  
                       

 

(2)      Stock-based compensation included in the above line items:

                               

                Service costs

  $ 52   $ 586   $ 473   $ 327   $ 663  

                Sales and marketing

    241     1,576     1,561     1,056     1,621  

                Product development

    504     1,030     1,349     991     1,216  

                General and administrative

    2,873     3,158     3,973     2,987     3,643  
                       

                    Total stock-based compensation

  $ 3,670   $ 6,350   $ 7,356   $ 5,361   $ 7,143  
                       
(3)
Basic loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Net loss attributable to common stockholders is increased for cumulative preferred stock dividends earned during the period. For the periods where we presented losses, all potentially

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    dilutive common shares comprising of stock options, restricted stock purchase rights, or RSPRs, warrants and convertible preferred stock are antidilutive.

    RSPRs are considered outstanding common shares and included in the computation of basic earnings per share as of the date that all necessary conditions of vesting are satisfied. RSPRs are excluded from the dilutive earnings per share calculation when their impact is antidilutive. Prior to satisfaction of all conditions of vesting, unvested RSPRs are considered contingently issuable shares and are excluded from weighted average common shares outstanding.

(4)
Unaudited pro forma basic and diluted net loss per common share have been computed to give effect to the conversion of our convertible preferred stock (using the if-converted method) into an aggregate of 61,672,256 shares of our common stock on a two-for-one basis as though the conversion had occurred at January 1, 2009.

(5)
In October 2010, our stockholders approved a 1-for-2 reverse stock split of our outstanding common stock, and a proportional adjustment to the existing conversion ratios for each series of preferred stock to be made prior to the effectiveness of this offering. Accordingly, all share and per share amounts for all periods presented have been adjusted retrospectively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratio.

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The following table presents a summary of our balance sheet as of September 30, 2010:

    On an actual basis;

    On a pro forma basis giving effect to the automatic conversion of all outstanding shares of preferred stock into an aggregate of 61,672,256 shares of common stock immediately prior to the closing of this offering; and

    On a pro forma as adjusted basis, after giving effect to the pro forma adjustments and our receipt of the net proceeds from the sale by us in this offering of 4,500,000 shares of common stock based upon an assumed initial public offering price of $        per share, which is the mid-point of the range set forth on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 
  As of September 30, 2010  
 
  Actual   Pro Forma   Pro Forma
As Adjusted
 
 
  (in thousands)
 

Balance Sheet Data:

                   
 

Cash and cash equivalents

  $ 29,230   $ 29,230   $    
 

Working capital

    (4,317 )   (4,317 )      
 

Total assets

    479,575     479,575        
 

Capital lease obligations, long term

    89     89        
 

Convertible preferred stock

    373,754          
 

Total stockholders' (deficit) equity

    (18,264 )   355,877        

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Non-GAAP Financial Measures

          To provide investors and others with additional information regarding our financial results, we have disclosed in the table below and within this prospectus the following non-GAAP financial measures: adjusted operating income before depreciation and amortization expense, or Adjusted OIBDA, and revenue less traffic acquisition costs, or revenue less TAC. We have provided a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measures. Our non-GAAP Adjusted OIBDA financial measure differs from GAAP in that it excludes certain expenses such as depreciation, amortization, stock-based compensation, and certain non-cash purchase accounting adjustments, as well as the financial impact of gains or losses on certain asset sales or dispositions. Our non-GAAP revenue less TAC financial measure differs from GAAP as it reflects our consolidated revenues net of our traffic acquisition costs. Adjusted OIBDA, or its equivalent, and revenue less TAC are frequently used by security analysts, investors and others as a common financial measure of operating performance.

          We use these non-GAAP financial measures to measure our consolidated operating performance, to understand and compare operating results from period to period, to analyze growth trends, to assist in internal budgeting and forecasting purposes, to develop short and long term operational plans, to calculate annual bonus payments for substantially all of our employees, and to evaluate our financial performance. Management believes these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful period to period comparisons and analysis of trends in our business. We also believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our consolidated revenue and operating results in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies.

          The following table presents a reconciliation of revenue less TAC and Adjusted OIBDA for each of the periods presented:

 
  Nine Months
ended
December 31,
  Year ended
December 31,
  Nine Months
ended
September 30,
 
 
  2007   2008   2009   2009   2010  
 
  (in thousands)
 

Non-GAAP Financial Measures (unaudited):

                               

Content & Media revenue

  $ 49,342   $ 84,821   $ 107,717   $ 75,641   $ 106,108  

Registrar revenue

    52,953     85,429     90,735     67,324     73,249  
 

Less: TAC(1)

    (7,254 )   (7,655 )   (10,554 )   (6,974 )   (8,911 )
                       

Total revenue less TAC

  $ 95,041   $ 162,595   $ 187,898   $ 135,991   $ 170,446  
                       

Loss from operations

  $ (7,081 ) $ (19,150 ) $ (18,036 ) $ (14,883 ) $ (3,310 )

Add (deduct):

                               

Depreciation

    3,590     10,506     14,963     10,637     12,963  

Amortization

    17,393     33,204     32,152     24,254     24,482  

Stock-based compensation(2)

    3,670     6,350     7,356     5,361     7,143  

Non-cash purchase accounting adjustments(3)

    1,282     1,533     960     740     615  

Gain on sale of asset(4)

            (582 )        
                       

Adjusted OIBDA

  $ 18,854   $ 32,443   $ 36,813   $ 26,109   $ 41,893  
                       

(1)
Represents revenue-sharing payments made to our network customers from advertising revenue generated from such customers' websites.

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(2)
Represents the fair value of stock-based awards and certain warrants to purchase our stock included in our GAAP results of operations.

(3)
Represents adjustments for certain deferred revenue and costs that we do not recognize under GAAP because of GAAP purchase accounting.

(4)
Represents a gain recognized on the sale of certain assets included in our GAAP operating results.

          The use of non-GAAP financial measures has certain limitations because they do not reflect all items of income and expense that affect our operations. We compensate for these limitations by reconciling the non-GAAP financial measures to the most comparable GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for, measures prepared in accordance with GAAP. Further, these non-GAAP measures may differ from the non-GAAP information used by other companies, including peer companies, and therefore comparability may be limited. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

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RISK FACTORS

          Before deciding to invest in our common stock, you should carefully consider each of the following risk factors and all of the other information set forth in this prospectus. The following risks and the risks described elsewhere in this prospectus, including in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," could materially harm our business, financial condition, future results and cash flow. If that occurs, the trading price of our common stock could decline, and you could lose all or part of your investment. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business.

Risks Relating to our Content & Media Service Offering

We are dependent upon certain material agreements with Google for a significant portion of our revenue. A termination of these agreements, or a failure to renew them on favorable terms, would adversely affect our business.

          We have an extensive relationship with Google and a significant portion of our revenue is derived from cost-per-click performance-based advertising provided by Google. For the year ended December 31, 2009 and the nine months ended September 30, 2010, we derived approximately 18% and 28%, respectively, of our total revenue from our various advertising arrangements with Google. We use Google for cost-per-click advertising and search results on our owned and operated websites and on our network of customer websites, and receive a portion of the revenue generated by advertisements provided by Google on those websites. Our Google cost-per-click agreement for our developed websites, such as eHow, expires in the second quarter of 2012 and our Google cost-per-click agreement for our undeveloped websites expires in the first quarter of 2011. In addition, we also engage Google's DoubleClick ad-serving platform to deliver advertisements to our developed websites and have another revenue-sharing agreement with respect to revenue generated by our content posted on Google's Youtube.com, both of which are currently on year to year terms that expire in the fourth quarter of 2010. Google, however, has termination rights in these agreements with us, including the right to terminate before the expiration of the terms upon the occurrence of certain events, including if our content violates the rights of third parties and other breaches of contractual provisions, a number of which are broadly defined. There can be no assurance that our agreements with Google will be extended or renewed after their respective expirations or that we will be able to extend or renew our agreements with Google on terms and conditions favorable to us. If our agreements with Google, in particular the cost-per-click agreement for our developed websites, are terminated we may not be able to enter into agreements with alternative third-party advertisement providers or ad-serving platforms on acceptable terms or on a timely basis or both. Any termination of our relationships with Google, and any extension or renewal after the initial term on terms and conditions less favorable to us would have a material adverse effect on our business, financial condition and results of operations.

          Our agreements with Google may not continue to generate levels of revenue commensurate with what we have achieved during past periods. Our ability to generate online advertising revenue from Google depends on its assessment of the quality and performance characteristics of Internet traffic resulting from online advertisements on our owned and operated websites and on our undeveloped websites as well as other components of our relationship with Google's advertising technology platforms. We have no control over any of these quality assessments or over Google's advertising technology platforms. Google may from time to time change its existing, or establish new, methodologies and metrics for valuing the quality of Internet traffic and delivering cost-per-click advertisements. Any changes in these methodologies, metrics and advertising technology platforms could decrease the amount of revenue that we generate from online advertisements. Since most of our agreements with Google contain exclusivity provisions, we are prevented from using other providers of services similar to those provided by Google. In addition, Google may at any time change or suspend

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the nature of the service that it provides to online advertisers and the catalog of advertisers from which online advertisements are sourced. These types of changes or suspensions would adversely impact our ability to generate revenue from cost-per-click advertising. Any decrease in revenue due to lower traffic or a change in the type of services that Google provides to us would have a material adverse effect on our business, financial condition and results of operations.

We base our capital allocation decisions primarily on our analysis of the predicted internal rate of return on content. If the estimates and assumptions we use in calculating internal rate of return on content are inaccurate, our capital may be inefficiently allocated. If we fail to appropriately allocate our capital, our growth rate and financial results will be adversely affected.

          We invest in content based on our calculation of the internal rate of return on previously published content cohorts for which we believe we have sufficient data. For purposes of these calculations, a content cohort is all of the content we publish in a particular quarter. We calculate the internal rate of return on a cohort of content as the annual discount rate that, when applied to the advertising revenue, less certain direct ongoing costs, generated from the cohort over a period of time, produces an amount equal to the initial investment in that cohort. Our calculations are based on certain material estimates and assumptions that may not be accurate. Accordingly, the calculation of internal rate of return may not be reflective of our actual returns. The material estimates and assumptions upon which we rely include estimates about portions of the costs to create content and the revenue allocated to that content. We make estimates regarding when revenue for each cohort will be received. Our internal rate of return calculations are highly dependent on the timing of this revenue, with revenue earned earlier resulting in greater internal rates of return than the same amount of revenue earned in subsequent periods. Further, our internal rate of return measure assumes a fair value of zero as of the measurement date.

          We make the following estimates and assumptions about the cost of creating content:

    For purposes of calculating internal rate of return, we use averages to estimate the upfront cost involved in creating content. Specifically, we estimate the aggregate cost to create a specific cohort of content by multiplying the average payment made to our freelance content creators by the number of articles produced in that period. Additionally, we allocate certain in-house editorial costs to each cohort of content.

    Our estimates exclude depreciation costs for capitalized equipment and equipment related software and the indirect service costs that support content creation and distribution, such as bandwidth and general corporate overhead, which support other aspects of our business in addition to content creation and distribution.

          Our estimates and assumptions about the revenue generated by content include the following:

    With respect to each cohort, we estimate the revenue generated over its lifetime to date by using the average revenue per thousand page views multiplied by the number of page views generated in that period. This revenue estimate may not accurately reflect the actual revenue generated by a particular cohort of content because while we have page views for individual cohorts, page views are not necessarily proportionate to the amount of revenue generated by a given cohort.

    Our revenue estimates exclude indirect revenue such as the revenue generated from advertising appearing on non-article pages or subscription revenues of websites to which content is distributed.

          We use more estimates and assumptions to calculate the internal rate of return on video content because our systems and processes to collect historical data on video content are less robust. As a result, our data on video content may be less reliable. If our estimates and calculations do not accurately reflect the costs or revenues associated with our content, the actual internal rate of return of

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a cohort may be more or less than our estimated internal rate of return for such cohort. In such an event, we may misallocate capital and our growth, revenue, financial condition and results of operations could be negatively impacted.

Since our content creation and distribution model is new and evolving, the future internal rates of return on content may be less than our historical internal rates of return on content.

          The majority of the content that we published from January 1, 2008 through September 30, 2010 consists of text articles published to our owned and operated website, eHow. We have disclosed in this prospectus an internal rate of return of 76% for text content published in the third quarter of 2008, or our Q308 cohort, which consists entirely of articles published to eHow.

          We selected the Q308 cohort for analysis because it represents the oldest cohort that utilized the core elements of our current content creation process, yielding eight quarters of historical results to date. However, due to the evolving nature of our business, the composition and distribution of the Q308 cohort is not the same as the composition and distribution of the content produced in all other historical periods and will not be the same as the composition and distribution of future content cohorts. Certain variables that may affect our internal rate of return on content include the following:

    Distribution outlets for our content are changing. We are distributing increasing amounts of content to customer websites and to owned and operated websites other than eHow. For example, 69% of our content produced in the third quarter of 2010 was published to eHow while 100% of the content in our Q308 cohort was published to eHow. To date, eHow is our largest and most established distribution outlet for our content. On average, internal rates of return on content published on less established distribution outlets have not been as high as the rates achieved on eHow.

    We have used and will continue to use new methodologies for content production. For example, approximately 32% of our Q308 cohort was sourced from third parties who were more expensive than our freelance content creators and who did not widely utilize our internal algorithms. Since the second quarter of 2009 our internal algorithms and freelance content creation processes have been used to produce substantially all of our article content.

    The format, category and media of the content that we produce changes over time, including the mix of article content versus video content. Although historically our data on video performance is not as comprehensive as our data on article performance, we believe currently that the internal rate of return on video is less than the internal rate of return on article content. Our Q308 cohort had no video content in it.

    Content production costs, monetization rates and page views all affect internal rates of return, and these factors may vary among cohorts. For example, internal rates of return from articles published on eHow year to date in 2010 have, on average, been comparable to the internal rates of return from articles published on eHow over the comparable period of 2008, but have, on average, been lower than the internal rates of return from articles published on eHow over the comparable period of 2009. This is due to significantly higher page views generated on eHow by 2009 published content as compared to that initially published in 2008 and 2010. Further, in an effort to create long-term growth opportunities for our business such as expanding internationally or producing more expensive, long form content, we may elect to make investments that generate lower internal rates of return than those experienced in the past.

    We have historically had a small number of revenue-sharing arrangements with our content creators and our customers. We are currently planning on entering into more of these revenue-sharing arrangements. Our Q308 cohort had no revenue sharing agreements.

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          As a result, you should not rely on the internal rate of return for a cohort, including our Q308 cohort, as being indicative of the internal rate of return for any other cohorts. In the event that our content does not generate internal rates of return consistent with the internal rates of return achieved in prior periods or related to content produced for different areas of consumer interest, our growth, revenue, financial condition and results of operations could be adversely affected.

We face significant competition to our Content & Media service offering, which we expect will continue to intensify, and we may not be able to maintain or improve our competitive position or market share.

          We operate in highly competitive and still developing markets. We compete for advertisers and customers on the basis of a number of factors including return on marketing expenditures, price of our offerings, and ability to deliver large volumes or precise types of customer traffic. This competition could make it more difficult for us to provide value to our consumers, our advertisers and our freelance content creators and result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses, decreased website traffic and failure to increase, or the loss of, market share, any of which would likely seriously harm our business, revenue, financial condition and results of operations. There can be no assurance that we will be able to compete successfully against current or future competitors.

          We face intense competition from a wide range of competitors, including online marketing and media companies, integrated social media platforms and other specialist and enthusiast websites. Our current principal competitors include:

    Online Marketing and Media Companies.  We compete with other Internet marketing and media companies, such as AOL, About.com and various startup companies as well as leading online media companies such as Yahoo!, for online marketing budgets. Most of these competitors compete with us across several areas of consumer interest, such as do-it-yourself, health, home and garden, golf, outdoors and humor.

    Integrated Social Media Applications.  We compete with various software technology competitors, such as Jive Software and KickApps, in the integrated social media space where we offer our social media applications.

    Specialized and Enthusiast Websites.  We compete with companies that provide specialized consumer information websites, particularly in the do-it-yourself, health, home and garden, golf, outdoors and humor categories, as well as enthusiast websites in specific categories, including message boards, blogs and other enthusiast websites maintained by individuals and other Internet companies.

    Distributed Content Creation Platforms.  We compete with a growing number of companies, such as AOL and Yahoo! that employ a content creation model with aspects similar to our platform, such as the use of freelance content creators.

          We may be subject to increased competition with any of these types of businesses in the future to the extent that they seek to devote increased resources to more directly address the online market for the professional creation of commercially valuable content at scale. For example, if Google chose to compete more directly with us, we may face the prospect of the loss of business or other adverse financial consequences given that Google possesses a significantly greater consumer base, financial resources, distribution channels and patent portfolio. In addition, should Google decide to directly compete with us in areas such as content creation, it may decide for competitive reasons to terminate or not renew our commercial agreements and, in such an event, we may experience a rapid decline in our revenue from the loss of our source for cost-per-click advertising on our owned and operated websites and on our network of customer websites. In addition, Google's access to more comprehensive data regarding user search queries through its search algorithms would give it a significant competitive

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advantage over everyone in the industry, including us. If this data is used competitively by Google, sold to online publishers or given away for free, our business may face increased competition from companies, including Google, with substantially greater resources, brand recognition and established market presence.

          In addition to Google, many of our current and other potential competitors enjoy substantial competitive advantages, such as greater name recognition, longer operating histories, substantially greater financial, technical and other resources and, in some cases, the ability to combine their online marketing products with traditional offline media such as newspapers or magazines. These companies may use these advantages to offer products similar to ours at a lower price, develop different products to compete with our current offerings and respond more quickly and effectively than we can to new or changing opportunities, technologies, standards or customer requirements. For example, both AOL and Yahoo! have access to proprietary search data which could be utilized to assist them in their content creation processes. In addition, many of our current and potential competitors have established marketing relationships with and access to larger customer bases. As the markets for online and social media expand, we expect new competitors, business models and solutions to emerge, some of which may be superior to ours. Even if our platform is more effective than the products and services offered by our competitors, potential customers might adopt competitive products and services in lieu of using our services. For all of these reasons, we may not be able to compete successfully against our current and potential competitors.

Our Content & Media service offering primarily generates its revenue from advertising, and the reduction in spending by or loss of advertisers could seriously harm our business.

          We generated 41% and 47% of our revenue for the year ended December 31, 2009 and nine months ended September 30, 2010 from advertising. One component of our platform that we use to generate advertiser interest in our content is our system of monetization tools, which is designed to match content with advertisements in a manner that maximizes revenue yield and end-user experience. Advertisers will not continue to do business with us if their investment in advertising with us does not generate sales leads, and ultimately customers, or if we do not deliver their advertisements in an appropriate and effective manner. The failure of our yield-optimized monetization technology to effectively match advertisements with our content in a manner that results in increased revenue for our advertisers would have an adverse impact on our ability to maintain or increase our revenue from advertising.

          We rely on third-party ad-providers, such as Google, to provide advertisements on our owned and operated websites and on our network of customer websites. Even if our content is effectively matched with such ad content, we cannot assure our current advertisers will fulfill their obligations under their existing contracts, continue to provide advertisements beyond the terms of their existing contracts or enter into any additional contracts. If any of our advertisers, but in particular Google, decided not to continue advertising on our owned and operated websites and on our network of customer websites, we could experience a rapid decline in our revenue over a relatively short period of time.

          In addition, our customers who receive a portion of the revenue generated from advertisements matched with our content displayed on their websites, may not continue to do business with us if our content does not generate increased revenue for them. If we are unable to remain competitive and provide value to advertisers they may stop placing advertisements with us or with our network of customer websites, which would negatively harm our business, revenue, financial condition and results of operations.

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          Lastly, we believe that advertising spending on the Internet, as in traditional media, fluctuates significantly as a result of a variety of factors, many of which are outside of our control. These factors include:

    variations in expenditures by advertisers due to budgetary constraints;

    the cancellation or delay of projects by advertisers;

    the cyclical and discretionary nature of advertising spending;

    general economic conditions, as well as economic conditions specific to the Internet and online and offline media industry; and

    the occurrence of extraordinary events, such as natural disasters, international or domestic terrorist attacks or armed conflict.

If we are unable to generate advertising revenue due to factors outside of our control, then our business, revenue, financial condition and results of operation would be adversely affected.

If we are unable to continue to drive and increase visitors to our owned and operated websites and to our customer websites and convert these visitors into repeat users and customers cost-effectively, our business, financial condition and results of operations could be adversely affected.

          The primary method that we use to attract traffic to our owned and operated websites and to our customer websites and convert these visitors into repeat users and customers is the content created by our freelance content creators. How successful we are in these efforts depends, in part, upon our continued ability to create and distribute high-quality, commercially valuable content in a cost effective manner at scale that connects consumers with content that meets their specific interests and enables them to share and interact with the content and supporting communities. We may not be able to create content in a cost effective manner or that meets rapidly changing consumer demand in a timely manner, if at all. Any such failure to do so could adversely affect user and customer experiences and reduce traffic driven to our owned and operated websites and to our customer websites through which we distribute our content, which would adversely affect our business, revenue, financial condition and results of operations.

          One effort we employ to create and distribute our content in a cost effective manner is our proprietary technology and algorithms which are designed to predict consumer demand and return on investment. Our proprietary technology and algorithms have a limited history, and as a result the ultimate returns on our investment in content creation are difficult to predict, and may not be sustained in future periods at the same level as in past periods. Furthermore, our proprietary technology and algorithms are dependent on analyzing existing Internet search traffic data, and our analysis may be impaired by changes in Internet traffic or search engines' methodologies which we do not have any control over. The failure of our proprietary technology and algorithms to accurately identify content that generates traffic on websites through which we distribute our content and which creates a sufficient return on investment for us and our customer websites would have an adverse impact on our business, revenue, financial condition and results of operations.

          Another method we employ to attract and acquire new, and retain existing, users and customers is commonly referred to as search engine optimization, or SEO. SEO involves developing websites to rank well in search engine results. Our ability to successfully manage SEO efforts across our owned and operated websites and our customer websites is dependent on the timely modification of SEO efforts from time to time in response to periodic changes in search engine algorithms, search query trends and related efforts by providers of search services designed to ensure the display of unique offerings in search results. Our failure to successfully manage our SEO strategy could result in a substantial decrease in traffic to our owned and operated websites and to our customer websites through which we distribute our content, which would result in substantial decreases in conversion rates and repeat

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business, as well as increased costs if we were to replace free traffic with paid traffic. Any or all of these results would adversely affect our business, revenue, financial condition and results of operations.

          Even if we succeed in driving traffic to our owned and operated websites and to our customer websites, neither we nor our advertisers and customers may be able to monetize this traffic or otherwise retain consumers. Our failure to do so could result in decreases in customers and related advertising revenue, which would have an adverse effect on our business, revenue, financial condition and results of operations.

If Internet search engines' methodologies are modified, traffic to our owned and operated websites and to our customers' websites and corresponding consumer origination volumes could decline.

          We depend in part on various Internet search engines, such as Google, Bing, Yahoo!, and other search engines to direct a significant amount of traffic to our owned and operated websites. For the quarter ended September 30, 2010, approximately 41% of the page view traffic directed to our owned and operated websites came directly from these Internet search engines (and a majority of the traffic from search engines came from Google), according to our internal data. Our ability to maintain the number of visitors directed to our owned and operated websites and to our customers' websites through which we distribute our content by search engines is not entirely within our control. For example, search engines frequently revise their algorithms in an attempt to optimize their search result listings. Changes in the methodologies used by search engines to display results could cause our owned and operated websites or our customer websites to receive less favorable placements, which could reduce the number of users who link to our owned and operated websites and to our customers' websites from these search engines. Some of our owned and operated websites and our customers' websites have experienced fluctuations in search result rankings and we anticipate similar fluctuations in the future. Internet search engines could decide that content on our owned and operated websites and on our customers' websites, including content that is created by our freelance content creators, is unacceptable or violates their corporate policies. Any reduction in the number of users directed to our owned and operated websites and to our customers' websites would negatively affect our ability to earn revenue. If traffic on our owned and operated websites and on our customers' websites declines, we may need to resort to more costly sources to replace lost traffic, and such increased expense could adversely affect our business, revenue, financial condition and results of operations.

Since the success of our Content & Media service offering has been closely tied to the success of eHow, if eHow's performance falters it could have a material adverse effect on our business, financial condition, and operations.

          For the year ended December 31, 2009 and the nine months ended September 30, 2010, Demand Media generated approximately 13% and 23%, respectively, of our revenue from eHow. No other individual site was responsible for more than 10% of our revenue in these periods. In addition, most of the content that we published during these periods was published to eHow.

          eHow depends on various Internet search engines to direct traffic to the site. For the quarter ended September 30, 2010, approximately 66% of eHow's page view traffic came from Google searches. Any changes in search engine methodologies or our failure to properly manage SEO efforts for eHow may adversely impact the traffic directed to eHow and in turn the performance of the content created for and distributed on eHow. Furthermore, as the amount of content housed on eHow grows, its increased size may slow future growth. For example, we have found that users' ability to find content on eHow through popular search engines is impaired if the increased volume of content on the site is not matched by an improved site architecture. Additionally, we have already produced a significant amount of content that is housed on eHow and it may become difficult for us to continue to identify topics and produce content with the same level of broad consumer appeal as the content we have

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produced up to this point. A material adverse effect on eHow could result in a material adverse effect to Demand Media and its business, financial condition, and operations.

Poor perception of our brand, business or industry could harm our reputation and adversely affect our business, financial condition and results of operations.

          Our business is dependent on attracting a large number of visitors to our owned and operated websites and our network of customer websites and providing leads and clicks to our advertisers and customers, which depends in part on our reputation within the industry and with our customers. Because our business is transforming traditional content creation models and is therefore not easily understood by casual observers, our brand, business and reputation is vulnerable to poor perception. For example, perception that the quality of our content may not be the same or better than that of other published Internet content, even though baseless, can damage our reputation. We are frequently the subject of unflattering reports in the media about our business and our model. While disruptive businesses are often criticized early on in their life cycles, we believe we are more frequently targeted than most because of the nature of the business we are disrupting — namely the traditional print and publication media as well as popular Internet publishing methods such as blogging. Any damage to our reputation could harm our ability to attract and retain advertisers, customers and freelance content creators, which would materially adversely affect our results of operations, financial condition and business. Furthermore, certain of our owned and operated websites, such as LIVESTRONG.com, are associated with high-profile experts to enhance the websites' brand recognition and credibility. In addition, any adverse news reports, negative publicity or other alienation of all or a segment of our consumer base relating to these high-profile experts would reflect poorly on our brands and could have an adverse effect on our business.

We rely primarily on freelance content creators for our online content. We may not be able to attract or retain sufficient freelance content creators to generate content on a scale sufficient to grow our business. As we do not control those persons or the source of content, we are at risk of being unable to generate interesting and attractive features and other material content.

          We rely primarily on freelance content creators for the content that we distribute through our owned and operated websites and our network of customer websites. We may not be able to attract or retain sufficient freelance creators to generate content on a scale sufficient to grow our business. In addition, our competitors may attempt to attract members of our freelance content creator community by offering compensation that we are unable to match. We believe that over the past two years our ability to attract and retain freelance content creators has benefited from the weak overall labor market and from the difficulties and resulting layoffs occurring in traditional media, particularly newspapers. We believe that this combination of circumstances is unlikely to continue and any change to the economy or the media jobs market may make it more difficult for us to attract and retain freelance content creators. While each of our freelance content creators are screened through our pre-qualification process, we cannot guarantee that the content created by our freelance content creators will be of sufficient quality to attract users to our owned and operated websites and to our network of customer websites. In addition, we have no written agreements with these persons which obligate them to create articles or videos beyond the one article or video that they elect to create at any particular time and have no ability to control their future performance. As a result, we cannot guarantee that our freelance content creators will continue to contribute content to us for further distribution through our owned and operated websites and our network of customer websites or that the content that is created and distributed will be sufficient to sustain our current growth rates. In the event that these freelance content creators decrease their contributions of such content, we are unable to attract or retain qualified freelance content creators or if the quality of such contributions is not sufficiently attractive to our advertisers or to drive traffic to our owned and operated websites and to our network of customer websites, we may incur substantial costs in procuring suitable replacement content, which could have a negative impact on our business, revenue and financial condition.

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The loss of third-party data providers could significantly diminish the value of our services and cause us to lose customers and revenue.

          We collect data regarding consumer search queries from a variety of sources. When a user accesses one of our owned and operated websites, we may have access to certain data associated with the source and specific nature of the visit to our website. We also license consumer search query data from third parties. Our Content & Media algorithms utilize this data to help us determine what content consumers are seeking, if that content is valuable to advertisers and whether we can cost-effectively produce this content. These third-party consumer search data agreements are generally for perpetual licenses of a discrete amount of data and generally do not provide for updates of the data licensed. There can be no assurances that we will be able to enter into agreements with these third parties to license additional data on the same or similar terms, if at all. If we are not able to enter into agreements with these providers, we may not be able to enter into agreements with alternative third-party consumer search data providers on acceptable terms or on a timely basis or both. Any termination of our relationships with these consumer search data providers, or any entry into new agreements on terms and conditions less favorable to us, could limit the effectiveness of our content creation process, which would have a material adverse effect on our business, financial condition and results of operations. In addition, new laws or changes to existing laws in this area may prevent or restrict our use of this data. In such event, the value of our algorithms and our ability to determine what consumers are seeking could be significantly diminished.

If we are unable to attract new customers for our social media applications products or to retain our existing customers, our revenue could be lower than expected and our operating results may suffer.

          Our enterprise-class social media tools allow websites to add feature-rich applications, such as user profiles, comments, forums, reviews, blogs, photo and video sharing, media galleries, groups and messaging offered through our social media application product suite. In addition to adding new customers for our social media products, to increase our revenue, we must sell additional social media products to existing customers and encourage existing customers to maintain or increase their usage levels. If our existing and prospective customers do not perceive our social media products to be of sufficiently high quality, we may not be able to retain our current customers or attract new customers. We sell our social media products pursuant to service agreements that are generally one to two years in length. Our customers have no obligation to renew their contracts for our products after the expiration of their initial commitment period, and these agreements may not be renewed at the same or higher level of service, if at all. In addition, these agreements generally require us to keep our product suite operational with minimal service interruptions and to provide limited credits to media customers in the event that we are unable to maintain these service levels. To date, service level credits have not been significant. Moreover, under some circumstances, some of our customers have the right to cancel their service agreements prior to the expiration of the terms of their agreements, including the right to cancel if our social media product suite suffers repeated service interruptions. If we are unable to attract new customers for our social media products, our existing customers do not renew or terminate their agreements for our social media products or we are required to provide service level credits in the future as a result of the operational failure of our social media products, then our operating results could be harmed.

Our success depends upon the continued commercial use of the Internet, and acceptance of online advertising as an alternative to offline advertising.

          The percentage of the advertising market allocated to online advertising lags the percentage of time spent by people consuming media online by a significant percentage. Growth in our business largely depends on this distinction between online and off-line advertising narrowing or being eliminated. This may not happen in a way or to the extent that we currently expect. Many advertisers

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still have limited experience with online advertising and may continue to devote significant portions of their advertising budgets to traditional, offline advertising media. Accordingly, we continue to compete for advertising dollars with traditional media, including print publications, in addition to websites with higher levels of traffic. We believe that the continued growth and acceptance of online advertising generally will depend on its perceived effectiveness and the acceptance of related advertising models, and the continued growth in commercial use of the Internet, among other factors. Any lack of growth in the market for various online advertising models could have an adverse effect on our business, financial condition and results of operations.

Wireless devices and mobile phones are increasingly being used to access the Internet, and our online marketing services may not be as effective when accessed through these devices, which could cause harm to our business.

          The number of people who access the Internet through devices other than personal computers has increased substantially in the last few years. Our Content & Media services were designed for persons accessing the Internet on a desktop or laptop computer. The smaller screens, lower resolution graphics and less convenient typing capabilities of these devices may make it more difficult for visitors to respond to our offerings. In addition, the cost of mobile advertising is relatively high and may not be cost-effective for our services. We must also ensure that our licensing arrangements with third-party content providers allow us to make this content available on these devices. If we cannot effectively make our content, products and services available on these devices, fewer consumers may access and use our content, products and services. Also, if our services continue to be less effective or economically attractive for customers seeking to engage in advertising through these devices and this segment of Internet traffic grows at the expense of traditional computer Internet access, we will experience difficulty attracting website visitors and attracting and retaining customers and our operating results and business will be harmed.

We are dependent upon the quality of traffic in our network to provide value to online advertisers, and any failure in our quality control could have a material adverse effect on the value of our websites to our third-party advertisement distribution providers and online advertisers and adversely affect our revenue.

          We use technology and processes to monitor the quality of, and to identify any anomalous metrics associated with, the Internet traffic that we deliver to online advertisers and our network of customer websites. These metrics may be indicative of low quality clicks such as non-human processes, including robots, spiders or other software; the mechanical automation of clicking; and other types of invalid clicks or click fraud. Even with such monitoring in place, there is a risk that a certain amount of low-quality traffic, or traffic that is deemed to be invalid by online advertisers, will be delivered to such online advertisers. As a result, we may be required to credit future amounts owed to us by our advertisers. Furthermore, low-quality or invalid traffic may be detrimental to our relationships with third-party advertisement distribution providers and online advertisers, and could adversely affect our revenue.

The expansion of our owned and operated websites into new areas of consumer interest, products, services and technologies subjects us to additional business, legal, financial and competitive risks.

          An important element of our business strategy is to grow our network of owned and operated websites to cover new areas of consumer interest, expand into new business lines and develop additional services, products and technologies. In directing our focus into new areas, we face numerous risks and challenges, including increased capital requirements, long development cycles, new competitors and the requirement to develop new strategic relationships. We cannot assure you that our strategy will result in increased net sales or net income. Furthermore, growth into new areas may require changes to our existing business model and cost structure, modifications to our infrastructure

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and exposure to new regulatory and legal risks, any of which may require expertise in areas in which we have little or no experience. If we cannot generate revenue as a result of our expansion into new areas that are greater than the cost of such expansion, our operating results could be harmed.

As a creator and a distributor of Internet content, we face potential liability and expenses for legal claims based on the nature and content of the materials that we create or distribute, or that are accessible via our owned and operated websites and our network of customer websites. If we are required to pay damages or expenses in connection with these legal claims, our operating results and business may be harmed.

          We rely on the work product of freelance content creators to create original content for our owned and operated websites and for our network of customer websites and for use in our marketing messages. As a creator and distributor of original content and third-party provided content, we face potential liability based on a variety of theories, including defamation, negligence, unlawful practice of a licensed profession, copyright or trademark infringement or other legal theories based on the nature, creation or distribution of this information, and under various laws, including the Lanham Act and the Copyright Act. We may also be exposed to similar liability in connection with content that we do not create but that is posted to our owned and operated websites and to our network of customer websites by users and other third parties through forums, comments, personas and other social media features. In addition, it is also possible that visitors to our owned and operated websites and to our network of customer websites could make claims against us for losses incurred in reliance upon information provided on our owned and operated websites or our network of customer websites. These claims, whether brought in the United States or abroad, could divert management time and attention away from our business and result in significant costs to investigate and defend, regardless of the merit of these claims. If we become subject to these or similar types of claims and are not successful in our defense, we may be forced to pay substantial damages. While we run our content through a rigorous quality control process, including an automated plagiarism program, there is no guarantee that we will avoid future liability and potential expenses for legal claims based on the content of the materials that we create or distribute. Should the content distributed through our owned and operated websites and our network of customer websites violate the intellectual property rights of others or otherwise give rise to claims against us, we could be subject to substantial liability, which could have a negative impact on our business, revenue and financial condition.

We may face liability in connection with our undeveloped owned and operated websites and our customers' undeveloped websites whose domain names may be identical or similar to another party's trademark or the name of a living or deceased person.

          A number of our owned and operated websites and our network of customer websites are undeveloped or minimally developed properties that primarily contain advertising listings and links. As part of our registration process, we perform searches and screenings to determine if the domain names of our owned and operated websites in combination with the advertisements displayed on those sites violate the trademark or other rights owned by third parties. Despite these efforts, we may inadvertently register the domain names of properties that are identical or similar to another party's trademark or the name of a living or deceased person. Moreover, our efforts are inherently limited due to the fact that the advertisements displayed on our undeveloped websites are delivered by third parties and the advertisements may vary over time or based on the location of the viewer. We may face primary or secondary liability in the United States under the Anticybersquatting Consumer Protection Act or under general theories of trademark infringement or dilution, unfair competition or under rights of publicity with respect to the domain names used for our owned and operated websites. If we fail to comply with these laws and regulations, we could be exposed to claims for damages, financial penalties and reputational harm, which could increase our costs of operations, reduce our profits or cause us to forgo opportunities that would otherwise support our growth.

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We may not succeed in establishing our businesses internationally, which may limit our future growth.

          One potential area of growth for us is in the international markets. We have launched sites in the United Kingdom and China, among others and are exploring launches in certain other countries. We have also been investing in translation capabilities for our technologies. Operating internationally, where we have limited experience, exposes us to additional risks and operating costs. We cannot be certain that we will be successful in introducing or marketing our services internationally or that our services will gain market acceptance or that growth in commercial use of the Internet internationally will continue. There are risks inherent in conducting business in international markets, including the need to localize our products and services to foreign customers' preferences and customs, difficulties in managing operations due to language barriers, distance, staffing and cultural differences, application of foreign laws and regulations to us, tariffs and other trade barriers, fluctuations in currency exchange rates, establishing management systems and infrastructures, reduced protection for intellectual property rights in some countries, changes in foreign political and economic conditions, and potentially adverse tax consequences. Our inability to expand and market our products and services internationally may have a negative effect on our business, revenue, financial condition and results of operations.

Risks Relating to our Registrar Service Offering

We face significant competition to our Registrar service offering, which we expect will continue to intensify. We may not be able to maintain or improve our competitive position or market share.

          We face significant competition from existing registrars and from new registrars that continue to enter the market. As of October 26, 2010, ICANN had accredited approximately 962 registrars to register domain names in one or more of the generic top level domains, or gTLDs, that it oversees. There are relatively few barriers to entry in this market, so as this market continues to develop we expect the number of competitors to increase. The continued entry into the domain name registration market of competitive registrars and unaccredited entities that act as resellers for registrars, and the rapid growth of some competitive registrars and resellers that have already entered the market, may make it difficult for us to maintain our current market share.

          The market for domain name registration and other related web-based services is intensely competitive and rapidly evolving. We expect competition to increase from existing competitors as well as from new market entrants. Most of our existing competitors are expanding the variety of services that they offer. These competitors include, among others, domain name registrars, website design firms, website hosting companies, Internet service providers, Internet portals and search engine companies, including GoDaddy, Network Solutions, Tucows, Microsoft and Yahoo!. Some of these competitors have greater resources, more brand recognition and consumer awareness, greater international scope, larger customer bases and larger bases of existing customers than we do. As a result, we may not be able to compete successfully against them in future periods.

          In addition, these and other large competitors, in an attempt to gain market share, may offer aggressive price discounts on the services they offer. These pricing pressures may require us to match these discounts in order to remain competitive, which would reduce our margins, or cause us to lose customers who decide to purchase the discounted service offerings of our competitors. As a result of these factors, in the future it may become increasingly difficult for us to compete successfully.

If our customers do not renew their domain name registrations or if they transfer their existing registrations to our competitors and we fail to replace their business, our business would be adversely affected.

          Our success depends in large part on our customers' renewals of their domain name registrations. Domain name registrations represented approximately 41% of total revenue in the year ended December 31, 2009, and approximately 36% of our total revenue in the nine months ended September 30, 2010. Our customer renewal rate for expiring domain name registrations was

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approximately 69% in the year ended December 31, 2009, and approximately 72% in the nine months ended September 30, 2010. If we are unable to maintain or increase our overall renewal rates for domain name registrations or if any decrease in our renewal rates, including due to transfers, is not offset by increases in new customer growth rates, our customer base and our revenue would likely decrease. This would also reduce the number of domain name registration customers to whom we could market our other higher-margin services, thereby further potentially impacting our revenue and profitability, driving up our customer acquisition costs and harming our operating results. Since our strategy is to expand the number of services we provide to our customers, any decline in renewals of domain name registrations not offset by new domain name registrations would likely have an adverse effect on our business, revenue, financial condition and results of operations.

Regulation could reduce the value of Internet domain names or negatively impact the Internet domain name acquisition process, which could significantly impair the value attributable to our acquisitions of Internet domain names.

          The acquisition of expiring domain names for development, undeveloped website commercialization, sale or other uses, involves the registration of thousands of Internet domain names, both with registries in the United States and internationally. We have and intend to continue to acquire previously-owned Internet domain names that have expired and that, following the period of permitted redemption by their prior owners, have been made available for registration. The acquisition of Internet domain names generally is governed by regulatory bodies. The regulation of Internet domain names in the United States and in foreign countries is subject to change. Regulatory bodies could establish additional requirements for previously-owned Internet domain names or modify the requirements for holding Internet domain names. As a result, we might not acquire or maintain names that contribute to our financial results in the same manner as we currently do. A failure to acquire or maintain such Internet domain names could adversely affect our business, revenue, financial condition and results of operations.

We could face liability, or our corporate image might be impaired, as a result of the activities of our customers or the content of their websites.

          Our role as a registrar of domain names and a provider of website hosting services may subject us to potential liability for illegal activities by our customers on their websites. For example, we are a party to a lawsuit in which a group registered a domain name through our registrar and proceeded to fill the site with content that was allegedly defamatory to another business whose name is similar to the domain name. We provide an automated service that enables users to register domain names and populate websites with content. We do not monitor or review, nor does our accreditation agreement with ICANN require that we monitor or review, the appropriateness of the domain names we register for our customers or the content of our network of customer websites, and we have no control over the activities in which our customers engage. While we have policies in place to terminate domain names or to take other appropriate action if presented with a court order, governmental injunction or evidence of illegal conduct from law enforcement or a trusted industry partner, we have in the past been publicly criticized for not being more proactive in this area by consumer watchdogs and we may encounter similar criticism in the future. This criticism could harm our reputation. Conversely, were we to terminate a domain name registration in the absence of legal compulsion or clear evidence of illegal conduct from a legitimate source, we could be criticized for prematurely and improperly terminating a domain name registered by a customer. In addition, despite the policies we have in place to terminate domain name registrations or to take other appropriate actions, customers could nonetheless engage in prohibited activities.

          For example, we have been criticized for not being more proactive in policing online pharmacies acting in violation of U.S. laws. We recently entered into an agreement with LegitScript, LLC, an

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Internet pharmacy verification and monitoring service recognized by the National Association of Boards of Pharmacy, to assist us in identifying customers who are violating our terms of service by operating online pharmacies in violation of U.S. state or federal law. Under that agreement, LegitScript provides us a list, updated regularly, of customers using their domain names knowingly to host illegal online pharmacies, allowing us to better enforce our policy of terminating services or taking other appropriate action against customers engaged in illegal activity in violation or our terms of service. In addition, LegitScript has agreed to serve as a resource to us regarding issues concerning drug safety, pharmacy laws and regulations, coordination with law enforcement authorities, and complaints regarding action taken by us against our customers based on information provided by LegitScript. We have agreed to assist LegitScript with its research concerning illegal online pharmacies by providing our expertise in the domain name registrar business. Our agreement with LegitScript may not be sufficient to identify all illegal online pharmacies hosted by our customers, may not protect us from further criticism when our customers engage in illegal activities, will not address any illegal activities other than in the online pharmacy area, and may subject us to complaints or liability if we terminate customer websites mistakenly.

          Several bodies of law may be deemed to apply to us with respect to various customer activities. Because we operate in a relatively new and rapidly evolving industry, and since this field is characterized by rapid changes in technology and in new and growing illegal activity, these bodies of laws are constantly evolving. Some of the laws that apply to us with respect to customer activity include the following:

    The Communications Decency Act of 1996, or CDA, generally protects online service providers, such as Demand Media, from liability for certain activities of their customers, such as posting of defamatory or obscene content, unless the online service provider is participating in the unlawful conduct. Notwithstanding the general protections from liability under the CDA, we may nonetheless be forced to defend ourselves from claims of liability covered by the CDA, resulting in an increased cost of doing business.

    The Digital Millennium Copyright Act of 1998, or DMCA, provides recourse for owners of copyrighted material who believe that their rights under U.S. copyright law have been infringed on the Internet. Under this statute, we generally are not liable for infringing content posted by third parties. However, if we receive a proper notice from a copyright owner alleging infringement of its protected works by web pages for which we provide hosting services, and we fail to expeditiously remove or disable access to the allegedly infringing material, fail to post and enforce a digital rights management policy or a policy to terminate accounts of repeat infringers, or otherwise fail to meet the requirements of the safe harbor under the statute, the owner may seek to impose liability on us.

          Although established statutory law and case law in these areas to date generally have shielded us from liability for customer activities, court rulings in pending or future litigation may serve to narrow the scope of protection afforded us under these laws. In addition, laws governing these activities are unsettled in many international jurisdictions, or may prove difficult or impossible for us to comply with in some international jurisdictions. Also, notwithstanding the exculpatory language of these bodies of law, we may be embroiled in complaints and lawsuits which, even if ultimately resolved in our favor, add cost to our doing business and may divert management's time and attention. Finally, other existing bodies of law, including the criminal laws of various states, may be deemed to apply or new statutes or regulations may be adopted in the future, any of which could expose us to further liability and increase our costs of doing business.

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We may face liability or become involved in disputes over registration of domain names and control over websites.

          As a domain name registrar, we regularly become involved in disputes over registration of domain names. Most of these disputes arise as a result of a third party registering a domain name that is identical or similar to another party's trademark or the name of a living person. These disputes are typically resolved through the Uniform Domain-Name Dispute-Resolution Policy, or UDRP, ICANN's administrative process for domain name dispute resolution, or less frequently through litigation under the Anticybersquatting Consumer Protection Act, or ACPA, or under general theories of trademark infringement or dilution. The UDRP generally does not impose liability on registrars, and the ACPA provides that registrars may not be held liable for registering or maintaining a domain name absent a showing of bad faith intent to profit or reckless disregard of a court order by the registrars. However, we may face liability if we fail to comply in a timely manner with procedural requirements under these rules. In addition, these processes typically require at least limited involvement by us, and therefore increase our cost of doing business. The volume of domain name registration disputes may increase in the future as the overall number of registered domain names increases.

          Domain name registrars also face potential tort law liability for their role in wrongful transfers of domain names. The safeguards and procedures we have adopted may not be successful in insulating us against liability from such claims in the future. In addition, we face potential liability for other forms of "domain name hijacking," including misappropriation by third parties of our network of customer domain names and attempts by third parties to operate websites on these domain names or to extort the customer whose domain name and website were misappropriated. Furthermore, our risk of incurring liability for a security breach on a customer website would increase if the security breach were to occur following our sale to a customer of an SSL certificate that proved ineffectual in preventing it. Finally, we are exposed to potential liability as a result of our private domain name registration service, wherein we become the domain name registrant, on a proxy basis, on behalf of our customers. While we have a policy of providing the underlying Whois information and reserve the right to cancel privacy services on domain names giving rise to domain name disputes including when we receive reasonable evidence of an actionable harm, the safeguards we have in place may not be sufficient to avoid liability in the future, which could increase our costs of doing business.

We may experience unforeseen liabilities in connection with our acquisitions of Internet domain names or arising out of third-party domain names included in our distribution network, which could negatively impact our financial results.

          We have acquired and intend to continue to acquire in the future additional previously-owned Internet domain names. While we have a policy against acquiring domain names that infringe on third-party intellectual property rights, including trademarks or confusingly similar business names, in some cases, these acquired names may have trademark significance that is not readily apparent to us or is not identified by us in the bulk purchasing process. As a result we may face demands by third-party trademark owners asserting infringement or dilution of their rights and seeking transfer of acquired Internet domain names under the UDRP administered by ICANN or actions under the ACPA. Additionally, we display paid listings on third-party domain names and third-party websites that are part of our distribution network, which also could subject us to a wide variety of civil claims including intellectual property infringement.

          We intend to review each claim or demand which may arise from time to time on a case-by-case basis with the assistance of counsel and we intend to transfer any rights acquired by us to any party that has demonstrated a valid prior right or claim. We cannot, however, guarantee that we will be able to resolve these disputes without litigation. The potential violation of third-party intellectual property rights and potential causes of action under consumer protection laws may subject us to unforeseen liabilities including injunctions and judgments for money damages.

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Our failure to register, maintain, secure, transfer or renew the domain names that we process on behalf of our customers or to provide our other services to our customers without interruption could subject us to additional expenses, claims of loss or negative publicity that have a material adverse effect on our business.

          Clerical errors and system and process failures made by us may result in inaccurate and incomplete information in our database of domain names and in our failure to properly register or to maintain, secure, transfer or renew the registration of domain names that we process on behalf of our customers. In addition, any errors of this type might result in the interruption of our other services. Our failure to properly register or to maintain, secure, transfer or renew the registration of our customers' domain names or to provide our other services without interruption, even if we are not at fault, might result in our incurring significant expenses and might subject us to claims of loss or to negative publicity, which could harm our business, revenue, financial condition and results of operations.

Governmental and regulatory policies or claims concerning the domain name registration system, and industry reactions to those policies or claims, may cause instability in the industry, disrupt our domain name registration business and negatively impact our business.

          ICANN is a private sector, not for profit corporation formed in 1998 for the express purposes of overseeing a number of Internet related tasks previously performed directly on behalf of the U.S. government, including managing the domain name registration system. ICANN has been subject to strict scrutiny by the public and by the United States government. For example, in the United States, Congress has held hearings to evaluate ICANN's selection process for new top level domains. In addition, ICANN faces significant questions regarding its financial viability and efficacy as a private sector entity. ICANN may continue to evolve both its long term structure and mission to address perceived shortcomings such as a lack of accountability to the public and a failure to maintain a diverse representation of interests on its board of directors. We continue to face the risks that:

    the U.S. or any other government may reassess its decision to introduce competition into, or ICANN's role in overseeing, the domain name registration market;

    the Internet community or the U.S. Department of Commerce or U.S. Congress may refuse to recognize ICANN's authority or support its policies, which could create instability in the domain name registration system;

    some of ICANN's policies and practices, and the policies and practices adopted by registries and registrars, could be found to conflict with the laws of one or more jurisdictions;

    the terms of the Registrar Accreditation Agreement, under which we are accredited as a registrar, could change in ways that are disadvantageous to us or under certain circumstances could be terminated by ICANN preventing us from operating our Registrar;

    ICANN and, under their registry agreements, VeriSign and other registries may impose increased fees received for each ICANN accredited registrar and/or domain name registration managed by those registries;

    international regulatory or governing bodies, such as the International Telecommunications Union or the European Union, may gain increased influence over the management and regulation of the domain name registration system, leading to increased regulation in areas such as taxation and privacy;

    ICANN or any registries may implement policy changes that would impact our ability to run our current business practices throughout the various stages of the lifecycle of a domain name; and

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    foreign constituents may succeed in their efforts to have domain name registration removed from a U.S. based entity and placed in the hands of an international cooperative.

          If any of these events occur, they could create instability in the domain name registration system. These events could also disrupt or suspend portions of our domain name registration solution, which would result in reduced revenue.

The relevant domain name registry and the ICANN regulatory body impose a charge upon each registrar for the administration of each domain name registration. If these fees increase, it would have a significant impact upon our operating results.

          Each registry typically imposes a fee in association with the registration of each domain name. For example, the VeriSign registry presently charges a $7.34 fee for each .com registration. ICANN charges a $0.18 fee for each domain name registered in the generic top level domains, or gTLDs, that fall within its purview. We have no control over these agencies and cannot predict when they may increase their respective fees. In terms of the registry agreement between ICANN and VeriSign that was approved by the U.S. Department of Commerce on November 30, 2006, VeriSign will continue as the exclusive registry for the .com gTLD through at least November 30, 2012 and is entitled to increase the fee it receives for each .com domain name once in either 2011 or 2012. Any increase in these fees either must be included in the prices we charge to our service providers, imposed as a surcharge or absorbed by us. If we absorb such cost increases or if surcharges act as a deterrent to registration, we may find that our profits are adversely impacted by these third-party fees.

As the number of available domain names with commercial value diminishes over time, our domain name registration revenue and our overall business could be adversely impacted.

          As the number of domain registrations increases and the number of available domain names with commercial value diminishes over time, and if it is perceived that the more desirable domain names are generally unavailable, fewer Internet users might register domain names with us. If this occurs, it could have an adverse effect on our domain name registration revenue and our overall business.

Risks Relating to our Company

We have a history of operating losses and may not be able to operate profitably or sustain positive cash flow in future periods.

          We were founded in 2006 and have a limited operating history. We have had a net loss in every year since inception. As of September 30, 2010, we had an accumulated deficit of approximately $52 million and we may incur net operating losses in the future. Moreover, we anticipate that our cash flows from operating activities in the near term will not be sufficient to fund our investments in the production of content and the purchase of property and equipment, domain names and other intangible assets and may never be. Our business strategy contemplates making substantial investments in our content creation, distribution processes and the development and launch of new products and services, each of which will require significant expenditures. In addition, as a public company, we will incur significant additional legal, accounting and other expenses that we did not incur as a private company. Our ability to generate net income in the future will depend in large part on our ability to generate and sustain substantially increased revenue levels, while continuing to control our expenses. We may incur significant losses in the future for a number of reasons, including those discussed in other risk factors and factors that we cannot foresee. Our inability to generate net income and positive cash flows would materially and adversely affect our business, revenue, financial condition and results of operations.

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We expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.

          Our revenue and operating results could vary significantly from quarter-to-quarter and year-to-year and may fail to match our past performance because of a variety of factors, many of which are outside of our control. In particular, our operating expenses are fixed and variable and, to the extent variable, less flexible to manage period-to-period, especially in the short-term. For example, our ability to manage our expenses in the near term period-to-period is affected by our sales and marketing expenses to refer traffic to or promote our owned and operated websites, generally a variable expense which can be managed based on operating performance in the near term. This expense has historically represented a relatively small percentage of our operating expenses. In addition, comparing our operating results on a period-to-period basis may not be meaningful. In addition to other risk factors discussed in this section, factors that may contribute to the variability of our quarterly and annual results include:

    lower than anticipated levels of traffic to our owned and operated websites and to our customers' websites;

    failure of our content to generate sufficient revenue during its useful life to recover its creation costs, or any changes in the estimated useful life our content;

    our ability to continue to create and develop content that attracts users to our owned and operated websites and to our network of customer websites that distribute our content;

    our ability to generate revenue from traffic to our owned and operated websites and to our network of customer websites;

    our ability to expand our existing distribution network to include emerging and alternative channels, including complementary social media platforms such as Facebook, custom applications for mobile platforms such as the iPhone, Blackberry and Android operating systems, and new types of devices used to access the Internet such as the iPad;

    our ability to attract and retain sufficient freelance content creators to generate content on a scale sufficient to grow our business;

    our ability to effectively manage rapid growth in the number of our freelance content creators, direct advertising sales force, in-house personnel and operations;

    a reduction in the number of domain names under management or in the rate at which this number grows, due to slow growth or contraction in our markets, lower renewal rates or other factors;

    reductions in the percentage of our domain name registration customers who purchase additional services from us;

    timing of and revenue recognition for large sales transactions such as significant new contracts for branded advertising;

    the mix of services sold in a particular period between our Registrar and our Content & Media service offerings;

    changes in our pricing policies or those of our competitors, changes in domain name fees charged to us by Internet registries or the Internet Corporation for Assigned Names and Numbers, or ICANN, or other competitive pressures on our prices;

    the timing and success of new services and technology enhancements introduced by our competitors, which could impact both new customer growth and renewal rates;

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    the entry of new competitors in our markets;

    our ability to keep our platform, domain name registration services and our owned and operated websites operational at a reasonable cost and without service interruptions;

    increased product development expenses relating to the development of new services;

    the amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our services, operations and infrastructure;

    changes in generally accepted accounting principles;

    our focus on long-term goals over short-term results;

    federal, state or foreign regulation affecting our business; and

    weakness or uncertainty in general economic or industry conditions.

          It is possible that in one or more future quarters, due to any of the factors listed above, a combination of those factors or other reasons, our operating results may be below our expectations and the expectations of public market analysts and investors. In that event, the price of our shares of common stock could decline substantially.

Changes in our business model or external developments in our industry could negatively impact our operating margins.

          Our operating margins may experience downward pressure as a result of increasing competition and increased expenditures for many aspects of our business, including expenses related to content creation. For example, historically, we have paid substantially all of our freelance content creators upon the creation of text articles and videos, rather than on a revenue share basis, and we capitalize these payments. However, if we increase the use of revenue sharing arrangements to compensate our freelance content creators, our operating margins may suffer if such revenue-share payments exceed our amortization expense on comparably performing content. In addition, we intend to enter into additional revenue sharing arrangements with our customers which could cause our operating margins to experience downward pressure if a greater percentage of our revenue comes from advertisements placed on our network of customer websites compared to advertisements placed on our owned and operated websites. Additionally, the percentage of advertising fees that we pay to our customers may increase, which would reduce the margin we earn on revenue generated from those customers.

Our recent revenue growth rate may not be sustainable.

          Our revenue increased rapidly in each of the fiscal years ended December 31, 2007 through December 31, 2009. However, our revenue growth rate could decline in the future as a result of a number of factors, including increasing competition and the decline in growth rates as our revenue increases to higher levels. We may not be able to sustain our revenue growth rate in future periods and you should not rely on the revenue growth of any prior quarterly or annual period as an indication of our future performance. If our future growth fails to meet investor or analyst expectations, it could have a materially negative effect on our stock price. If our growth rate were to decline significantly or become negative, it would adversely affect our business, financial condition and results of operations.

If we do not effectively manage our growth, our operating performance will suffer and we may lose consumers, advertisers, customers and freelance content creators.

          We have experienced rapid growth in our operations, and we expect to experience continued growth in our business, both through internal growth and potential acquisitions. For example, our employee headcount has grown from approximately 360 to 600 in the thirty-three months ended

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September 30, 2010. During this same period, the number of freelance content creators affiliated with us has grown to over 13,000. This growth has placed, and will continue to place, significant demands on our management and our operational and financial infrastructure. In particular, continued rapid growth may make it more difficult for us to accomplish the following:

    successfully scale our technology and infrastructure to support a larger business;

    continue to grow our platform at scale and distribute through our new and existing properties while successfully monetizing our content;

    maintain our standing with key advertisers as well as Internet search companies and our network of customer websites;

    maintain our customer service standards;

    develop and improve our operational, financial and management controls and maintain adequate reporting systems and procedures;

    acquire and integrate websites and other businesses;

    successfully expand our footprint in our existing areas of consumer interest and enter new areas of consumer interest; and

    respond effectively to competition and potential negative effects of competition on profit margins.

          In addition, our personnel, systems, procedures and controls may be inadequate to support our current and future operations. The improvements required to manage our growth will require us to make significant expenditures, expand, train and manage our employee base and allocate valuable management resources. If we fail to effectively manage our growth, our operating performance will suffer and we may lose our advertisers, customers and key personnel.

If we do not continue to innovate and provide products and services that are useful to our customers, we may not remain competitive, and our revenue and operating results could suffer.

          Our success depends on our ability to innovate and provide products and services useful to our customers in both our Content & Media and Registrar service offerings. Our competitors are constantly developing innovations in content creation and distribution as well as in domain name registration and related services, such as web hosting, email and website creation solutions. As a result, we must continue to invest significant resources in product development in order to maintain and enhance our existing products and services and introduce new products and services that deliver a sufficient return on investment and that our customers can easily and effectively use. If we are unable to provide quality products and services, we may lose consumers, advertisers, customers and freelance content creators, and our revenue and operating results would suffer. Our operating results would also suffer if our innovations are not responsive to the needs of our customers and our advertisers, are not appropriately timed with market opportunities or are not effectively brought to market.

We may have difficulty scaling and adapting our existing technology and network infrastructure to accommodate increased traffic and technology advances or changing business requirements, which could lead to the loss of consumers, advertisers, customers and freelance content creators, and cause us to incur expenses to make architectural changes.

          To be successful, our network infrastructure has to perform well and be reliable. The greater the user traffic and the greater the complexity of our products and services, the more computing power we will need. In the future, we may spend substantial amounts to purchase or lease data centers and equipment, upgrade our technology and network infrastructure to handle increased traffic on our

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owned and operated websites and roll out new products and services. This expansion could be expensive and complex and could result in inefficiencies or operational failures. If we do not implement this expansion successfully, or if we experience inefficiencies and operational failures during its implementation, the quality of our products and services and our users' experience could decline. This could damage our reputation and lead us to lose current and potential consumers, advertisers, customers and freelance content creators. The costs associated with these adjustments to our architecture could harm our operating results. Cost increases, loss of traffic or failure to accommodate new technologies or changing business requirements could harm our business, revenue and financial condition.

We rely on technology infrastructure and a failure to update or maintain this technology infrastructure could adversely affect our business.

          Significant portions of our content, products and services are dependent on technology infrastructure that was developed over multiple years. Updating and replacing our technology infrastructure may be challenging to implement and manage, may take time to test and deploy, may cause us to incur substantial costs and may cause us to suffer data loss or delays or interruptions in service. These delays or interruptions in our service may cause our consumers, advertisers, customers and freelance content creators to become dissatisfied with our offerings and could adversely affect our business. Failure to update our technology infrastructure as new technologies become available may also put us in a weaker position relative to a number of our key competitors. Competitors with newer technology infrastructure may have greater flexibility and be in a position to respond more quickly than us to new opportunities, which may impact our competitive position in certain markets and adversely affect our business.

We are currently expanding and improving our information technology systems. If these implementations are not successful, our business and operations could be disrupted and our operating results could suffer.

          We recently deployed the first phase of our enterprise reporting system, Oracle Applications ERP and Platform, to assist us in the management of our financial data and reporting, as well as to automate certain business wide processes and internal controls. We anticipate that this system will be a long-term investment and that the addition of future build-outs, customizations and/or applications associated with this system will require significant management time, support and cost. Moreover, there are inherent risks associated with developing, improving and expanding information systems. We cannot be sure that the expansion of any of our systems, including our Oracle system, will be fully or effectively implemented on a timely basis, if at all. If we do not successfully implement informational systems on a timely basis or at all, our operations may be disrupted and or our operating results could suffer. In addition, any new information system deployments may not operate as we expect them to, and we may be required to expend significant resources to correct problems or find alternative sources for performing these functions.

Changes in regulations or user concerns regarding privacy and protection of user data, or any failure to comply with such laws, could diminish the value of our services and cause us to lose customers and revenue.

          When a user visits our websites or certain pages of our customers' websites, we use technologies, including "cookies," to collect information related to the user, such as the user's Internet Protocol, or IP, address, demographic information, and history of the user's interactions with advertisements previously delivered by us. The information that we collect about users helps us deliver appropriate content and targeted advertising to the user. A variety of federal, state and international laws and regulations govern the collection, use, retention, sharing and security of data that we receive from and about our users. The existing privacy-related laws and regulations are evolving and subject to potentially differing interpretations. We post privacy policies on all of our owned and operated websites

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which set forth our policies and practices related to the collection and use of consumer data. Any failure, or perceived failure, by us to comply with our posted privacy policies or with industry standards or laws or regulations could result in a loss of consumer confidence in us, or result in actions against us by governmental entities or others, all of which could potentially cause us to lose consumers and revenues.

          In addition, various federal, state and foreign legislative and regulatory bodies may expand current or enact new laws regarding privacy matters. Recent developments related to "instant personalization" and similar technologies potentially allow us and other publishers access to even broader and more detailed information about users. These developments have led to greater scrutiny of industry data collection practices by regulators and privacy advocates. New laws may be enacted, or existing laws may be amended or re-interpreted, in a manner which limits our ability to analyze user data. If our access to user data is limited through legislation or any industry development, we may be unable to provide effective technologies and services to customers and we may lose customers and revenue.

We depend on key personnel to operate our business, and if we are unable to retain our current personnel or hire additional personnel, our ability to develop and successfully market our business could be harmed.

          We believe that our future success is highly dependent on the contributions of our executive officers, in particular the contributions of our Chairman and Chief Executive Officer, Richard M. Rosenblatt, as well as our ability to attract and retain highly skilled managerial, sales, technical and finance personnel. We do not maintain "key person" life insurance policies for our Chief Executive Officer or any of our executive officers. Qualified individuals are in high demand, and we may incur significant costs to attract them. All of our officers and other employees are at-will employees, which means they may terminate their employment relationship with us at any time, and their knowledge of our business and industry would be extremely difficult to replace. If we are unable to attract and retain our executive officers and key employees, our business, operating results and financial condition will be harmed.

          Volatility or lack of performance in our stock price may also affect our ability to attract employees and retain our key employees. Our executive officers have become, or will soon become, vested in a substantial amount of stock or stock options. Employees may be more likely to leave us if the shares they own or the shares underlying their options have significantly appreciated in value relative to the original purchase prices of the shares or the exercise prices of the options, or if the exercise prices of the options that they hold are significantly above the market price of our common stock.

Our industry is undergoing rapid change, and our business model is also evolving, which makes it difficult to evaluate our current business and future prospects and may increase the risk of your investment.

          We derive a significant portion of our revenue from the sale of advertising on the Internet, which is an evolving industry that, in its short history, has undergone rapid and dramatic changes in industry standards and consumer and customer demands. For example, devices through which consumers are accessing information, the types of information being delivered and the types of websites through which consumers access information are all in a rapid state of change. Our business model is also evolving and is distinct from many other companies in our industry, and it may not be successful. In addition, the ways in which online advertisements are delivered are also rapidly changing. For example, an increasing percentage of advertisements are being delivered through social media websites such as Facebook. While we sell social media tools, we currently do not operate any properties that are solely social media sites. If advertisers determine that their yields on such social media sites significantly outstrip their return on other types of websites, such as eHow, our results could be impacted. We need

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to continually evolve our services and the way we deliver them to keep up with such changes to remain relevant to our customers. We may not be able to do so.

The interruption or failure of our information technology and communications systems, or those of third parties that we rely upon, may adversely affect our business, operating results and financial condition.

          The availability of our products and services depends on the continuing operation of our information technology and communications systems. Any damage to or failure of our systems, or those of third parties that we rely upon (co-location providers for data servers, storage devices, and network access) could result in interruptions in our service, which could reduce our revenue and profits, and damage our brand. Our systems are also vulnerable to damage or interruption from earthquakes, terrorist attacks, floods, fires, power loss, telecommunications failures, computer viruses or other attempts to harm our systems. We, and in particular our Registrar, have experienced an increasing number of computer distributed denial of service attacks which have forced us to shut down certain of our websites, including eNom.com. We have implemented certain defenses against these attacks, but we may continue to be subject to such attacks, and future denial of service attacks may cause all or portions of our websites to become unavailable. In addition, some of our data centers are located in areas with a high risk of major earthquakes. Our data centers are also subject to break-ins, sabotage and intentional acts of vandalism, and to potential disruptions if the operators of these facilities have financial difficulties. Some of our systems are not fully redundant, and our disaster recovery planning is currently underdeveloped and does not account for all eventualities. The occurrence of a natural disaster, a decision to close a facility we are using without adequate notice for financial reasons or other unanticipated problems at our data centers could result in lengthy interruptions in our service.

          Furthermore, third-party service providers may experience an interruption in operations or cease operations for any reason. If we are unable to agree on satisfactory terms for continued data center hosting relationships, we would be forced to enter into a relationship with other service providers or assume hosting responsibilities ourselves. If we are forced to switch hosting facilities, we may not be successful in finding an alternative service provider on acceptable terms or in hosting the computer servers ourselves. We may also be limited in our remedies against these providers in the event of a failure of service. We also rely on third-party providers for components of our technology platform, such as hardware and software providers. A failure or limitation of service or available capacity by any of these third-party providers could adversely affect our business, revenue, financial condition and results of operations.

If our security measures are breached and unauthorized access is obtained to a user's or freelance content creator's data, our service may be perceived as not being secure and customers may curtail or stop using our service.

          Our Content & Media and Registrar service offerings involve the storage and transmission of users', Registrar customers' and our freelance content creators' personal information, such as names, social security numbers, addresses, email addresses and credit card and bank account numbers, and security breaches could expose us to a risk of loss of this information, litigation and possible liability. Our payment services may be susceptible to credit card and other payment fraud schemes, including unauthorized use of credit cards, debit cards or bank account information, identity theft or merchant fraud.

          As nearly all of our products and services are Internet based, the amount of data we store for our users on our servers (including personal information) has increased. If our security measures are breached or our systems fail in the future as a result of third-party action, employee error, malfeasance or otherwise, and as a result, someone obtains unauthorized access to our users' and our freelance content creators' data, our reputation and brands will be damaged, the adoption of our products and services could be severely limited, our business may suffer and we could incur significant liability.

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Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. We may also need to expend significant resources to protect against security breaches, including encrypting personal information, or remedy breaches after they occur, including notifying each person whose personal data may have been compromised. The risk that these types of events could seriously harm our business is likely to increase as we expand the number of Internet-based products and services we offer as well as increase the number of countries where we operate. If an actual or perceived breach of our security measures occurs, the market perception of the effectiveness of our security measures and our reputation could be harmed and we could lose sales, advertisers, freelance content creators and customers and potentially face costly litigation.

If we do not adequately protect our intellectual property rights, our competitive position and business may suffer.

          Our intellectual property, consisting of trade secrets, trademarks, copyrights and patents, is, in the aggregate, important to our business. We rely on a combination of trade secret, trademark, copyright and patent laws in the United States and other jurisdictions together with confidentiality agreements and technical measures to protect our proprietary rights. As of September 30, 2010, we have been granted eight patents by the United States Patent and Trademark Office, or USPTO, and we have 19 patent applications pending in the United States and other jurisdictions. Our patents expire between 2021 and 2027. We rely more heavily on trade secret protection than patent protection. To protect our trade secrets, we control access to our proprietary systems and technology and enter into confidentiality and invention assignment agreements with our employees and consultants and confidentiality agreements with other third parties. Effective trade secret, copyright, trademark and patent protection may not be available in all countries where we currently operate or in which we may operate in the future. Some of our systems and technologies are not covered by any copyright, patent or patent application and, because of the relatively high cost we would experience in registering all of our copyrights with the United States Copyright Office, we generally do not register the copyrights associated with our content. We cannot guarantee that:

    our intellectual property rights will provide competitive advantages to us;

    our ability to assert our intellectual property rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties;

    our intellectual property rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak;

    any of the patents, trademarks, copyrights, trade secrets or other intellectual property rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged or abandoned;

    competitors will not design around our protected systems and technology; or

    we will not lose the ability to assert our intellectual property rights against others.

          We have from time to time become aware of third parties who we believe may have infringed or are infringing on our intellectual property rights. The use of our intellectual property rights by others could reduce any competitive advantage we have developed and cause us to lose advertisers and website publishers or otherwise cause harm to our business. Policing unauthorized use of our proprietary rights can be difficult and costly. In addition, it may be necessary to enforce or protect our intellectual property rights through litigation or to defend litigation brought against us, which could result in substantial costs and diversion of resources and management attention and could adversely affect our business, even if we are successful on the merits.

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Confidentiality agreements with employees, consultants and others may not adequately prevent disclosure of trade secrets and other proprietary information.

          We have devoted substantial resources to the development of our proprietary systems and technology. Although we enter into confidentiality agreements with our employees, consultants, independent contractors and other advisors, these agreements may not effectively prevent or provide remedies for unauthorized disclosure of confidential information or unauthorized parties from copying aspects of our services or obtaining and using information that we regard as proprietary. Others may independently discover or develop trade secrets and proprietary information, and in such cases we may not be able to assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could reduce any competitive advantage we have and cause us to lose customers and advertisers, or otherwise cause harm to our business.

Third parties may sue us for intellectual property infringement or misappropriation which, if successful, could require us to pay significant damages or curtail our offerings.

          We cannot be certain that our internally-developed or acquired systems and technologies do not and will not infringe the intellectual property rights of others. In addition, we license content, software and other intellectual property rights from third parties and may be subject to claims of infringement or misappropriation if such parties do not possess the necessary intellectual property rights to the products or services they license to us. We have in the past and may in the future be subject to legal proceedings and claims that we have infringed the patent or other intellectual property rights of a third party. These claims sometimes involve patent holding companies or other patent owners who have no relevant product revenue and against whom our own patents may provide little or no deterrence. In addition, third parties may in the future assert intellectual property infringement claims against our customers, which we have agreed in certain circumstances to indemnify and defend against such claims. Any intellectual property-related infringement or misappropriation claims, whether or not meritorious, could result in costly litigation and could divert management resources and attention. Moreover, should we be found liable for infringement or misappropriation, we may be required to enter into licensing agreements, if available on acceptable terms or at all, pay substantial damages or limit or curtail our systems and technologies. Also, any successful lawsuit against us could subject us to the invalidation of our proprietary rights. Moreover, we may need to redesign some of our systems and technologies to avoid future infringement liability. Any of the foregoing could prevent us from competing effectively and increase our costs.

Certain U.S. and foreign laws could subject us to claims or otherwise harm our business.

          We are subject to a variety of laws in the U.S. and abroad that may subject us to claims or other remedies. Our failure to comply with applicable laws may subject us to additional liabilities, which could adversely affect our business, financial condition and results of operations. Laws and regulations that are particularly relevant to our business address:

    privacy;

    freedom of expression;

    information security;

    pricing, fees and taxes;

    content and the distribution of content, including liability for user reliance on such content;

    intellectual property rights, including secondary liability for infringement by others;

    taxation;

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    domain name registration; and

    online advertising and marketing, including email marketing and unsolicited commercial email.

          Many applicable laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues of the Internet. Moreover, the applicability and scope of the laws that do address the Internet remain uncertain. For example, the laws relating to the liability of providers of online services are evolving. Claims have been either threatened or filed against us under both U.S. and foreign laws for defamation, copyright infringement, cybersquatting and trademark infringement. In the future, claims may also be alleged against us based on tort claims and other theories based on our content, products and services or content generated by our users.

          We receive, process and store large amounts of personal data of users on our owned and operated websites and from our freelance content creators. Our privacy and data security policies govern the collection, use, sharing, disclosure and protection of this data. The storing, sharing, use, disclosure and protection of personal information and user data are subject to federal, state and international privacy laws, the purpose of which is to protect the privacy of personal information that is collected, processed and transmitted in or from the governing jurisdiction. If requirements regarding the manner in which certain personal information and other user data are processed and stored change significantly, our business may be adversely affected, impacting our financial condition and results of operations. In addition, we may be exposed to potential liabilities as a result of differing views on the level of privacy required for consumer and other user data we collect. We may also need to expend significant resources to protect against security breaches, including encrypting personal information, or remedy breaches after they occur, including notifying each person whose personal data may have been compromised. Our failure or the failure of various third-party vendors and service providers to comply with applicable privacy policies or applicable laws and regulations or any compromise of security that results in the unauthorized release of personal information or other user data could adversely affect our business, revenue, financial condition and results of operations.

          Our business operations in countries outside the United States are subject to a number of United States federal laws and regulations, including restrictions imposed by the Foreign Corrupt Practices Act, or FCPA, as well as trade sanctions administered by the Office of Foreign Assets Control, or OFAC, and the Commerce Department. The FCPA is intended to prohibit bribery of foreign officials or parties and requires public companies in the United States to keep books and records that accurately and fairly reflect those companies' transactions. OFAC and the Commerce Department administer and enforce economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign states, organizations and individuals.

          If we fail to comply with these laws and regulations, we could be exposed to claims for damages, financial penalties, reputational harm, incarceration of our employees or restrictions on our operations, which could increase our costs of operations, reduce our profits or cause us to forgo opportunities that would otherwise support our growth.

We are subject to a number of risks related to credit card payments we accept. If we fail to be in compliance with applicable credit card rules and regulations, we may incur additional fees, fines and ultimately the revocation of the right to accept credit card payments, which would have a material adverse effect on our business, financial condition or results of operations.

          Many of the customers of our Content & Media and Registrar service offerings pay amounts owed to us using a credit card or debit card. For credit and debit card payments, we pay interchange and other fees, which may increase over time and raise our operating expenses and adversely affect our net income. We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. We believe we are compliant with the Payment Card Industry

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Data Security Standard, which incorporates Visa's Cardholder Information Security Program and MasterCard's Site Data Protection standard. However, there is no guarantee that we will maintain such compliance or that compliance will prevent illegal or improper use of our payment system. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees and lose our ability to accept credit and debit card payments from our customers. A failure to adequately control fraudulent credit card transactions would result in significantly higher credit card-related costs and could have a material adverse effect on our business, revenue, financial condition and results of operations.

New tax treatment of companies engaged in Internet commerce may adversely affect the commercial use of our marketing services and our financial results.

          Due to the global nature of the Internet, it is possible that, although our services and the Internet transmissions related to them originate in California, Texas, Illinois, Virginia and the Netherlands, governments of other states or foreign countries might attempt to regulate our transmissions or levy sales, income or other taxes relating to our activities. Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in Internet commerce. New or revised international, federal, state or local tax regulations may subject us or our customers to additional sales, income and other taxes. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over the Internet. New or revised taxes and, in particular, sales taxes, would likely increase the cost of doing business online and decrease the attractiveness of advertising and selling goods and services over the Internet. New taxes could also create significant increases in internal costs necessary to capture data, and collect and remit taxes. Any of these events could have an adverse effect on our business and results of operations.

A reclassification of our freelance content creators from independent contractors to employees by tax authorities could require us to pay retroactive taxes and penalties and significantly increase our cost of operations.

          As of September 30, 2010, we contracted with over 13,000 freelance content creators as independent contractors to create content for our owned and operated websites and for our network of customer websites. Because we consider our freelance content creators with whom we contract to be independent contractors, as opposed to employees, we do not withhold federal or state income or other employment related taxes, make federal or state unemployment tax or Federal Insurance Contributions Act payments, or provide workers' compensation insurance with respect to such freelance content creators. Our contracts with our independent contractor freelance content creators obligate these freelance content creators to pay these taxes. The classification of freelance content creators as independent contractors depends on the facts and circumstances of the relationship. In the event of a determination by federal or state taxing authorities that the freelance content creators engaged as independent contractors are employees, we may be adversely affected and subject to retroactive taxes and penalties. In addition, if it was determined that our content creators were employees, the costs associated with content creation would increase significantly and our financial results would be adversely affected.

We rely on outside providers for our billing, collection, payment processing and payroll. If these outside service providers are not able to fulfill their service obligations, our business and operations could be disrupted, and our operating results could be harmed.

          Outside providers perform various functions for us, such as billing, collection, payment processing and payroll. These functions are critical to our operations and involve sensitive interactions between us and our advertisers, customers and employees. Although in some instances we have implemented service level agreements and have established monitoring controls, if we do not successfully manage our

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service providers or if the service providers do not perform satisfactorily to agreed-upon service levels, our operations could be disrupted resulting in advertiser, customer or employee dissatisfaction. In addition, our business, revenue, financial condition and results of operations could be adversely affected.

Our credit facility with a syndicate of commercial banks contains financial and other restrictive covenants which, if breached, could result in the acceleration of our outstanding indebtedness.

          Our existing credit facility with a syndicate of commercial banks contains financial covenants that require, among other things, that we maintain a minimum fixed charge coverage ratio and a maximum net senior leverage ratio. In addition, our credit facility with a syndicate of commercial banks contains covenants restricting our ability to, among other things:

    incur additional debt or incur or permit to exist certain liens;

    pay dividends or make other distributions or payments on capital stock;

    make investments and acquisitions;

    enter into transactions with affiliates; and

    transfer or sell our assets.

          These covenants could adversely affect our ability to finance our future operations or capital needs or to pursue available business opportunities, including acquisitions. A breach of any of these covenants could result in a default and acceleration of our indebtedness. Furthermore, if the syndicate is unwilling to waive certain covenants, we may be forced to amend our credit facility on terms less favorable than current terms or enter into new financing arrangements. As of September 30, 2010, we had no indebtedness outstanding under this facility.

We may need additional funding to meet our obligations and to pursue our business strategy. Additional funding may not be available to us and our financial condition could therefore be adversely affected.

          We may require additional funding to meet our ongoing obligations and to pursue our business strategy, which may include the selective acquisition of businesses and technologies. There can be no assurance that if we were to need additional funds that additional financing arrangements would be available in amounts or on terms acceptable to us, if at all. Furthermore, if adequate additional funds are not available, we may be required to delay, reduce the scope of or eliminate material parts of the implementation of our business strategy, including potential additional acquisitions or internally-developed businesses.

We have made and may make additional acquisitions that could entail significant execution, integration and operational risks.

          We have made numerous acquisitions in the past and our future growth may depend, in part, on acquisitions of complementary websites, businesses, solutions or technologies rather than internal development. We may consider making acquisitions in the future to increase the scope of our business domestically and internationally. The identification of suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions. If we are unable to identify suitable future acquisition opportunities, reach agreement with such parties or obtain the financing necessary to make such acquisitions, we could lose market share to competitors who are able to make such acquisitions. This loss of market share could negatively impact our business, revenue and future growth.

          Furthermore, even if we successfully complete an acquisition, we may not be able to successfully assimilate and integrate the websites, business, technologies, solutions, personnel or operations of the

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company that we acquired, particularly if key personnel of an acquired company decide not to work for us. In addition, we may incur indebtedness to complete an acquisition, which would increase our costs and impose operational limitations, or issue equity securities, which would dilute our stockholders' ownership and could adversely affect the price of our common stock. We may also unknowingly inherit liabilities from previous or future acquisitions that arise after the acquisition and are not adequately covered by indemnities.

Impairment in the carrying value of goodwill or long-lived assets could negatively impact our consolidated results of operations and net worth.

          Goodwill represents the excess of cost of an acquired entity over the fair value of the acquired net assets. Goodwill is not amortized, but is reviewed for impairment at least annually or more frequently if impairment indicators are present. In general, long-lived assets are only reviewed for impairment if impairment indicators are present. In assessing goodwill and long-lived assets for impairment, we make significant estimates and assumptions, including estimates and assumptions about market penetration, anticipated growth rates and risk-adjusted discount rates based on our budgets, business plans, economic projections, anticipated future cash flows and industry data. Some of the estimates and assumptions used by management have a high degree of subjectivity and require significant judgment on the part of management. Changes in estimates and assumptions in the context of our impairment testing may have a material impact on us, and any potential impairment charges could substantially affect our financial results in the periods of such charges.

The impact of worldwide economic conditions may adversely affect our business, operating results and financial condition.

          Our performance is subject to worldwide economic conditions. We believe that the current recession has adversely affected our business. To the extent that the current economic recession continues, or worldwide economic conditions materially deteriorate, our existing and potential advertisers and customers may no longer use our content or register domain names through our Registrar service offering, or our advertisers may elect to reduce advertising budgets. Historically, economic downturns have resulted in overall reductions in advertising spending. In particular, online advertising may be viewed by some of our existing and potential advertisers and customers as a lower priority and may be among the first expenditures reduced as a result of unfavorable economic conditions. These developments could have an adverse effect on our business, revenue, financial condition and results of operations.


Risks Relating to Owning Our Common Stock

An active, liquid and orderly market for our common stock may not develop or be sustained, and the trading price of our common stock is likely to be volatile.

          Prior to this offering, there has been no public market for shares of our common stock. An active trading market for our common stock may not develop or be sustained, which could depress the market price of our common stock and could affect your ability to sell your shares. The initial public offering price will be determined through negotiations between us and the representatives of the underwriters and may bear no relationship to the price at which our common stock will trade following the completion of this offering. The trading price of our common stock following this offering is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this "Risk Factors" section and elsewhere in this prospectus, these factors include:

    our operating performance and the operating performance of similar companies;

    the overall performance of the equity markets;

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    the number of shares of our common stock publicly owned and available for trading;

    threatened or actual litigation;

    changes in laws or regulations relating to our solutions;

    any major change in our board of directors or management;

    publication of research reports about us or our industry or changes in recommendations or withdrawal of research coverage by securities analysts;

    large volumes of sales of our shares of common stock by existing stockholders; and

    general political and economic conditions.

          In addition, the stock market in general, and the market for Internet-related companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company's securities. This litigation, if instituted against us, could result in very substantial costs, divert our management's attention and resources and harm our business, operating results and financial condition. In addition, the recent distress in the financial markets has also resulted in extreme volatility in security prices.

The large number of shares eligible for public sale or subject to rights requiring us to register them for public sale could depress the market price of our common stock.

          The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering, and the perception that these sales could occur may also depress the market price of our common stock. Based on shares outstanding as of September 30, 2010, we will have                   shares of common stock outstanding after this offering. This number is comprised of all the shares of our common stock that we are selling in this offering, which may be resold immediately in the public market. The holders of            shares of outstanding common stock have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock until 180-days following the date of this prospectus, except with the prior written consent each of Goldman, Sachs & Co. and Morgan Stanley & Co. Incorporated. After the expiration of the 180-day restricted period, these shares may be sold in the public market in the United States, subject to prior registration in the United States, if required, or reliance upon an exemption from U.S. registration, including, in the case of shares held by affiliates or control persons, compliance with the volume restrictions of Rule 144.

Number of Shares and
% of Total Outstanding
  Date Available for Sale into Public Markets
            or        %   Immediately after this offering.

            or        %

 

180 days after the date of this prospectus due to contractual obligations and lock-up agreements. However, the underwriters can waive the provisions of these lock-up agreements and allow these stockholders to sell their shares at any time, provided their respective six-month holding periods under Rule 144 have expired.

            or        %

 

From time to time after the date 180 days after the date of this prospectus upon expiration of their respective one-year holding periods in the U.S.

          Any participant in the directed share program who purchases more than $1,000,000 of shares will be subject to a 25-day lock-up with respect to any shares sold to him or her pursuant to that program.

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          Following the date that is 180 days after the completion of this offering, stockholders owning an aggregate of                        shares will be entitled, under contracts providing for registration rights, to require us to register shares of our common stock owned by them for public sale in the United States, subject to the restrictions of Rule 144. In addition, we intend to file a registration statement to register the approximately                        shares previously issued or reserved for future issuance under our equity compensation plans and agreements. Upon effectiveness of that registration statement, subject to the satisfaction of applicable exercise periods and, in certain cases, lock-up agreements with the representatives of the underwriters referred to above, the shares of common stock issued upon exercise of outstanding options will be available for immediate resale in the United States in the open market.

          Sales of our common stock as restrictions end or pursuant to registration rights may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales also could cause our stock price to fall and make it more difficult for you to sell shares of our common stock.

          We also may issue our shares of common stock from time to time as consideration for future acquisitions and investments. If any such acquisition or investment is significant, the number of shares that we may issue may in turn be significant. In addition, we may also grant registration rights covering those shares in connection with any such acquisitions and investments.

Investors purchasing common stock in this offering will experience immediate and substantial dilution.

          The assumed initial public offering price of our common stock is substantially higher than the net tangible book value per outstanding share of our common stock immediately after this offering. As a result, you will pay a price per share that substantially exceeds the book value of our tangible assets after subtracting our liabilities. Purchasers of our common stock in this offering will incur immediate and substantial dilution of $        per share in the net tangible book value of our common stock based upon an assumed initial public offering price of $        per share, which is the mid-point of the range set forth on the cover of this prospectus. If the underwriters exercise in full their option to purchase additional shares, there will be an additional dilution of $        per share in the net tangible book value of our common stock, assuming the same public offering price.

As a result of becoming a public company, we will be obligated to develop and maintain proper and effective internal controls over financial reporting and will be subject to other requirements that will be burdensome and costly. We may not complete our analysis of our internal controls over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.

          We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting, as well as a statement that our auditors have issued an attestation report on our management's assessment of our internal controls.

          We are just beginning the costly and challenging process of compiling the system and processing documentation before we perform the evaluation needed to comply with Section 404. We may not be able to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our auditors are unable to attest that our management's report is fairly stated or they are unable to express an opinion on the effectiveness of our internal control, we could lose investor confidence in the accuracy and

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completeness of our financial reports, which would have a material adverse effect on the price of our common stock. Failure to comply with the new rules might make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we might be forced to accept reduced policy limits and coverage and/or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors, or as executive officers.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

          The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no securities or industry analysts commence coverage of our company, the trading price for our stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our stock or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our stock could decrease, which might cause our stock price and trading volume to decline.

We do not anticipate paying cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.

          The terms of our credit agreement currently prohibit us from paying cash dividends on our common stock. In addition, we do not anticipate paying cash dividends in the future. As a result, only appreciation of the price of our common stock, which may never occur, will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock.

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

          Our management will generally have broad discretion to use the net proceeds to us from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds from this offering in ways that increase the value of your investment. We expect that we will use the net proceeds of this offering for investments in content, working capital, product development, sales and marketing activities, general and administrative matters, capital expenditures and international expansion. We have not otherwise allocated the net proceeds from this offering for any specific purposes. Until we use the net proceeds to us from this offering, we plan to invest them, and these investments may not yield a favorable rate of return. If we do not invest or apply the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.

Certain provisions in our charter documents and Delaware law could discourage takeover attempts and lead to management entrenchment.

          Our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of our board of directors, including, among other things:

    a classified board of directors with three-year staggered terms, which may delay the ability of stockholders to change the membership of a majority of our board of directors;

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    no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

    the ability of our board of directors to determine to issue shares of preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

    the exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

    a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

    the requirement that a special meeting of stockholders may be called only by the chairman of our board of directors, the Chief Executive Officer, the president (in absence of a Chief Executive Officer) or our board of directors, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;

    the requirement for the affirmative vote of holders of at least 662/3% of the voting power of all of the then outstanding shares of the voting stock, voting together as a single class, to amend the provisions of our amended and restated certificate of incorporation relating to the issuance of preferred stock and management of our business or our amended and restated bylaws, which may inhibit the ability of an acquiror from amending our certificate of incorporation or bylaws to facilitate a hostile acquisition;

    the ability of our board of directors, by majority vote, to amend the bylaws, which may allow our board of directors to take additional actions to prevent a hostile acquisition and inhibit the ability of an acquiror from amending the bylaws to facilitate a hostile acquisition; and

    advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted upon at a stockholders' meeting, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror's own slate of directors or otherwise attempting to obtain control of us.

          We are also subject to certain anti-takeover provisions under Delaware law. Under Delaware law, a corporation may not, in general, engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, our board of directors has approved the transaction.

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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

          This prospectus, including the sections entitled "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business" contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations, are forward-looking statements. The words "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect" and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in "Risk Factors." Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

          You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

          You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.


MARKET, INDUSTRY AND OTHER DATA

          Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our services. These data involve a number of assumptions and limitations. While we believe the market position, market opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in "Risk Factors" and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

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USE OF PROCEEDS

          We estimate that our net proceeds from the sale of 4,500,000 shares of common stock in this offering will be approximately $       million, based upon an assumed initial public offering price of $        per share, which is the mid-point of the range set forth on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses that we must pay in connection with this offering. Each $1.00 increase or decrease in the assumed initial public offering price of $        per share, which is the mid-point of the range set forth on the cover of this prospectus, would increase or decrease our net proceeds by approximately $     million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

          If the underwriters option to purchase additional shares in this offering is exercised in full, we estimate that our net proceeds will be approximately $       million, based upon an assumed initial public offering price of $        per share, which is the mid-point of the range set forth on the cover of this prospectus, and after deducting estimated underwriter discounts and commissions and estimated offering expenses that we must pay in connection with this offering.

          We will not receive any proceeds from the sale of shares of common stock by the selling stockholders, including any shares of common stock sold by the selling stockholders in connection with the underwriters' exercise of their option to purchase additional shares of common stock, although we will bear the costs, other than underwriting discounts and commissions, associated with the sale of these shares. The selling stockholders may include certain of our executive officers and members of our board of directors or entities affiliated with or controlled by them.

          We intend to use the net proceeds from this offering for investments in content, working capital, product development, sales and marketing activities, general and administrative matters, capital expenditures and international expansion. We currently anticipate that our aggregate investments in content during the year ending December 31, 2011 will range from $50 million to $75 million. We intend to fund a portion of these estimated investments with the proceeds of the offering, although as of the date of this prospectus, we cannot estimate the amount of net proceeds that will be used for the other purposes described above. The amounts and timing of our actual expenditures, including content investments, will depend on numerous factors, including data supporting our predicted internal rates of return, the status of our product development efforts, our sales and marketing activities, the amount of cash generated or used by our operations, and competitive pressures. We believe that we will be able to fund our content investments and other expenditures described above through 2011 with our cash flow from operations, our existing cash balances and the availability under our revolving credit facility and without using the net proceeds from this offering. Our management will have broad discretion over the uses of the net proceeds in this offering. Pending these uses, we intend to invest the net proceeds from this offering in short-term, investment-grade interest-bearing securities such as money market accounts, certificates of deposit, commercial paper and guaranteed obligations of the U.S. government.

          Some of the other principal purposes of this offering are to create a public market for our common stock and increase our visibility in the marketplace. A public market for our common stock will facilitate future access to public equity markets and enhance our ability to use our common stock as a means of attracting and retaining key employees and as consideration for acquisitions or strategic transactions.

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DIVIDEND POLICY

          We have never declared or paid cash dividends on our common or convertible preferred stock. We currently do not anticipate paying any cash dividends in the foreseeable future. Instead, we anticipate that all of our earnings on our common stock will be used to provide working capital, to support our operations and to finance the growth and development of our business. Any future determination to declare cash dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. In addition, our credit agreement with a syndicate of commercial banks prohibits our payment of dividends.

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CAPITALIZATION

          The following table sets forth our capitalization as of September 30, 2010:

    on an actual basis;

    on a pro forma basis giving effect to (i) the automatic conversion of all outstanding preferred stock into an aggregate of 61,672,256 shares of common stock upon completion of this offering, (ii) the issuance of            shares of common stock upon the net exercise of common stock warrants and a convertible preferred stock warrant, respectively, that would otherwise expire upon the completion of this offering based upon an assumed initial public offering price of $        per share, which is the mid-point of the range set forth on the cover of this prospectus and (iii) the filing and effectiveness of our amended and restated certificate of incorporation immediately prior to the closing of this offering; and

    on a pro forma, as adjusted basis, giving effect to the pro forma adjustments and our receipt of the net proceeds from the sale by us in this offering of 4,500,000 shares of common stock based upon an assumed initial public offering price of $        per share, which is the mid-point of the range set forth on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

          You should read this table together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus.

 
  As of September 30, 2010  
 
  Actual   Pro Forma   Pro Forma
As Adjusted(1)
 
 
  (in thousands, except per share data)
 

Cash and cash equivalents

  $ 29,230   $ 29,230   $    
               

Preferred stock warrant liability

    387            

Convertible preferred stock, par value $0.0001; 200,000,000 shares authorized, 123,344,512 shares issued and outstanding, actual; no shares authorized, issued and outstanding pro forma and pro forma as adjusted

    373,754            

Stockholders' equity:

                   
 

Preferred stock, par value $0.0001; no shares authorized, issued and outstanding, actual; 200,000,000 shares authorized, pro forma, 25,000,000 shares authorized, pro forma as adjusted; no shares issued and outstanding, pro forma and pro forma as adjusted

               
               
 

Common stock, par value $0.0001; 500,000,000 shares authorized; 15,217,051 shares issued and outstanding, actual; 500,000,000 shares authorized pro forma and pro forma as adjusted;                   shares issued and outstanding, pro forma;                   shares issued and outstanding, pro forma as adjusted(2)

    2     8        
 

Additional paid-in capital

    33,671     407,806        
 

Accumulated deficit

    (52,044 )   (52,044 )      
 

Accumulated other comprehensive income

    107     107        
               
   

Total stockholders' (deficit) equity

    (18,264 )   355,877        
               

Total capitalization

  $ 355,877   $ 355,877   $    
               

(1)
A $1.00 increase (decrease) in the assumed initial public offering price of $        per share of our common stock in this offering, which is the midpoint of the range set forth on the cover of this

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    prospectus, would increase (decrease) each of cash and cash equivalents, additional paid-in capital, total stockholders' (deficit) equity and total capitalization by $     million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The share information in the table above excludes, as of September 30, 2010:

    19,024,633 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2010 to purchase our common stock at a weighted average exercise price of $11.72 per share;

    131,000 shares of common stock issuable upon the exercise of options granted on October 27, 2010 pursuant to our 2010 Incentive Award Plan at a weighted average exercise price of $15.36 per share;

    12,500 restricted stock units granted on October 27, 2010 pursuant to our 2010 Incentive Award Plan;

    15,500,000 shares of common stock reserved for issuance under our 2010 Incentive Award Plan and 10,000,000 shares of our common stock reserved for issuance under our 2010 Employee Stock Purchase Plan, as well as shares that become available under the 2010 Incentive Award Plan due to shares subject to awards under our Amended and Restated 2006 Equity Incentive Plan that terminate, expire or lapse for any reason and pursuant to provisions in the 2010 Incentive Award Plan that automatically increase the share reserve under the plan each year, as more fully described in "Executive Compensation—Equity Incentive Plans"; and

    The issuance of 375,000 shares of common stock upon the exercise of a common stock warrant that does not expire upon the completion of this offering.

(2)
The number of shares of our common stock to be issued upon the conversion of our outstanding shares of Series D Preferred Stock depends in part on the initial offering price and the date of the consummation of our public offering. This is because, as further described in "Related Party Transactions," the terms of our Series D Preferred Stock provide that the ratio at which each share of Series D Preferred Stock automatically converts into shares of our common stock in connection with a qualified financing will increase if the qualified financing is priced below a specified minimum dollar amount per share of common stock. The specified minimum dollar amount with respect to this offering depends on the completion date of this offering. As of September 30, 2010, an initial public offering price below $15.82 per share would result in an increase in the conversion ratio of our Series D Preferred Stock. Pricing at this point or higher would have no additional impact on our outstanding shares of common stock. In addition, assuming that the closing of this offering occurs on                         , 2010:

An initial public offering price of $        per share would result in an increase in the number of shares of common stock outstanding after this offering by approximately            shares;

An initial public offering price of $        per share would result in an increase in the number of shares of common stock outstanding after this offering by approximately            shares;

An initial public offering price of $        per share would result in an increase in the number of shares of common stock outstanding after this offering by approximately            shares; and

An initial public offering price below $        per share would result in a further increase in the number of shares of common stock outstanding after this offering.

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DILUTION

          If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after the offering. After giving effect to a 1-for-2 reverse stock split of our common stock and a corresponding adjustment to the conversion price of all outstanding convertible preferred stock and the automatic conversion of our preferred stock in connection with this offering, our pro forma historical net tangible book value of our common stock as of September 30, 2010 was $31.9 million, or $      per share. Historical net tangible book value per share represents the amount of our total tangible assets reduced by the amount of our total liabilities and divided by the number of shares of our outstanding common stock.

          After giving effect to the (i) above referenced reverse stock split and the automatic conversion of all outstanding preferred stock into an aggregate of 61,672,256 shares of common stock upon completion of this offering, (ii) the issuance of             shares of common stock upon the net exercise of common stock warrants and a convertible preferred stock warrant, respectively that would otherwise expire upon the completion of this offering based upon an assumed initial public offering price of $         per share, which is the mid-point of the range set forth on the cover of this prospectus and (iii) receipt of the net proceeds from our sale of 4,500,000 shares of common stock in this offering based upon an assumed initial public offering price of $        per share, which is the mid-point of the range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of September 30, 2010 would have been approximately $       million, or $      per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $       per share to existing stockholders and an immediate dilution of $        per share to new investors purchasing common stock in this offering.

          The following table illustrates this dilution on a per share basis to new investors:

Assumed initial public offering price per share

        $    
 

Pro forma net tangible book value per share as of September 30, 2010

  $          
 

Increase per share attributable to this offering from new investors

             
             

Pro forma net tangible book value per share, as adjusted to give effect to this offering

             
             

Dilution per share to new investors in this offering

        $    
             

          If the underwriters exercise their option to purchase additional shares of our common stock in full, based upon an assumed initial public offering price of $        per share, which is the mid-point of the range set forth on the cover of this prospectus, the pro forma as adjusted net tangible book value per share after this offering would be $      per share, and the dilution in pro forma net tangible book value per share to new investors in this offering would be $         per share.

          The number of shares of our common stock to be issued upon the conversion of our outstanding shares of Series D Preferred Stock depends in part on the initial offering price and the date of the consummation of our public offering. This is because, as further described in "Related Party Transactions," the terms of our Series D Preferred Stock provide that the ratio at which each share of Series D Preferred Stock automatically converts into shares of our common stock in connection with a qualified financing will increase if the qualified financing is priced below a specified minimum dollar amount per share of common stock. The specified minimum dollar amount with respect to this offering depends on the completion date of this offering. As of September 30, 2010, an initial public offering price below $15.82 per share would result in an increase in the conversion ratio of our Series D Preferred Stock. Pricing at this point or higher would have no additional impact on our outstanding

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shares of common stock. Accordingly, assuming that the closing of this offering occurs on                        , 2010:

    A $1.00 increase in the assumed public offering price of $        per share, the mid-point of the range set forth on the cover of this prospectus, would increase our pro forma as adjusted net tangible book value by $      per share, and increase the dilution to new investors by $      per share, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us;

    A $1.00 decrease in the assumed public offering price of $        per share, the mid-point of the range set forth on the cover of this prospectus, would decrease our pro forma as adjusted net tangible book value by $      per share, and decrease the dilution to new investors by $      per share, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us;

    A $2.00 increase in the assumed public offering price of $        per share, the mid-point of the range set forth on the cover of this prospectus, would increase our pro forma as adjusted net tangible book value by $      per share, and increase the dilution to new investors by $      per share, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us;

    A $2.00 decrease in the assumed public offering price of $        per share, the mid-point of the range set forth on the cover of this prospectus, would decrease our pro forma as adjusted net tangible book value by $      per share, and decrease the dilution to new investors by $      per share, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us;

    More than a $2.00 increase in the assumed public offering price of $            per share, the mid-point of the range set forth on the cover of this prospectus, would further increase our pro forma as adjusted net tangible book value, and further increase the dilution to new investors; and

    More than a $2.00 decrease in the assumed public offering price of $            per share, the mid-point of the range set forth on the cover of this prospectus, would further decrease our pro forma as adjusted net tangible book value, and further decrease the dilution to new investors.

          The following table sets forth, as of September 30, 2010, on a pro forma as adjusted basis, the differences between existing stockholders and new investors with respect to the total number of shares of common stock purchased from us, the total consideration paid and the average price per share paid before deducting underwriting discounts and commissions and estimated offering expenses payable by us, based upon an assumed initial public offering price of $        per share of common stock, which is the mid-point of the range set forth on the cover of this prospectus:

 
   
   
  Total
Consideration
   
 
 
  Total Shares    
 
 
  Average
Price Per
Share
 
 
  Number   Percent   Amount   Percent  

Existing stockholders

            % $         % $    

New stockholders in this offering

    4,500,000       %           %      
                         
 

Total

          100 % $       100 %      
                         

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          Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to                  shares, or    % of the total number of shares of our common stock outstanding after this offering. If the underwriters' option to purchase additional shares is exercised in full, the number of shares held by existing stockholders after this offering would be reduced to                  , or    %, of the total number of shares of our common stock outstanding after this offering.

          As discussed above, the number of shares of our common stock to be issued upon the conversion of our outstanding shares of Series D Preferred Stock depends in part on the initial offering price and the date of the consummation of our public offering. Accordingly, assuming that the closing of this offering occurs on                        , 2010, upon completion of this offering at:

    A $1.00 increase in the assumed public offering price of $        per share, the mid-point of the range set forth on the cover of this prospectus, would increase total consideration paid by new investors and total consideration paid by all stockholders by approximately $     million, and result in our existing stockholders owning    % and new investors owning    % of the total number of shares of common stock outstanding;

    A $1.00 decrease in the assumed public offering price of $        per share, the mid-point of the range set forth on the cover of this prospectus, would decrease total consideration paid by new investors and total consideration paid by all stockholders by approximately $     million, and result in our existing stockholders owning    % and new investors owning    % of the total number of shares of common stock outstanding;

    A $2.00 increase in the assumed public offering price of $        per share, the mid-point of the range set forth on the cover of this prospectus, would increase total consideration paid by new investors and total consideration paid by all stockholders by approximately $     million, and result in our existing stockholders owning    % and new investors owning    % of the total number of shares of common stock outstanding;

    A $2.00 decrease in the assumed public offering price of $        per share, the mid-point of the range set forth on the cover of this prospectus, would decrease total consideration paid by new investors and total consideration paid by all stockholders by approximately $     million, and result in our existing stockholders owning    % and new investors owning    % of the total number of shares of common stock outstanding;

    More than a $2.00 increase in the assumed public offering price of $            per share, the mid-point of the range set forth on the cover of this prospectus, would further increase total consideration paid by new investors and total consideration paid by all stockholders; and

    More than a $2.00 decrease in the assumed public offering price of $            per share, the mid-point of the range set forth on the cover of this prospectus, would further decrease total consideration paid by new investors and total consideration paid by all stockholders, and result in our existing stockholders owning a larger percentage and new investors owning a smaller percentage of the total number of shares of common stock outstanding.

          The above discussion and tables are based on a pro forma, as adjusted basis, of                  shares of common stock issued and outstanding as of September 30, 2010, and excludes:

    19,024,633 shares of common stock issuable upon the exercise of options outstanding as of September 30, 2010 to purchase our common stock at a weighted average exercise price of $11.72 per share;

    131,000 shares of common stock issuable upon the exercise of options granted October 27, 2010 pursuant to our 2010 Incentive Award Plan at a weighted average exercise price of $15.36 per share;

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    12,500 restricted stock units granted on October 27, 2010 pursuant to our 2010 Incentive Award Plan;

    15,500,000 shares of common stock reserved for issuance under our 2010 Incentive Award Plan and 10,000,000 shares of our common stock reserved for issuance under our 2010 Employee Stock Purchase Plan, as well as shares that become available under the 2010 Incentive Award Plan due to shares subject to awards under our Amended and Restated 2006 Equity Incentive Plan that terminate, expire or lapse for any reason and pursuant to provisions in the 2010 Incentive Award Plan that automatically increase the share reserve under the plan each year, as more fully described in "Executive Compensation—Equity Incentive Plans"; and

    The issuance of 375,000 shares of common stock upon the exercise of a common stock warrant that does not expire upon the completion of this offering.

          To the extent that any outstanding options or warrants are exercised, new investors will experience further dilution.

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

          Demand Media was incorporated on March 23, 2006 and had no substantive business activities prior to the acquisition of eNom, Inc in April 2006. As a result eNom is considered to be the Predecessor company (the "Predecessor"). eNom had a fiscal year ended September 30.

          The consolidated statements of operations data for the nine months ended December 31, 2007 and the two years ended December 31, 2008 and 2009, as well as the consolidated balance sheet data as of December 31, 2008 and 2009, are derived from our audited consolidated financial statements that are included elsewhere in this prospectus. The consolidated statements of operations data for the year ended September 30, 2005, seven months ended April 28, 2006 and the year ended March 31, 2007, as well as the consolidated balance sheet data as of September 30, 2005, April 28, 2006, March 31, 2007 and December 31, 2007, are derived from audited consolidated financial statements not included in this prospectus. The consolidated statements of operations data for the nine months ended September 30, 2009 and 2010 and balance sheet data as of September 30, 2010 are derived from our unaudited consolidated financial statements that are included elsewhere in this prospectus. The unaudited consolidated financial statements were prepared on a basis consistent with our audited consolidated financial statements and include, in the opinion of management, all adjustments necessary, which include only normal recurring adjustments, for the fair statement of the financial information contained in those statements. The historical results presented below are not necessarily indicative of financial results to be achieved in future periods.

          The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus.

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  Predecessor   Successor  
 
  Year ended
September 30,
  Seven
Months
ended
April 28,
  Year
ended
March 31,
  Nine Months
ended
December 31,
  Year ended
December 31,
  Nine Months
ended
September 30,
 
 
  2005   2006   2007(3)   2007(3)   2008(3)   2009   2009   2010  
 
  (in thousands, except per share data)
 

Consolidated Statements of Operations:

                                                 

Revenue

  $ 38,967   $ 30,145   $ 58,978   $ 102,295   $ 170,250   $ 198,452   $ 142,965   $ 179,357  

Operating expenses

                                                 
 

Service costs (exclusive of amortization of intangible assets)

    26,371     19,515     26,723     57,833     98,238     114,482     82,941     95,209  
 

Sales and marketing

    1,751     1,224     3,016     3,601     15,360     19,994     14,324     16,805  
 

Product development

    3,032     2,773     9,3383     10,965     14,407     21,502     15,253     19,136  
 

General and administrative

    3,328     3,514     8,826     19,584     28,191     28,358     21,076     27,035  
 

Amortization of intangible assets

    941     854     15,074     17,393     33,204     32,152     24,254     24,482  
                                   
   

Total operating expenses

    35,423     27,880     62,977     109,376     189,400     216,488     157,848     182,667  
                                   

Income (loss) from operations

    3,544     2,265     (3,999 )   (7,081 )   (19,150 )   (18,036 )   (14,883 )   (3,310 )
                                   

Other income (expense)

                                                 
 

Interest income

    10     60     1,772     1,415     1,636     494     285     19  
 

Interest expense

    (36 )   (7 )   (3,206 )   (1,245 )   (2,131 )   (1,759 )   (1,508 )   (517 )
 

Other income (expense), net

    (55 )   100     54     (999 )   (250 )   (19 )   (2 )   (164 )
                                   
   

Total other income (expense)

    (81 )   153     (1,380 )   (829 )   (745 )   (1,284 )   (1,225 )   (662 )
                                   

Income (loss) before income taxes

    3,463     2,418     (5,379 )   (7,910 )   (19,895 )   (19,320 )   (16,108 )   (3,972 )

Income tax (benefit) provision

    172     1,050     (1,448 )   (2,293 )   (5,736 )   2,663     1,990     2,382  
                                   

Net income (loss)

    3,291     1,368     (3,931 )   (5,617 )   (14,159 )   (21,983 )   (18,098 )   (6,354 )

Cumulative preferred stock dividends

            (10,199 )   (14,059 )   (28,209 )   (30,848 )   (22,858 )   (24,649 )
                                   

Net income (loss) attributable to common stockholders

 
$

3,291
 
$

1,368
 
$

(14,130

)

$

(19,676

)

$

(42,368

)

$

(52,831

)

$

(40,956

)

$

(31,003

)
                                   

Net income (loss) per share:(1)

                                                 
 

Basic

  $ 1.27   $ 0.49   $ (7.13 ) $ (4.25 ) $ (5.18 ) $ (4.73 ) $ (3.78 ) $ (2.32 )
                                   
 

Diluted

  $ 1.19   $ 0.45   $ (7.13 ) $ (4.25 ) $ (5.18 ) $ (4.73 ) $ (3.78 ) $ (2.32 )
                                   

Weighted average number of shares(1)(4)

                                                 
 

Basic

    2,598     2,772     1,981     4,631     8,184     11,159     10,823     13,350  
 

Diluted

    2,755     3,064     1,981     4,631     8,184     11,159     10,823     13,350  

Pro forma net loss per share of common stock, basic and diluted(2)

                                $ (0.30 )       $ (0.08 )
                                               

Shares used in computing the pro forma net loss per share of common stock, basic and diluted(2)

                                  72,831           75,022  

(1)
Basic loss per share is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Net loss attributable to common stockholders is increased for cumulative preferred stock dividends earned during the period. For the periods where we presented losses, all potentially dilutive common shares comprising of stock options, restricted stock purchase rights, or RSPRs, warrants and convertible preferred stock are antidilutive.

    RSPRs are considered outstanding common shares and included in the computation of basic earnings per share as of the date that all necessary conditions of vesting are satisfied. RSPRs are excluded from the dilutive earnings per share calculation when their impact is antidilutive. Prior to satisfaction of all conditions of vesting, unvested RSPRs are considered contingently issuable shares and are excluded from weighted average common shares outstanding.

(2)
Unaudited pro forma basic and diluted net loss per common share have been computed to give effect to the conversion of our convertible preferred stock (using the if-converted method) into an aggregate of 61,672,256 shares of our common stock on a two-for-one basis as though the conversion had occurred at January 1, 2009.

(3)
During the year ended March 31, 2007, nine months ended December 31, 2007 and year ended December 31, 2008 the Company completed 26 business acquisitions.

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(4)
In October 2010, our stockholders approved a 1-for-2 reverse stock split of our outstanding common stock, and a proportional adjustment to the existing conversion ratios for each series of preferred stock to be made prior to the effectiveness of this offering. Accordingly, all share and per share amounts for all periods presented have been adjusted retrospectively, where applicable, to reflect this reverse stock split and adjustment of the preferred stock conversion ratio.

 

 
  Predecessor   Successor  
 
  September 30,   April 28,   March 31,   December 31,   September 30,  
 
  2005   2006   2007   2007   2008   2009   2010  
 
  (in thousands)
 

Consolidated Balance Sheet Data:

                                           
 

Cash and cash equivalents and marketable securities

  $ 1,310   $ 3,594   $ 32,975   $ 47,365   $ 103,496   $ 49,908   $ 29,230  
 

Working capital

    (8,578 )   (10,097 )   12,781     44,992     64,639     19,665     (4,317 )
 

Total assets

    36,593     42,475     318,772     424,328     527,152     468,318     479,575  
 

Long term debt

            16,499     4,000     55,000     10,000      
 

Capital lease obligations, long term

    16                     488     89  
 

Convertible preferred stock

            239,445     338,962     373,754     373,754     373,754  
 

Total stockholders' equity (deficit)

    (1,591 )   (2,446 )   (2,203 )   (3,205 )   (7,622 )   (21,847 )   (18,264 )

Non-GAAP Financial Measures

          To provide investors and others with additional information regarding our financial results, we have disclosed in the table below and within this prospectus the following non-GAAP financial measures: adjusted operating income before depreciation and amortization expense, or Adjusted OIBDA, and revenue less traffic acquisition costs, or revenue less TAC. We have provided a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measures. Our non-GAAP Adjusted OIBDA financial measure differs from GAAP in that it excludes certain expenses such as depreciation, amortization, stock-based compensation, and certain non-cash purchase accounting adjustments, as well as the financial impact of gains or losses on certain asset sales or dispositions. Our non-GAAP revenue less TAC financial measure differs from GAAP as it reflects our consolidated revenues net of our traffic acquisition costs. Adjusted OIBDA, or its equivalent, and revenue less TAC are frequently used by security analysts, investors and others as a common financial measure of operating performance.

          We use these non-GAAP financial measures to measure our consolidated operating performance, to understand and compare operating results from period to period, to analyze growth trends, to assist in internal budgeting and forecasting purposes, to develop short and long term operational plans, to calculate annual bonus payments for substantially all of our employees, and to evaluate our financial performance. Management believes these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful period to period comparisons and analysis of trends in our business. We also believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our consolidated revenue and operating results in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies.

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          The following table presents a reconciliation of revenue less TAC and Adjusted OIBDA for each of the periods presented:

 
  Predecessor   Successor  
 
  Year ended
September 30,
  Seven
Months
ended
April 28,
  Year
ended
March 31,
  Nine Months
ended
December 31,
  Year ended
December 31,
  Nine Months
ended
September 30,
 
 
  2005   2006   2007   2007   2008   2009   2009   2010  
 
  (in thousands)
 

Non-GAAP Financial Measures:

                                                 

Content & Media revenue

  $   $   $ 18,073   $ 49,342   $ 84,821   $ 107,717   $ 75,641   $ 106,108  

Registrar revenue

    38,967     30,145     40,906     52,953     85,429     90,735     67,324     73,249  

Less: traffic acquisition costs (TAC)(1)

            (5,087 )   (7,254 )   (7,655 )   (10,554 )   (6,974 )   (8,911 )
                                   

Total revenue less TAC

  $ 38,967   $ 30,145   $ 53,892   $ 95,041   $ 162,595   $ 187,898   $ 135,991   $ 170,446  
                                   

Loss from operations

                    $ (7,081 ) $ (19,150 ) $ (18,036 ) $ (14,883 ) $ (3,310 )

Add (deduct):

                                                 

Depreciation

                      3,590     10,506     14,963     10,637     12,963  

Amortization

                      17,393     33,204     32,152     24,254     24,482  

Stock-based compensation(2)

                      3,670     6,350     7,356     5,361     7,143  

Non-cash purchase accounting adjustments(3)

                      1,282     1,533     960     740     615  

Gain on sale of asset(4)

                              (582 )        
                                         

Adjusted OIBDA

                    $ 18,854   $ 32,443   $ 36,813   $ 26,109   $ 41,893  
                                         

(1)
Represents revenue-sharing payments made to our network customers from advertising revenue generated from such customers' websites.

(2)
Represents the fair value of stock-based awards and certain warrants to purchase our stock included in our GAAP results of operations.

(3)
Represents adjustments for certain deferred revenue and costs that we do not recognize under GAAP because of GAAP purchase accounting.

(4)
Represents a gain recognized on the sale of certain assets included in our GAAP operating results.

          The use of non-GAAP financial measures has certain limitations because they do not reflect all items of income and expense that affect our operations. We compensate for these limitations by reconciling the non-GAAP financial measures to the most comparable GAAP financial measures. These non-GAAP financial measures should be considered in addition to, not as a substitute for, measures prepared in accordance with GAAP. Further, these non-GAAP measures may differ from the non-GAAP information used by other companies, including peer companies, and therefore comparability may be limited. We encourage investors and others to review our financial information in its entirety and not rely on a single financial measure.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and related notes that are included elsewhere in this prospectus. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under "Risk Factors" or in other parts of this prospectus.

Overview

          We are a leader in a new Internet-based model for the professional creation of high-quality, commercially valuable content at scale. Our business is comprised of two distinct and complementary service offerings: Content & Media and Registrar. Our Content & Media offering is engaged in creating media content, primarily consisting of text articles and videos, and delivering it along with our social media and monetization tools to our owned and operated websites and to our network of customer websites. Our Content & Media service offering also includes a number of websites primarily containing advertising listings, which we refer to as our undeveloped websites. Our Registrar is the world's largest wholesale registrar of Internet domain names and the world's second largest registrar overall, based on the number of names under management, and provides domain name registration and related value-added services.

          Our principal operations and decision-making functions are located in the United States. We report our financial results as one operating segment, with two distinct service offerings. Our operating results are regularly reviewed by our chief operating decision maker on a consolidated basis, principally to make decisions about how we allocate our resources and to measure our consolidated operating performance. Together, our service offerings provide us with proprietary data that enable commercially valuable content production at scale combined with broad distribution and targeted monetization capabilities. We currently generate substantially all of our Content & Media revenue through the sale of advertising, and to a lesser extent through subscriptions to our social media applications and select content and service offerings. Substantially all of our Registrar revenue is derived from domain name registration and related value-added service subscriptions. Our chief operating decision maker regularly reviews revenue for each of our Content & Media and Registrar service offerings in order to gain more depth and understanding of the key business metrics driving our business. Accordingly, we report Content & Media and Registrar revenue separately.

          For the year ended December 31, 2009 and the nine months ended September 30, 2010, we reported revenue of $198 million and $179 million, respectively. For the year ended December 31, 2009 and the nine months ended September 30, 2010, our Content & Media offering accounted for 54% and 59% of our total revenues, respectively, and our Registrar service accounted for 46% and 41% of our total revenues, respectively.

          As of December 31, 2007 we changed our fiscal year-end from March 31 to December 31, resulting in our financial statements reflecting a nine-month period from April 1, 2007 to December 31, 2007.


Key Business Metrics

          We regularly review a number of business metrics, including the following key metrics, to evaluate our business, measure the performance of our business model, identify trends impacting our business,

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determine resource allocations, formulate financial projections and make strategic business decisions. Measures which we believe are the primary indicators of our performance are as follows:

Content & Media Metrics

    page views:  We define page views as the total number of web pages viewed across our owned and operated websites and/or our network of customer websites, including web pages viewed by consumers on our customers' websites using our social media tools. Page views are primarily tracked through internal systems, such as our Omniture web analytics tool, contain estimates for our customer websites using our social media tools and may use data compiled from certain customer websites. We periodically review and refine our methodology for monitoring, gathering, and counting page views in an effort to improve the accuracy of our measure.

    RPM:  We define RPM as Content & Media revenue per one thousand page views.

Registrar Metrics

    domain:  We define a domain as an individual domain name paid for by a third-party customer where the domain name is managed through our Registrar service offering. This metric does not include any of the company's owned and operated websites.

    average revenue per domain:  We calculate average revenue per domain by dividing Registrar revenues for a period by the average number of domains registered in that period. The average number of domains is the simple average of the number of domains at the beginning and end of the period. Average revenue per domain for partial year periods is annualized. For example, average revenue per domain for the nine months ended September 30, 2010 is calculated by multiplying Registrar revenue for the nine month period ended September 30, 2010 by twelve ninths, divided by the average number of domains registered in this period.

          The following table sets forth additional performance highlights of key business metrics for the periods presented:

 
  Year ended
December 31,
  Nine Months ended
September 30,
 
 
  2008(1)   2009(1)   %
Change
  2009(1)   2010(1)   %
Change
 

Content & Media Metrics:

                                     

Owned & operated

                                     
 

Page views (in billions)

    5.9     6.8     15 %   5.0     6.0     20 %
 

RPM

  $ 10.56   $ 10.69     1 % $ 10.33   $ 12.60     22 %

Network of customer websites

                                     
 

Page views (in billions)

    5.4     10.0     84 %   7.4     9.3     26 %
 

RPM

  $ 4.04   $ 3.45     (15 )% $ 3.25   $ 3.24      

Registrar Metrics:

                                     
 

End of Period # of Domains (in millions)

    8.8     9.1     3 %   9.0     10.6     18 %
 

Average Revenue per Domain

  $ 9.85   $ 10.11     3 % $ 10.04     9.93     (1 )%

(1)
For a discussion of these period to period changes in the number of page views, RPM, end of period domains and average revenue per domain and how they impacted our financial results, see "Nine Months ended September 30, 2009 and 2010" and "Nine Months ended December 31, 2007 and Years ended December 31, 2008 and 2009" below.

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Opportunities, Challenges and Risks

          To date, we have derived substantially all of our revenue through the sale of advertising in connection with our Content & Media service offering and through domain name registration subscriptions in our Registrar service offering. Our advertising revenue is primarily generated by performance-based Internet advertising, such as cost-per-click where an advertiser pays only when a user clicks on its advertisement that is displayed on our owned and operated websites and our network of customer websites. For the nine months ended September 30, 2010, the majority of our advertising revenue was generated by our relationship with Google on a cost-per-click basis. We deliver online advertisements provided by Google on our owned and operated websites as well as on certain of our customer websites where we share a portion of the advertising revenue. For the year ended December 31, 2009 and the nine months ended September 30, 2010, approximately 18% and 28%, respectively, of our total consolidated revenue was derived from our advertising arrangements with Google. Google maintains the direct relationships with the advertisers and provides us with cost-per-click advertising services.

          Our historical growth in Content & Media revenue has principally come from growth in RPM and page views due to increased volume of commercially valuable content published. To a lesser extent, Content & Media revenue growth has resulted from customers utilizing our social media tools and from publishing our content on our network of customer websites, including YouTube. We believe that, in addition to opportunities to grow our revenue and our page views by creating and publishing more content, there is a substantial long term revenue opportunity with respect to selling online advertisements through our internal sales force, particularly on our owned and operated websites. During the first nine months of 2010, we began to more aggressively hire and expand our internal advertising sales force, including hiring a chief revenue officer, to exploit this opportunity.

          As we continue to create more content, we may face challenges in finding effective distribution outlets. To address this challenge, we recently began to deploy our content and related advertising capabilities to certain of our customers, such as the online versions of the San Francisco Chronicle and the Houston Chronicle. Previously these customers had used our platform on their websites for social media applications only. Under the terms of our customer arrangements, we are entitled to a share of the underlying revenues generated by the advertisements displayed with our content on these websites. We believe that expanding this business model across our network of customer websites presents a potentially large long-term revenue opportunity. As is the case with our owned and operated websites, under these arrangements we incur substantially all of our content costs up front. However, because under the revenue sharing arrangements we are sharing the resulting revenue, there is a risk that these relationships over the long term will not generate sufficient revenue to meet our financial objectives, including recovering our content creation costs. In addition, the growing presence of other companies that produce online content, including AOL's Seed.com and Associated Content, which was recently acquired by Yahoo!, may create increased competition for available distribution opportunities, which would limit our ability to reach a wider audience of consumers.

          Our content studio identifies and creates online text articles and videos through a community of freelance content creators and is core to our business strategy and long term growth initiatives. As of September 30, 2010, our studio had over 13,000 freelance content creators, who generated a daily average of over 6,300 text articles and videos during the quarter ended September 30, 2010. Historically, we have made substantial investments in our platform to support our expanding community of freelance content creators and the growth of our content production and distribution, and expect to continue to make such investments. As discussed above, we have also seen increasing competition from large Internet companies such as AOL and Yahoo!. Although these competitive offerings are not directly comparable to all aspects of our content offering, increased competition for freelance content creators could increase our freelance creator costs and adversely impact our ability to attract and retain content creators.

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          Registrar revenue growth historically has been driven by growth in the number of domains and growth in average revenue per domain due to an increase in the amounts we charge for registration and related value-added services. Prior to June 30, 2010, our Registrar experienced stable growth in both domains and average revenue per domain. Growth in average revenue per domain was due in part to an increase in our registration pricing in response to price increases from registries which control the rights of large top level domains, or TLDs (such as VeriSign which is the registry for the .com TLD). Beginning in the second quarter of 2010 and extending through early 2011, we expect modest declines in average revenue per domain as a result of recently attracting certain large volume customers, from which we have only begun to recognize revenue, and as a result of more aggressive pricing.

          Our direct costs to register domain names on behalf of our customers are almost exclusively controlled by registries and by the Internet Corporation for Assigned Names and Numbers, or ICANN. ICANN is a private sector, not for profit corporation formed to oversee a number of Internet related tasks, including domain registrations for which it collects fees, previously performed directly on behalf of the U.S. government. In addition, the market for wholesale registrar services is both price sensitive and competitive, particularly for large volume customers, such as large web hosting companies and owners of large portfolios of domain names. We have a relatively limited ability to increase the pricing of domain name registrations without negatively impacting our ability to maintain or grow our customer base. Moreover, we anticipate that any price increases mandated by registries could adversely increase our service costs as a percentage of our total revenue. ICANN is currently deliberating on the timing and framework for a potentially significant expansion of the number of generic TLDs, or gTLDs. Although there can be no assurance that any gTLD expansion will occur, we believe that such expansion, if any, would result in an increase in the number of domains we register and related revenues.

          Our service costs, the largest component of our operating expenses, can vary from period to period based upon the mix of the underlying Content & Media and Registrar services revenue we generate. We believe that our service costs as a percentage of total revenue decrease as our percentage of revenues derived from our Content & Media service offering increases. In the near term and consistent with historical trends, we expect that the growth in our Content & Media revenue will exceed the growth in our Registrar revenue. As a result, we expect that our service costs as a percentage of our total revenue will decrease when compared to our historical results. However, as we expand our Content & Media offering and enter into more revenue-sharing arrangements with our customers and content creators in the long term, our service costs as a percentage of our total revenue when compared to our historical results may not decrease at a similar rate.

          For the nine months ended September 30, 2010, more than 90% of our revenue has been derived from websites and customers located in the United States. While our content is primarily targeted towards English-speaking users in the United States today, we believe that there is a substantial opportunity in the long term for us to create content targeted to users outside of the United States and thereby increase our revenue generated from countries outside of the United States.

Basis of Presentation

Revenues

          Our revenues are derived from our Content & Media and Registrar service offerings.

Content & Media Revenues

          We currently generate substantially all of our Content & Media revenue through the sale of advertising, and to a lesser extent through subscriptions to our social media applications and select content and service offerings. Our revenue generating advertising arrangements, for both our owned and operated websites and our network of customer websites, include cost-per-click performance-based advertising; contain display advertisements where revenue is dependent upon the number of page views;

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and lead generating advertisements where revenue is dependent upon users registering for, or purchasing or demonstrating interest in, advertisers' products and services. We generate revenue from advertisements displayed alongside our content offered to consumers across a broad range of topics and categories on our owned and operated websites and on certain customer websites. Our advertising revenue also includes revenue derived from cost-per-click advertising links we place on undeveloped websites owned both by us and certain of our customers. To a lesser extent, we also generate revenue from our subscription-based offerings, which include our social media applications deployed on our network of customer websites and subscriptions to premium content or services offered on certain of our owned and operated websites.

          Where we enter into revenue sharing arrangements with our customers, such as for the online version of the San Francisco Chronicle and for undeveloped customer websites, and when we are considered the primary obligor, we report the underlying revenues on a gross basis in our consolidated statements of operations, and record these revenue-sharing payments to our customers as traffic acquisition costs, or TAC, which are included in service costs. In circumstances where the customer acts as the primary obligor, such as YouTube which sells advertisements alongside our video content, we recognize revenue on a net basis.

Registrar Revenue

          Our Registrar revenue is principally comprised of registration fees charged to resellers and consumers in connection with new, renewed and transferred domain name registrations. In addition, our Registrar also generates revenue from the sale of other value-added services that are designed to help our customers easily build, enhance and protect their domains, including security services, e-mail accounts and web-hosting. Finally, we generate revenues from fees related to auction services we provide to facilitate the selling of third-party owned domains. Our Registrar revenue varies based upon the number of domains registered, the rates we charge our customers and our ability to sell value-added services. We market our Registrar wholesale services under our eNom brand, and our retail registration services under the eNomCentral brand, among others.

Operating Expenses

          Operating expenses consist of service costs, sales and marketing, product development, general and administrative, and amortization of intangible assets. Included in our operating expenses are depreciation expenses associated with our capital expenditures and stock-based compensation.

Service Costs

          Service costs consist of: fees paid to registries and ICANN associated with domain registrations; advertising revenue recognized by us and shared with others as a result of our revenue-sharing arrangements, such as TAC and content creator revenue-sharing arrangements; Internet connection and co-location charges and other platform operating expenses associated with our owned and operated websites and our network of customer websites, including depreciation of the systems and hardware used to build and operate our Content & Media platform and Registrar; and personnel costs related to in-house editorial, customer service and information technology. Our service costs are dependent on a number of factors, including the number of page views generated across our platform and the volume of domain registrations and value-added services supported by our Registrar. In the near term and consistent with historical trends, we expect that the growth in our Content & Media revenue will exceed the growth in our Registrar revenue. As a result, we expect that our service costs as a percentage of our total revenue will decrease when compared to our historical results.

Sales and Marketing

          Sales and marketing expenses consist primarily of sales and marketing personnel costs, sales support, public relations advertising and promotional expenditures. Fluctuations in our sales and

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marketing expenses are generally the result of our efforts to support the growth in our Content & Media service, including expenses required to support the expansion of our direct advertising sales force. We currently anticipate that our sales and marketing expenses will continue to increase and will increase in the near term as a percent of revenue as we continue to build our sales and marketing organizations to support the growth of our business.

Product Development

          Product development expenses consist primarily of expenses incurred in our software engineering, product development and web design activities and related personnel costs. Fluctuations in our product development expenses are generally the result of hiring personnel to support and develop our platform, including the costs to further develop our content algorithms, our owned and operated websites and future product and service offerings of our Registrar. We currently anticipate that our product development expenses will increase as we continue to hire more product development personnel and further develop our products and offerings to support the growth of our business, but may decrease as a percentage of revenue.

General and Administrative

          General and administrative expenses consist primarily of personnel costs from our executive, legal, finance, human resources and information technology organizations and facilities related expenditures, as well as third party professional fees, insurance and bad debt expenses. Professional fees are largely comprised of outside legal, audit and information technology consulting. To date, we have not experienced any significant amount of bad debt expense. During the year ended December 31, 2009 and nine months ended September 30, 2010, our allowance for doubtful accounts and bad debt expense were not significant and we expect that this trend will continue in the near term. However, as we grow our revenue from direct advertising sales, which tend to have longer collection cycles, we expect that our allowance for doubtful accounts will increase, which may lead to increased bad debt expense. In addition, we have historically operated as a private company. As we continue to expand our business and incur additional expenses associated with being a publicly traded company, we anticipate general and administrative expenses will increase and will increase as a percentage of revenue in the near term. Specifically, we expect that we will incur additional general and administrative expenses to provide insurance for our directors and officers and to comply with SEC reporting requirements, exchange listing standards, the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Sarbanes-Oxley Act of 2002. We anticipate that these insurance and compliance costs will substantially increase certain of our general and administrative expenses in the near term although its percentage of revenue will depend upon a variety of factors as listed above.

Amortization of Intangibles

          We capitalize certain costs allocated to the purchase price of certain identifiable intangible assets acquired in connection with business combinations, to acquire content and to acquire, including through initial registration, undeveloped websites. We amortize these costs on a straight-line basis over the related expected useful lives of these assets, which have a weighted average useful life of approximately 5.4 years on a combined basis as of September 30, 2010. The Company determines the appropriate useful life of intangible assets by performing an analysis of expected cash flows based on its historical experience of intangible assets of similar quality and value. We currently estimate the useful life of our content to be five years. We expect amortization expense to increase modestly in the near term, although its percentage of revenues will depend upon a variety of factors, such as the mix of our investments in content as compared to our identifiable intangible assets acquired in business combinations.

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Stock-based Compensation

          Included in our operating expenses are expenses associated with stock based compensation, which are allocated and included in service costs, sales and marketing, product development and general and administrative expenses. Stock-based compensation expense is largely comprised of costs associated with stock options granted to employees and restricted stock issued to employees. We record the fair value of these equity-based awards and expense their cost ratably over related vesting periods, which is generally four years. The determination of the fair value of these equity awards on the date of grant as discussed in detail below in "Critical Accounting Policies and Estimates." In addition, stock-based compensation expense includes the cost of warrants to purchase common and preferred stock issued to certain non-employees.

          As of September 30, 2010, we had approximately $23 million of unrecognized employee related stock-based compensation, net of estimated forfeitures, that we expect to recognize over a weighted average period of approximately 2.7 years. Of this amount, we expect to recognize approximately $2.4 million during the remaining three months ended December 31, 2010. In addition, we expect to recognize approximately $5 million in additional stock-based compensation during the first year following this offering related to awards granted to certain executive officers to acquire approximately 2.6 million of our shares that will vest upon the fulfillment of certain liquidity events and market conditions, including but not limited to an initial public offering occurring prior to June 1, 2013 and the maintenance of an average closing price of our stock above certain amounts for a stipulated period of time. Assuming these conditions are met prior to December 31, 2010, we would recognize the additional stock-based compensation expense of approximately $5 million during the three months ended December 31, 2010. Further, we also expect to recognize approximately $30.8 million in additional stock-based compensation related to awards granted to certain executive officers in August 2010 to acquire 5.8 million of our shares that will commence vesting upon the completion of an initial public offering prior to March 31, 2011. This expense would be recognized from the date of the consummation of an initial public offering prior to March 2011 over a five year period with a weighted average period of 4.79 years. In future periods, our stock-based compensation is expected to increase materially as a result of our existing unrecognized stock-based compensation and as we issue additional stock-based awards to continue to attract and retain employees and non-employee directors.

Interest Expense

          Interest expense principally consists of interest on outstanding debt and certain prepaid underwriting costs associated with our $100 million revolving credit facility with a syndicate of commercial banks. As of September 30, 2010, we had no indebtedness outstanding under this facility.

Interest Income

          Interest income consists of interest earned on cash balances and short-term investments. We typically invest our available cash balances in money market funds, short-term United States Treasury obligations and commercial paper.

Other Income (Expense), Net

          Other income (expense), net consists primarily of the change in the fair value of our preferred stock warrant liability, transaction gains and losses on foreign currency-denominated assets and liabilities and changes in the value of certain long term investments. We expect our transaction gains and losses will vary depending upon movements in underlying currency exchange rates, and could become more significant when we expand internationally. We expect our preferred stock warrant liability, and thus all future charges associated with it, to be eliminated following our initial public offering, because the warrants currently outstanding will either be exercised or expire upon the completion of this offering.

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Provision for Income Taxes

          Since our inception, we have been subject to income taxes principally in the United States, and certain other countries where we have legal presence, including the United Kingdom, the Netherlands, Canada and Sweden. We anticipate that as we expand our operations outside the United States, we will become subject to taxation based on the foreign statutory rates and our effective tax rate could fluctuate accordingly.

          Income taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

          We currently believe that based on the available information, it is more likely than not that our deferred tax assets will not be realized, and accordingly we have taken a full valuation allowance against all of our United States deferred tax assets. As of December 31, 2009, we had approximately $71 million of federal and $10 million of state operating loss carry-forwards available to offset future taxable income which expire in varying amounts beginning in 2020 for federal and 2013 for state purposes if unused. Federal and state laws impose substantial restrictions on the utilization of net operating loss and tax credit carry-forwards in the event of an "ownership change," as defined in Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code. Currently, we do not expect the utilization of our net operating loss and tax credit carry-forwards in the near term to be materially affected as no significant limitations are expected to be placed on these carry-forwards as a result of our previous ownership changes. If an ownership change is deemed to have occurred as a result of this offering, potential near term utilization of these assets could be reduced. We do not expect this offering to cause a material limitation to the utilization of our net operating loss and tax credits carry-forwards.


Critical Accounting Policies and Estimates

          Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.

          We believe that the assumptions and estimates associated with our revenue recognition, accounts receivable and allowance for doubtful accounts, capitalization and useful lives associated with our intangible assets, including our internal software and website development and content costs, income taxes, stock-based compensation and the recoverability of our goodwill and long-lived assets have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

Revenue Recognition

          We recognize revenue when four basic criteria are met: persuasive evidence of a sales arrangement exists; performance of services has occurred; the sales price is fixed or determinable; and collectability is reasonably assured. We consider persuasive evidence of a sales arrangement to be the receipt of a signed contract. Collectability is assessed based on a number of factors, including transaction history and the credit worthiness of a customer. If it is determined that collection is not reasonably assured, revenue is not recognized until collection becomes reasonably assured, which is generally upon receipt of cash. We record cash received in advance of revenue recognition as deferred revenue.

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Content & Media

Advertising Services

          In determining whether an arrangement for our advertising services exists, we ensure that a binding arrangement is in place, such as a standard insertion order or a fully executed customer-specific agreement. Obligations pursuant to our advertising revenue arrangements typically include a minimum number of impressions or the satisfaction of the other performance criteria. Revenue from performance-based arrangements, including cost-per-click and referral revenues, is recognized as the related performance criteria are met. We assess whether performance criteria have been met and whether our fees are fixed or determinable based on a reconciliation of the performance criteria and an analysis of the payment terms associated with a transaction. The reconciliation of the performance criteria generally includes a comparison of third-party performance data, such as periodic online reports provided by certain of our customer websites, to the contractual performance obligation and to internal or customer performance data in circumstances where such data is available. Historically, any difference between the amounts recognized based on preliminary information and cash collected has not been material to our results of operations.

          Where we enter into revenue sharing arrangements with our customers, such as for the online version of the San Francisco Chronicle or with respect to undeveloped customer websites, and when we are considered the primary obligor, we report the underlying revenues on a gross basis in our consolidated statements of operations. In circumstances where the customer acts as the primary obligor, such as YouTube, we recognize the underlying revenue on a net basis in our statement of operations.

Subscription and Social Media Services

          Subscription services revenue is generated through the sale of membership fees paid to access content available on certain owned and operated websites, such as Trails.com. The majority of the memberships range from six to twelve month terms, and generally renew automatically at the end of the membership term, if not previously cancelled. Membership revenue is recognized on a straight-line basis over the membership term.

          We configure, host and maintain almost all of our platform's social media services for commercial customers. We earn revenues from our social media services through initial set-up fees, recurring management support fees, overage fees in excess of standard usage terms and outside consulting fees. Due to the fact that our social media services customers have no contractual right to take possession of our software, we account for our social media services as subscription service arrangements, whereby social media services revenues are recognized when persuasive evidence of an arrangement exists, delivery of the service has occurred and no significant obligations remain, the selling price is fixed or determinable and collectability is reasonably assured.

          Social media service arrangements may contain multiple elements, including, but not limited to, single arrangements containing set-up fees, monthly support fees and overage billings and consulting services. To the extent that consulting services have value on a standalone basis and there is objective and reliable evidence of social media services, we allocate revenue to each element based upon each element's objective and reliable evidence of fair value. Objective and reliable evidence of fair value for all elements of a service arrangement is based upon our normal pricing and discounting practices for those services when such services are sold separately. To date, substantially all consulting services entered into concurrent with the original social media service arrangements are not treated as separate deliverables as such services are essential to the functionality of the hosted social media services and do not have value to the customer on a standalone basis. Such fees are recognized as revenue on a straight-line basis over the greater of the contractual or estimated customer life once monthly recurring services have commenced. Fees for other items are recognized as follows:

    Customer set-up fees:  set-up fees are generally paid prior to the commencement of monthly recurring services. We initially defer set-up fees and recognize the related revenue straight-line

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      over the greater of the contractual or estimated customer life once monthly recurring services have commenced.

    Monthly support fees:  recognized each month at contractual rates.

    Overage billings:  recognized when delivered and at contractual rates in excess of standard usage terms.

          We determine the estimated customer life based on analysis of historical attrition rates, average contractual term and renewal expectations. We periodically review the estimated customer life at least quarterly and when events or changes in circumstances, such as significant customer attrition relative to expected historical or projected future results, occur. Outside consulting services performed for customers on a stand-alone basis are recognized ratably as services are performed at contractual rates.

Registrar

Domain Name Registration Fees

          Registration fees charged to third parties in connection with new, renewed and transferred domain name registrations are recognized on a straight line basis over the registration term, which range from one to ten years. Payments received in advance of the domain name registration term are included in deferred revenue in our consolidated balance sheets. The registration term and related revenue recognition commences once we confirm that the requested domain name has been recorded in the appropriate registry under accepted contractual performance standards. Associated direct and incremental costs, which principally consist of registry and ICANN fees, are also deferred and expensed as service costs on a straight line basis over the registration term.

          Our wholly owned subsidiary, eNom, is an ICANN accredited registrar. Thus, we are the primary obligor with our reseller and retail registrant customers and are responsible for the fulfillment of our registrar services. As a result, we report revenue derived from the fees we receive from our resellers and retail registrant customers for registrations on a gross basis in our consolidated statements of operations. A minority of our resellers have contracted with us to provide billing and credit card processing services to the resellers' retail customer base in addition to registration services. Under these circumstances, the cash collected from these resellers' retail customer base exceeds the fixed amount per transaction that we charge for domain name registration services. Accordingly, these amounts, which are collected for the benefit of the reseller, are not recognized as revenue and are recorded as a liability until remitted to the reseller on a periodic basis. Revenue from these resellers is reported on a net basis because the reseller determines the price to charge retail customers and maintains the primary customer relationship.

Value-added Services

          Revenue from online Registrar value-added services, which include, but are not limited to, security certificates, domain name identification protection, charges associated with alternative payment methodologies, web hosting services and email services is recognized on a straight line basis over the period in which services are provided. Payments received in advance of services being provided are included in deferred revenue.

Auction Service Revenues

          Domain name auction service revenues represent fees received from facilitating the sale of third-party owned domains through an online bidding process primarily through NameJet, a domain name aftermarket auction company formed in October 2007 by us and an unrelated third party. While certain names sold through the auction process are registered on our Registrar platform upon sale, we have determined that auction revenues and related registration revenues represent separate units of accounting, given that the domain name has value to the customers on a standalone basis and there is

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objective and reliable evidence of the fair value of the registration service. We recognize the related registration fees on a straight-line basis over the registration term. We recognize the bidding portion of auction revenues upon sale, net of payments to third parties since we are acting as an agent only.

Accounts Receivable and Allowance for Doubtful Accounts

          Accounts receivable primarily consist of amounts due from:

    third parties such as Google who provide advertising services to our owned and operated websites and certain customer websites in exchange for a share of the underlying advertising revenue. Accounts receivable from these advertising providers are recorded as the amount of the revenue share as reported to us by them and are generally due within 30 to 45 days from the month-end in which the invoice is generated. Certain accounts receivable from these providers are billed quarterly and are due within 45 days from the quarter-end in which the invoice is generated, and are non-interest bearing;

    social media services customers and include: account set-up fees, which are generally billed and collected once set-up services are completed; monthly recurring services, which are billed in advance of services on a quarterly or monthly basis; account overages, which are billed when incurred and contractually due; and consulting services, which are generally billed in the same manner as set-up fees. Accounts receivable from social media customers are recorded at the invoiced amount, are generally due within 30 days and are non-interest bearing;

    direct advertisers who engage us to deliver branded advertising views. Accounts receivable from our direct advertisers are recorded at negotiated advertising rates (customarily based on advertising impressions) and as the related advertising is delivered over our owned and operated websites. Direct advertising accounts receivables are due within 30 to 60 days from the date the advertising services are delivered and billed; and

    customers who syndicate the Company's content over their websites in exchange for a share of related advertising revenue. Accounts receivable from our customers are recorded at the revenue share as reported by our customers and are due within 30 to 45 days.

          We maintain an allowance for doubtful accounts to reserve for potentially uncollectible receivables from our customers based on our best estimate of the amount of probable losses from existing accounts receivable. We determine the allowance based on analysis of historical bad debts, advertiser concentrations, advertiser credit-worthiness and current economic trends. In addition, past due balances over 90 days and specific other balances are reviewed individually for collectability on at least a quarterly basis.

Goodwill

          Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. We perform our impairment testing for goodwill at the reporting unit level. As of December 31, 2009, we determined that we have three reporting units. For the purpose of performing the required impairment tests, we primarily apply a present value (discounted cash flow) method to determine the fair value of the reporting units with goodwill. We test goodwill for impairment annually during the fourth quarter of our fiscal year or when events or circumstances change that would indicate that goodwill might be permanently impaired. Events or circumstances that could trigger an impairment review include, but are not limited to, a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends or significant underperformance relative to expected historical or projected future results of operations.

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          The testing for a potential impairment of goodwill involves a two-step process. The first step involves comparing the estimated fair values of our reporting units with their respective book values, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the reporting unit is less than book value, the second step is performed to determine if goodwill is impaired and to recognize the amount of impairment loss, if any. The estimate of the fair value of goodwill is primarily based on an estimate of the discounted cash flows expected to result from that reporting unit and may require valuations of certain recognized and unrecognized intangible assets such as our content, software, technology, patents and trademarks. If the carrying amount of goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess. To date, we have not recognized an impairment loss associated with our goodwill.

          We estimate the fair value of our reporting units, using various valuation techniques, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various judgmental assumptions about sales, operating margins, growth rates and discount rates. Assumptions about discount rates are based on a weighted-average cost of capital for comparable companies. Assumptions about sales, operating margins, and growth rates are based on our forecasts, business plans, economic projections, anticipated future cash flows and marketplace data. Assumptions are also made for varying perpetual growth rates for periods beyond the long-term business plan period. As of December 31, 2009, the date of the most recent impairment assessment, we determined that the fair value of each of our reporting units was substantially in excess of its carrying value.

Capitalization and Useful Lives Associated with our Intangible Assets, including Content and Internal Software and Website Development Costs

          We capitalize certain costs incurred to develop, acquire and deploy our intangible assets, which principally include our content and initial registration and acquisition costs of our undeveloped websites. We also capitalize our internally developed software and website development costs during their development phase. In addition we have also capitalized certain identifiable intangible assets acquired in connection with business combinations and we use valuation techniques to value these intangibles assets, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysis requires us to make various judgmental assumptions and estimates including projected revenues, operating costs, growth rates, useful lives and discount rates.

          Our finite lived intangible assets are amortized over their estimated useful lives using the straight-line method, which approximate the estimated pattern in which the underlying economic benefits are consumed. Capitalized website registration costs for undeveloped websites are amortized on a straight-line basis over their estimated useful lives of one to seven years. Internally developed software and website development costs are depreciated on a straight-line basis over their estimated three year useful life. We amortize our intangible assets acquired through business combinations on a straight-line basis over the period in which the underlying economic benefits are expected to be consumed.

          Capitalized content is amortized on a straight-line basis over five years, representing our estimate of the pattern that the underlying economic benefits are expected to be realized and based on our estimates of the projected cash flows from advertising revenues expected to be generated by the deployment of our content. These estimates are based on our current plans and projections for our content, our comparison of the economic returns generated by content of comparable quality and an analysis of historical cash flows generated by that content to date which, particularly for more recent content cohorts, is somewhat limited. To date, certain content that we acquired in business combinations has generated cash flows from advertisements beyond a five year useful life. The creation and acquisition of content, at scale, however, is a new and rapidly evolving model, and therefore we closely monitor its performance and, periodically, assess its estimated useful life.

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          Advertising revenue generated from the deployment of our media content makes up a significant element of our business such that amounts we record in our financial statements related to our content are material. Significant judgment is required in estimating the useful life of our content. Changes from the five year useful life we currently use to amortize our capitalized content would have a significant impact on our financial statements. For example, if underlying assumptions were to change such that our estimate of the weighted average useful life of our media content was higher by one year from January 1, 2010, our net loss would decrease by approximately $1.6 million for the nine months ended September 30, 2010, and would increase by approximately $2.4 million should the weighted average useful life be reduced by one year. We periodically assess the useful life of our content, and when adjustments in our estimate of the useful life of content are required, any changes from prior estimates are accounted for prospectively.

Recoverability of Long-lived Assets

          We evaluate the recoverability of our intangible assets, and other long-lived assets with finite useful lives for impairment when events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. These trigger events or changes in circumstances include, but are not limited to a significant decrease in the market price of a long-lived asset, a significant adverse change in the extent or manner in which a long-lived asset is being used, significant adverse change in legal factors or in the business climate that could affect the value of our long-lived asset, an accumulation of costs significantly in excess of the amount originally expected for the acquisition or development of a long-lived asset, current or future operating or cash flow losses that demonstrates continuing losses associated with the use of our long-lived asset, or a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. An impairment test would be performed when the estimated undiscounted future cash flows expected to result from the use of the asset group is less than its carrying amount. Impairment is measured by assessing the usefulness of an asset by comparing its carrying value to its fair value. If an asset is considered impaired, the impairment loss is measured as the amount by which the carrying value of the asset group exceeds its estimated fair value. Fair value is determined based upon estimated discounted future cash flows. The key estimates applied when preparing cash flow projections relate to revenues, operating margins, economic life of assets, overheads, taxation and discount rates. To date, we have not recognized any such impairment loss associated with our long-lived assets.

Income Taxes

          We account for our income taxes using the liability and asset method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or in our tax returns. In estimating future tax consequences, generally all expected future events other than enactments or changes in the tax law or rates are considered. Deferred income taxes are recognized for differences between financial reporting and tax bases of assets and liabilities at the enacted statutory tax rates in effect for the years in which the temporary differences are expected to reverse. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. We evaluate the realizability of our deferred tax assets and valuation allowances are provided when necessary to reduce deferred tax assets to the amounts expected to be realized.

          We operate in various tax jurisdictions and are subject to audit by various tax authorities. We provide tax contingencies whenever it is deemed probable that a tax asset has been impaired or a tax liability has been incurred for events such as tax claims or changes in tax laws. Tax contingencies are based upon their technical merits, and relevant tax law and the specific facts and circumstances as of each reporting period. Changes in facts and circumstances could result in material changes to the amounts recorded for such tax contingencies.

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          We recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. We recognize interest and penalties accrued related to unrecognized tax benefits in our income tax (benefit) provision in the accompanying statements of operations.

          We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed in subsequent years. Adjustments based on filed returns are recorded when identified. The amount of income taxes we pay is subject to ongoing audits by federal, state and foreign tax authorities. Our estimate of the potential outcome of any uncertain tax issue is subject to management's assessment of relevant risks, facts, and circumstances existing at that time. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which the determination is made.

Stock-based Compensation

          We measure and recognize compensation expense for all share-based payment awards made to employees and directors based on the grant date fair values of the awards. For stock option awards to employees with service and/or performance based vesting conditions, the fair value is estimated using the Black-Scholes option pricing model. The value of an award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. We elected to treat share-based payment awards, other than performance awards, with graded vesting schedules and time-based service conditions as a single award and recognize stock-based compensation expense on a straight-line basis (net of estimated forfeitures) over the requisite service period. Stock-based compensation expenses are classified in the statement of operations based on the department to which the related employee reports. Our stock-based awards are comprised principally of stock options and restricted stock purchase rights.

          Some employee award grants contain certain performance and/or market conditions. We recognize compensation cost for awards with performance conditions based upon the probability of that performance condition being met, net of an estimate of pre-vesting forfeitures. Awards granted with performance and/or market conditions are amortized using the graded vesting method. The effect of a market condition is reflected in the award's fair value on the grant date. We use a binomial lattice model to determine the grant date fair value of awards with market conditions. All compensation cost for an award that has a market condition is recognized as the requisite service period is fulfilled, even if the market condition is never satisfied.

          We account for stock options issued to non-employees in accordance with the guidance for equity-based payments to non-employees. Stock option awards to non-employees are accounted for at fair value using the Black-Scholes option pricing model. Our management believes that the fair value of stock options is more reliably measured than the fair value of the services received. The fair value of the unvested portion of the options granted to non-employees is re-measured each period. The resulting increase in value, if any, is recognized as expense during the period the related services are rendered.

          The Black-Scholes option pricing model requires management to make assumptions and to apply judgment in determining the fair value of our awards. The most significant assumptions and judgments include estimating the fair value of underlying stock, expected volatility and expected term. In addition, the recognition of stock-based compensation expense is impacted by estimated forfeiture rates.

          Because our common stock has no publicly traded history, we estimate the expected volatility of our awards from the historical volatility of selected public companies within the Internet and media industry with comparable characteristics to us, including similarity in size, lines of business, market capitalization, revenue and financial leverage. From our inception through December 31, 2008, the

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weighted average expected life of options was calculated using the simplified method as prescribed under guidance by the SEC. This decision was based on the lack of relevant historical data due to our limited experience and the lack of an active market for our common stock. Effective January 1, 2009, we calculated the weighted average expected life of our options based upon our historical experience of option exercises combined with estimates of the post-vesting holding period. The risk free interest rate is based on the implied yield currently available on U.S. Treasury issues with terms approximately equal to the expected life of the option. The expected dividend rate is zero based on the fact that we currently have no history or expectation of paying cash dividends on our common stock. The forfeiture rate is established based on the historical average period of time that options were outstanding and adjusted for expected changes in future exercise patterns.

 
  Nine Months
ended
December 31,
2007
  Year ended
December 31,
2008
  Year ended
December 31,
2009
  Nine Months
ended
September 30,
2010

Expected term (in years)

  6.25   6.19   5.72   6.29

Risk-free interest rate

  3.28 - 4.98%   1.54 - 3.52%   1.37 - 2.86%   1.31 - 2.83%

Expected volatility range

  77 - 80%   65 - 72%   60 - 62%   54 - 56%

Weighted average expected volatility

  79%   69%   61%   56%

Dividend yield

       

          We do not believe there is a reasonable likelihood that there will be material changes in the estimates and assumptions we use to determine stock-based compensation expense. In the future, if we determine that other option valuation models are more reasonable, the stock-based compensation expense that we record may differ significantly from what we have historically recorded using the Black-Scholes option pricing model.

          We recorded stock-based compensation expense of approximately $3.7 million for the nine months ended December 31, 2007, $6.4 million and $7.4 million for the years ended December 31, 2008 and 2009, respectively, and $7.1 million for the nine months ended September 30, 2010. Included in our stock-based compensation expense for the years ended December 31, 2008 and 2009 and nine months ended September 30, 2010 were cash payments of $0.9 million, $0.6 million and $0.3 million, respectively, in connection with our agreement to pay out certain unvested options to former employees continuing employment with us after our acquisition of Pluck Corporation, or Pluck, which formed the basis of our social media tools offering, in March 2008 and non-cash charges of $0.4 million, $0.4 million and $0.3 million, respectively, related to consideration paid to Lance Armstrong in January 2008 in the form of a ten-year warrant to purchase 625,000 shares of our common stock at $12.00 per share in exchange for certain services to be performed by Mr. Armstrong through December 2011. Also included in our stock-based compensation expense for the nine months ended September 30, 2010 were non-cash charges of $0.1 million related to consideration paid to Tyra Banks in June 2010 in the form of a ten-year warrant to purchase 375,000 shares of our common stock at $12.00 per share in exchange for certain services to be performed by Ms. Banks through June 2014. In addition and as part of our capitalization of internally developed software, we capitalized $0.1 million, $0.7 million, $0.7 million, and $0.7 million of stock-based compensation during the nine months ended December 31, 2007, years ended December 31, 2008 and 2009, and the nine months ended September 30, 2010, respectively.

Significant Factors, Assumptions and Methodologies Used in Determining the Fair Market Value of Our Common Stock

          We have regularly conducted contemporaneous valuations to assist us in the determination of the fair value of our common stock for each stock option grant. Our board of directors was regularly apprised that each valuation was being conducted and considered the relevant objective and subjective factors deemed important by our board of directors in each valuation conducted. Our board of

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directors also determined that the assumptions and inputs used in connection with such valuations reflected our board of directors' best estimate of our business condition, prospects and operating performance at each valuation date. The deemed fair value per common share underlying our stock option grants was determined by our board of directors with input from management at each grant date.

          In the absence of a public trading market for our common stock, our board of directors reviewed and discussed a variety of objective and subjective factors when exercising its judgment in determining the deemed fair value of our common stock. These factors generally include the following:

    the nature and history of our business;

    general economic conditions and specific industry outlook;

    our book value and financial condition;

    our operating and financial performance;

    contemporaneous independent valuations performed at periodic intervals;

    the introduction of new products or services;

    the market price of companies engaged in the same or similar line of business having their equity securities actively traded in a free and open market;

    the likelihood of achieving a liquidity event, such as an initial public offering or sale given prevailing market conditions and the nature and history of our business;

    the differences between our preferred and common stock in respect of liquidation preferences, conversion rights, voting rights and other features; and

    an adjustment necessary to recognize a lack of marketability for our common stock.

          The valuation of our common stock was performed in accordance with the guidelines outlined in the American Institute of Certified Public Accountants Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. In order to value our common stock, we first determined our business enterprise value, and then allocated this business enterprise value to each part of our capital structure (associated with both preferred and common equity). Our business enterprise value was estimated using a combination of two generally accepted approaches: the income approach and the market-based approach. The income approach estimates value based on the expectation of future net cash flows that were then discounted back to the present using a rate of return available from alternative companies of similar type and risk. The market approach measures the value of an asset or business through an analysis of recent sales or offerings of comparable investments or assets, and in our case, focused on comparing us to similar publicly traded entities. In applying this method, valuation multiples are derived from historical operating data of selected comparable entities and evaluated and/or adjusted based on the strengths and weaknesses of our company relative to the comparable entities. We then apply an adjusted multiple to our operating data to arrive at a value indication. The value indicated by the market approach was consistent with the valuation derived from the income approach for the periods presented.

          For each valuation, we prepared a financial forecast to be used in the computation of the value of invested capital for both the market approach and income approach. The financial forecast took into account our past experience and future expectations. The risk associated with achieving this forecast was assessed in selecting the appropriate discount rate. There is inherent uncertainty in these estimates as the assumptions used are highly subjective and subject to changes as a result of new operating data and economic and other conditions that impact our business.

          In order to determine the value of our common stock for purposes of applying the Black-Scholes option pricing model, the enterprise value was allocated among the holders of preferred stock and

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common stock. The aggregate value of the common stock derived from application of the Black-Scholes option pricing model was then divided by the number of shares of common stock outstanding to arrive at the per share value. The per share value was then adjusted for a lack of marketability discount which was determined based on the analysis performed on the restricted stock of companies whose unrestricted stock is freely traded, as well as a put option model calculation.

          We also utilize a probability-weighted expected return method as a reasonableness check to validate the fair value of our common stock based on the methods discussed above. The recent growth and expansion of our business in 2009, combined with a continuing trend of general improvement in the capital markets during the same period, had provided us better visibility into the likelihood of a liquidity event transpiring in the next one to two years. This probability-weighted expected return method includes the following steps:

    We estimate the timing of each possible liquidity outcome and its future value. In our analysis, we considered potential liquidity scenarios related to an initial public offering, staying private, a sale and bankruptcy. The anticipated timing of a potential liquidity event utilized in these valuations, such as an initial public offering of our common stock, was based primarily on then current plans and estimates of our board of directors and management.

    We determine the appropriate allocation of value to the common stockholders under each liquidity scenario based on the rights and preferences of each class of stock at that time.

    The resulting value of common stock under each scenario is multiplied by a present value factor, calculated based on our cost of equity and the expected timing of the event.

    The value of common stock is then multiplied by an estimated probability for each of the expected events determined by our management.

    We then calculate the probability-weighted value per share of common stock and apply a lack of marketability discount.

          The calculated fair values of our common stock derived from the income approach, market approach and probability-weighted expected return method were principally consistent throughout the years ended December 31, 2008 and 2009, and the nine months ended September 30, 2010.

Common Stock Valuations

          The most significant factors considered by our board of directors in determining the fair value of our common stock at these valuation dates were as follows:

February 2, 2009, February 24, 2009 and March 24, 2009

    The most recent independent contemporaneous valuation report as of December 31, 2008.

    The business enterprise value based on the income approach decreased by $175 million to $600 million since the previous valuation date of September 15, 2008. This was due to a wide variety of variables in the valuation model but was primarily driven by a significant decline in the general economy due to the financial crisis in the fourth quarter of 2008 and a resulting decline in our business outlook.

    Discount rate applied was 15% based on the calculated weighted average cost of capital.

    Lack of marketability discount was determined to be 20.4%.

    Probability-weighted expected return method scenario probabilities—Based upon the prevailing business outlook and an uncertain economy, our management estimated a 30% initial public offering probability, a 30% sale or merger probability and a 30% probability that we would continue as a private company. A bankruptcy scenario was deemed unlikely and was assigned a 10% probability.

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April 16, 2009, May 12, 2009, June 9, 2009 and June 24, 2009

    The most recent independent contemporaneous valuation report as of March 31, 2009.

    The business enterprise value based on the income approach increased by $50 million to $650 million since the previous valuation date. This was due to a wide variety of variables in the valuation model but was primarily driven by an improvement in the confidence for our longer term outlook for our Content & Media revenue.

    Discount rate applied was 15% based on the calculated weighted average cost of capital.

    Lack of marketability discount was determined to be 20%.

    Probability-weighted expected return method scenario probabilities—Our management estimated a 30% initial public offering probability, a 30% sale or merger probability and a 30% probability that we would continue as a private company. A bankruptcy scenario was deemed unlikely and was assigned a 10% probability.

July 30, 2009 and September 16, 2009

    The most recent independent contemporaneous valuation report as of June 30, 2009.

    The business enterprise value based on the income approach increased by $75 million to $725 million since the previous valuation date. This was due to a wide variety of variables in the valuation model but was primarily driven by a continued improvement in the confidence for our outlook for our Content & Media revenue based on our actual results in the second quarter of 2009.

    Discount rate applied was 15% based on the calculated weighted average cost of capital.

    Lack of marketability discount was determined to be 17.6%.

    Probability-weighted expected return method scenario probabilities—Our management estimated a 50% initial public offering probability, a 20% sale or merger probability and a 20% probability that we would continue as a private company. A bankruptcy scenario was deemed unlikely and was assigned a 10% probability.

November 5, 2009

    The most recent independent contemporaneous valuation report as of September 30, 2009.

    The business enterprise value based on the income approach increased by $75 million to $800 million since the previous valuation date. This was due to a wide variety of variables in the valuation model but was primarily driven by a continued improvement in the confidence for our outlook for our Content & Media revenue based on increasing revenues and yields from our growing investment in content.

    Discount rate applied was 14% based on the calculated weighted average cost of capital, representing a reduction of one percentage point from the previous valuation.

    Lack of marketability discount was determined to be 18.9%.

    Probability-weighted expected return method scenario probabilities—Our management estimated a 50% initial public offering probability, a 20% sale or merger probability and a 20% probability that we would continue as a private company. A bankruptcy scenario was deemed unlikely and was assigned a 10% probability.

January 20, 2010, March 3, 2010, March 24, 2010 and March 26, 2010

    The most recent independent contemporaneous valuation report as of December 31, 2009.

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    The business enterprise value based on the income approach remained at $800 million unchanged since the previous valuation date. This was due to a wide variety of variables in the valuation model but was primarily driven by a continued improvement in the confidence for our business model being offset by an increase in expected operating costs needed to support our growing business.

    Discount rate applied was 14% based on the calculated weighted average cost of capital.

    Lack of marketability discount was determined to be 9.3% as it became apparent that the revenue growth trends throughout 2009 stemming from our increased investment in content provided support for the current viability and future potential of our business model. In addition, we expanded our relationship with our customer network, such as USATODAY.com, to deploy some or all parts of our platform across their websites, thus increasing the scale of our business.

    Probability-weighted expected return method scenario probabilities—Our management estimated a 50% initial public offering probability, a 20% sale or merger probability and a 20% probability that we would continue as a private company. A bankruptcy scenario was deemed unlikely and was assigned a 10% probability.

May 4, 2010, May 18, 2010 and June 11, 2010

    The most recent independent contemporaneous valuation report as of April 15, 2010.

    The business enterprise value based on the income approach increased by $130 million to $930 million since the previous valuation date as the continued successful performance of our business further increased the probability of an initial public offering.

    Discount rate applied was 13% based on the calculated weighted average cost of capital, representing a reduction by one percentage point from the previous valuation as the potential for an initial public offering continued to increase as our business grew.

    Lack of marketability discount was determined to be 7.4%, representing a decrease of 1.9 percentage points from the previous valuation.

    Probability-weighted expected return method scenario probabilities—Our management estimated a 70% initial public offering probability (an increase from the previous valuation by 20 percentage points), a 20% sale or merger probability and a 5% probability that we would continue as a private company. A bankruptcy scenario was deemed unlikely and was assigned a 5% probability.

July 15, 2010, August 3, 2010 and August 27, 2010

    The most recent independent contemporaneous valuation report as of June 30, 2010.

    The business enterprise value based on the income and market approaches increased by $220 million to $1,150 million since the previous valuation date. The movement since the previous valuation was primarily driven by an increased confidence in our projected revenue primarily stemming from better than expected performance of our Content & Media service offering's revenue throughout the six months ended June 30, 2010, including branded advertising sales during the three months ended June 30, 2010 and progress in developing advertising relationships and recurring revenue contracts in the preceding months following the appointment of our Chief Revenue Officer in early 2010, as well as a decrease in the discount rate applied to our projected cash flows described below.

    Discount rate applied was 12% based on the calculated weighted average cost of capital, representing a reduction by one percentage point from the previous valuation primarily due to a decrease in the U.S. Treasury 20 year bond rate during the period.

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    Lack of marketability discount was determined to be 6.6%, representing a decrease of 0.8 percentage points from the previous valuation due to the shorter expected time until the initial public offering.

    Probability-weighted expected return method scenario probabilities—Our management estimated a 70% initial public offering probability, a 20% sale or merger probability and a 5% probability that we would continue as a private company. A bankruptcy scenario was deemed unlikely and was assigned a 5% probability.

September 15, 2010 and September 27, 2010

    The most recent independent contemporaneous valuation report as of September 15, 2010.

    The business enterprise value based on the income and market approaches increased by $175 million to $1.3 billion since the previous valuation date representing the continued successful performance of, and increasing confidence in, our business. Specifically, this included increased confidence in our medium term revenue growth rates stemming from the strong performance of content published in preceding periods. Accordingly, our analysis of actual results in the third quarter of 2010 provided greater assurance over the progress in scaling our content production in late 2009 and early 2010, providing us greater confidence over the medium term growth prospects of our content service offering. Additionally, the continued successful performance of our business further increased the probability of an initial public offering thus reducing the company specific risk premium and discount for lack of marketability.

    Discount rate applied was 12% based on the calculated weighted average cost of capital, as the increase in the U.S. Treasury 20 year bond rate since the date of the previous valuation was offset by a reduction in the company specific risk premium as we assessed there to be an increased probability of an initial public offering.

    Lack of marketability discount was determined to be 4.0%, representing a decrease of 2.6 percentage points from the previous valuation largely due to the shorter expected time to an initial public offering coupled with our assessment that there is a greater probability of an initial public offering as well as the sustained growth rates in 2010 year to date.

    Probability-weighted expected return method scenario probabilities—our management estimated a 90% initial public offering probability (an increase from the previous valuation by 20 percentage points) and a 4% sale or merger probability. The probability that we would continue as a private company and bankruptcy scenario were both deemed unlikely and were assigned a 5% and 1% probability, respectively. The probability of an initial public offering increased between the June 30, 2010 valuation and the September 15, 2010 valuation as a result of our increased confidence that an initial public offering would be consummated given the continued successful performance of, and increasing confidence in, our business described above.

          In April 2010 and in conjunction with the preparation of our consolidated financial statements, we performed a retrospective analysis to reassess the fair value of our common stock for certain option grants made during the year ended December 31, 2009 and the three months ended March 31, 2010, for financial reporting purposes. The retrospective analysis was largely a result of the reassessed increase in the probability of achieving a liquidity event under prevailing market conditions, such as an initial public offering for shares of our common stock. In addition, we also considered the impact of certain limited offers and transactions made by and between existing shareholders and, at times, with certain members of our management to exchange, sell or transfer our common stock during 2009 at values in excess of our then-estimated fair value of our shares. In conjunction with this retrospective

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analysis, we also considered a variety of objective and subjective factors over these periods, including but not limited to contemporaneous valuations of our common stock.

          As a result of our retrospective valuation in April 2010 of our common stock during the year ended December 31, 2009 and the three months ended March 31, 2010, and for financial reporting purposes, we recorded stock-based compensation expense above the original estimated fair values of our common stock for certain grants made during the year ended December 31, 2009 and three months ended March 31, 2010. This resulted in additional stock based compensation of $1 million and $1.2 million for the year ended December 31, 2009 and nine months ended September 30, 2010.

          The table below highlights the stock options granted with the following exercise prices subsequent to January 1, 2009.

Date of Grant
  Number
of Shares
  Exercise
Price and
Estimated
Fair Value
of the Shares
at Date of Grant
  Retrospective
Fair Value(1)
  Intrinsic
Value(2)
 

February 2, 2009

    179,250   $ 3.20   $ 4.80   $ 1.60  

February 24, 2009

    167,614     3.20     4.80     1.60  

March 24, 2009

    963,227     3.20     4.80     1.60  

April 16, 2009

    100,500     3.30     4.86     1.56  

May 12, 2009

    5,000     3.30     4.86     1.56  

June 9, 2009(3)

    3,150,000     9.50     4.86      

June 24, 2009

    76,500     3.30     4.86     1.56  

July 30, 2009

    144,750     4.30     5.54     1.24  

September 16, 2009

    185,500     4.90     5.94     1.04  

November 5, 2009

    209,750     5.30     6.20     0.90  

January 20, 2010

    328,500     6.70     7.14     0.44  

March 3, 2010

    157,250     7.70     8.64     0.94  

March 24, 2010

    1,096,820     7.70     8.86     1.16  

March 26, 2010

    200,000     7.70     8.86     1.16  

May 4, 2010

    92,000     9.74     9.74      

May 18, 2010

    179,000     9.74     9.74      

June 11, 2010

    69,250     10.74     10.74      

July 15, 2010

    125,500     11.50     11.50      

August 3, 2010(4)

    2,375,000     18.00     12.92      

August 3, 2010(4)

    1,150,000     24.00     12.92      

August 3, 2010(4)

    1,150,000     30.00     12.92      

August 3, 2010(4)

    1,150,000     36.00     12.92      

August 27, 2010

    236,500     13.94     13.94      

September 15, 2010

    82,250     14.74     14.74      

September 27, 2010

    118,000     15.24     15.24      

October 27, 2010

    131,000     15.36     15.36      

(1)
Represents our retrospective fair value assessment of our common stock throughout the year ended December 31, 2009 and three months ended March 31, 2010 performed in April 2010. Represents the fair value of our common stock on the grant date for grants made after March 31, 2010.

(2)
Represents the difference between the exercise price and the retrospective fair value assessment of our common stock for grants made prior to March 31, 2010.

(3)
The June 9, 2009 grants were made to certain members of senior management where the exercise price was intentionally set by the board of directors at a price above the-then estimated fair value of the shares.

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(4)
The August 3, 2010 grants were made to certain members of senior management with the exercise prices intentionally set by the board of directors at a price above the-then estimated fair value of the shares.

          We believe consideration of the factors described above by our board of directors was a reasonable approach to estimating the fair value of our common stock for those periods. Determining the fair value of our common stock requires complex and subjective judgments, however, and there is inherent uncertainty in our estimate of fair value.

          Based upon an assumed initial public offering price of $        per share, which is the mid-point of the range set forth on the cover of this prospectus, the aggregate intrinsic value of outstanding stock options vested and expected to vest as of September 30, 2010 was $         million, of which $         million related to vested options and $         million related to options expected to vest as of September 30, 2010.

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Results of Operations

          The following tables set forth our results of operations for the periods presented. The period-to-period comparison of financial results is not necessarily indicative of future results.

 
   
   
   
  Nine Months ended
September 30,
 
 
  Nine Months
ended
December 31,
2007
  Year ended December 31,  
 
  2008   2009   2009   2010  
 
  (in thousands)
 

Revenues

  $ 102,295   $ 170,250   $ 198,452     142,965     179,357  

Operating expenses(1)(2):

                               
 

Service costs (exclusive of amortization of intangible assets)

    57,833     98,238     114,482     82,941     95,209  
 

Sales and marketing

    3,601     15,360     19,994     14,324     16,805  
 

Product development

    10,965     14,407     21,502     15,253     19,136  
 

General and administrative

    19,584     28,191     28,358     21,076     27,035  
 

Amortization of intangible assets

    17,393     33,204     32,152     24,254     24,482  
                       
   

Total operating expenses

    109,376     189,400     216,488     157,848     182,667  
                       

Loss from operations

    (7,081 )   (19,150 )   (18,036 )   (14,883 )   (3,310 )
                       

Other income (expense)

                               
 

Interest income

    1,415     1,636     494     285     19  
 

Interest expense

    (1,245 )   (2,131 )   (1,759 )   (1,508 )   (517 )
 

Other income (expense), net

    (999 )   (250 )   (19 )   (2 )   (164 )
                       
   

Total other expense

    (829 )   (745 )   (1,284 )   (1,225 )   (662 )
                       

Loss before income taxes

    (7,910 )   (19,895 )   (19,320 )   (16,108 )   (3,972 )

Income tax (benefit) provision

    (2,293 )   (5,736 )   2,663     1,990     2,382  
                       

Net loss

    (5,617 )   (14,159 )   (21,983 )   (18,098 )   (6,354 )

Cumulative preferred stock dividends

    (14,059 )   (28,209 )   (30,848 )   (22,858 )   (24,649 )
                       

Net loss attributable to common shareholders

  $ (19,676 ) $ (42,368 ) $ (52,831 )   (40,956 )   (31,003 )
                       

(1)      Depreciation expense included in the above line

                               

                items:

                               

                Service costs

  $ 2,581   $ 8,158   $ 11,882   $ 8,435   $ 10,424  

                Sales and marketing

    42     94     184     137     128  

                Product development

    509     1,094     1,434     1,033     996  

                General and administrative

    458     1,160     1,463     1,032     1,415  
                       

                    Total depreciation expense

  $ 3,590   $ 10,506   $ 14,963   $ 10,637   $ 12,963  
                       

 

(2)      Stock-based compensation included in the above

                               

                 line items:

                               

                Service costs

  $ 52   $ 586   $ 473   $ 327   $ 663  

                 Sales and marketing

    241     1,576     1,561     1,056     1,621  

                Product development

    504     1,030     1,349     991     1,216  

                 General and administrative

    2,873     3,158     3,973     2,987     3,643  
                       

                    Total stock-based compensation

  $ 3,670   $ 6,350   $ 7,356   $ 5,361   $ 7,143  
                       

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          As a percentage of revenue:

 
   
  Year ended December 31,   Nine Months
ended
September 30,
 
 
  Nine Months
ended
December 31,
2007
 
 
  2008   2009   2009   2010  

Revenues

    100.0 %   100.0 %   100.0 %   100.0 %   100.0 %

Operating expenses:

                               
 

Service costs (exclusive of amortization of intangible assets)

    56.5 %   57.7 %   57.7 %   58.0 %   53.1 %
 

Sales and marketing

    3.5 %   9.0 %   10.1 %   10.0 %   9.4 %
 

Product development

    10.7 %   8.5 %   10.8 %   10.7 %   10.7 %
 

General and administrative

    19.1 %   16.6 %   14.3 %   14.7 %   15.1 %
 

Amortization of intangible assets

    17.1 %   19.4 %   16.2 %   17.0 %   13.6 %
                       
   

Total operating expenses

    106.9 %   111.2 %   109.1 %   110.4 %   101.8 %
                       

Loss from operations

    (6.9 )%   (11.2 )%   (9.1 )%   (10.4 )%   (1.8 )%
                       

Other income (expense)

                               
 

Interest income

    1.4 %   1.0 %   0.3 %   0.2 %   0.0 %
 

Interest expense

    (1.2 )%   (1.3 )%   (0.9 )%   (1.1 )%   (0.3 )%
 

Other income (expense), net

    (1.0 )%   (0.2 )%   (0.0 )%   0.0 %   (0.1 )%
                       
   

Total other expense

    (0.8 )%   (0.5 )%   (0.6 )%   (0.9 )%   (0.4 )%
                       

Loss before income taxes

    (7.7 )%   (11.7 )%   (9.7 )%   (11.3 )%   (2.2 )%

Income tax (benefit) provision

    (2.2 )%   (3.4 )%   1.4 %   1.4 %   1.3 %
                       

Net Loss

    (5.5 )%   (8.3 )%   (11.1 )%   (12.7 )%   (3.5 )%
                       

Nine Months ended September 30, 2009 and 2010

Revenues

          Revenues by service line were as follows:

 
  Nine Months ended
September 30,
   
 
 
  2009   2010   % Change  
 
  (in thousands)
   
 

Content & Media:

                   
 

Owned and operated websites

  $ 51,649   $ 75,982     47 %
 

Network of customer websites

    23,992     30,126     26 %
                 

Total Content & Media

    75,641     106,108     40 %

Registrar

    67,324     73,249     9 %
                 
 

Total revenues

  $ 142,965   $ 179,357     25 %
                 

          Content & Media Revenue    

    Owned and operated websites.  Content & Media revenue from our owned and operated websites increased by $24.4 million, or 47% to $76.0 million for the nine months ended September 30, 2010, as compared to $51.6 million for the year ago period. The increase was primarily due to growth in page views and RPMs driven primarily from publishing our content to our owned and operated websites. Page views increased by 20%, from 5.0 billion page views in the nine months ended September 30, 2009 to 6.0 billion page views in the nine months ended September 30, 2010. RPMs increased by 22% from $10.33 in the nine months ended September 30, 2009 to $12.60 in the nine months ended September 30, 2010. The increase in RPMs was primarily

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      attributable to a larger percentage of page views being represented by eHow which has a higher RPM than the weighted average of our other owned and operated properties. In addition, RPM growth was driven by increased display advertising revenue sold directly through our sales force during the first nine months of 2010 as compared to the same period in 2009. On average, our direct display advertising sales generate higher RPMs than display advertising we deliver from our advertising networks, such as Google.

    Network of Customer Websites.  Content & Media revenue from our network of customer websites for the nine months ended September 30, 2010 increased by $6.1 million or 26% to $30.1 million, as compared to $24.0 million for the year ago period. The increase was due to growth in page views on our customer websites. Page views increased by 26%, from 7.4 billion page views in the nine months ended September 30, 2009 to 9.3 billion page views in the nine months ended September 30, 2010, driven primarily from growth in our social media customer base. RPMs remained relatively consistent from $3.25 in the nine months ended September 30, 2009 to $3.24 in the nine months ended September 30, 2010, which reflected declines in advertising yields on undeveloped customer websites, being offset partially by increased content RPMs, due to improved yields on video advertising on YouTube.

          Registrar Revenue.    Registrar revenue for the nine months ended September 30, 2010 increased $5.9 million or 9%, to $73.2 million as compared to $67.3 million for the same period in 2009. The increase was primarily due to an increase in domain registrations from the addition of certain large volume domain customers, an increased number of renewals and growth in value-added services, offset partially by a decrease in average revenue per domain due to the timing of cash receipts associated with our growth in certain domains occurring towards the end of the third quarter 2010 being deferred until such domains are renewed. The number of domains increased 1.6 million or 18% to 10.6 million at September 30, 2010, as compared to 9.0 million at September 30, 2010. Our average revenue per domain remained relatively flat at $9.93 during the nine months ended September 30, 2010 as compared to $10.04 for the same period in 2009.

Operating Expenses

          Operating costs and expenses were as follows:

 
  Nine Months
ended September 30,
   
 
 
  2009   2010   % Change  
 
  (in thousands)
   
 

Service costs

  $ 82,941   $ 95,209     15 %

Sales and marketing

    14,324     16,805     17 %

Product development

    15,253     19,136     25 %

General and administrative

    21,076     27,035     28 %

Amortization of intangible assets

    24,254     24,482     1 %

          Service Costs.    Service costs for the nine months ended September 30, 2010 increased by $12.3 million or 15% to $95.2 million, as compared to $82.9 million in the year-ago period. The increase was primarily due to a $2.9 million increase in registry fees due to the growth in domain name registrations and related revenues over the same period, a $1.9 million increase in TAC resulting from an increase in undeveloped website customers, and related revenue, a $2.0 million increase in depreciation expense of technology assets required to manage the growth of our Internet traffic, data centers, advertising and domain registration transactions, and new products and services and a $1.6 million increase in personnel and related costs due to increased head count. As a percentage of revenues, service costs decreased 490 basis points to 53.1% for the nine months ended September 30, 2010 from 58.0% during the same period in 2009 due primarily to Content & Media revenues representing a higher percentage of total revenues during the nine months ended September 30, 2010 as compared to the same period in 2009.

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          Sales and Marketing.    Sales and marketing expenses for the nine months ended September 30, 2010 increased by $2.5 million or 17% to $16.8 million, as compared to $14.3 million in the year ago period. The increase was primarily due to a $1.5 million increase in personnel costs related to growing our direct advertising sales team and an increase in sales commissions as compared to the same period of 2009, as well as a $0.6 million related increase in stock-based compensation expense due to additional stock options granted to our employees. As a percentage of revenue, sales and marketing expense decreased 60 basis points to 9.4% during the nine months ended September 30, 2010 from 10.0% during the same period in 2009.

          Product Development.    Product development expenses increased by $3.8 million or 25% to $19.1 million during the nine months ended September 30, 2010, as compared to $15.3 million in the year ago period. The increase was largely due to approximately a $3.0 million increase in personnel and related costs, net of internal costs capitalized as internal software development, to further develop our platform, our owned and operated websites, and to support and grow our Registrar product and service offerings. As a percentage of revenue, product development expense was 10.7% in both periods.

          General and Administrative.    General and administrative expenses for the nine months ended September 30, 2010 increased by $5.9 million or 28% to $27.0 million as compared to $21.1 million in the year ago period. The increase was due primarily to a $3.8 million increase in personnel costs to support the growth in our business and professional fees related to our public company readiness efforts, a $0.7 million increase in stock-based compensation expense and a $0.4 million increase in rent expense for additional office space to support our growth. The increase in stock based compensation expense was due to additional employee stock option grants made during the nine months ended September 30, 2010, coupled with an increasing fair market value for new grants of common stock made over the same period. As a percentage of revenue, general and administrative expense increased 40 basis points to 15.1% during the nine months ended September 30, 2010 from 14.7% as compared to the same period in 2009.

          Amortization of Intangibles.    Amortization expense for the nine months ended September 30, 2010 increased by $0.2 million or 0.8% to $24.5 million as compared to $24.3 million in the year ago period. The movement included a $5.2 million increase in amortization of content due to our growing investment in our content. Largely offsetting this increase was a $2.9 million decrease in amortization of our identifiable intangible assets acquired in business combinations and a $1.9 million decrease in amortization of our undeveloped websites largely due to reduced investments in undeveloped websites in the nine months ended September 30, 2010 compared to 2009. As a percentage of revenue, amortization of intangibles decreased 330 basis points to 13.6% during the nine months ended September 30, 2010 from 17.0% during the same period in 2009 as a result of the increase in revenue and the factors listed above.

          Interest Income.    Interest income for the nine months ended September 30, 2010 decreased by $0.3 million to approximately $19,000 as compared to $0.3 million in the year ago period. The decrease in interest income was a result of relatively higher returns on our cash and short-term investment balances during 2009, coupled with higher average cash balances during the first nine months of 2009.

          Interest Expense.    Interest expense for the nine months ended September 30, 2010 decreased by $1.0 million or 66% to $0.5 million as compared to $1.5 million in the year ago period. The decrease in our interest expense was primarily a result of lower average debt balances in the first nine months of 2010 as compared to 2009. In addition, we issued $10.0 million in unsecured promissory notes in conjunction with the acquisition of our social media tools business in March 2008, which were repaid in full in April 2009. Interest expense related to these promissory notes was approximately $0.2 million in 2009.

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          Income Tax (Benefit) Provision.    During the nine months ended September 30, 2009 and 2010, we recorded an income tax provision of $2.0 million and $2.4 million, respectively. The provision in both periods primarily reflects the tax amortization of deductible goodwill, the ultimate realization of which is uncertain and thus not available to assure the realization of deferred tax assets. Had we been able to offset our deferred tax assets with the tax amortization associated with our goodwill, our effective tax rate and income tax provision would have been insignificant as a result of our valuation allowance during the nine months ended September 30, 2009 and 2010. We reduce our deferred tax assets by a valuation allowance, and if based on the weight of the available evidence, it is more likely than not our deferred tax assets will not be realized.

Nine Months ended December 31, 2007 and Years ended December 31, 2008 and 2009

Revenues

          Revenues by service line were as follows:

 
   
   
   
  % Change  
 
  Nine Months
ended
December 31,
2007
  Year ended December 31,  
 
  (2007
to
2008)
  (2008
to
2009)
 
 
  2008   2009  
 
  (in thousands)
   
   
 

Content & Media:

                               
 

Owned and operated websites

  $ 35,437   $ 62,833   $ 73,204     77 %   17 %
 

Network of customer websites

    13,905     21,988     34,513     58 %   57 %
                           

Total Content & Media

    49,342     84,821     107,717     72 %   27 %

Registrar

    52,953     85,429     90,735     61 %   6 %
                           
 

Total revenues

  $ 102,295   $ 170,250   $ 198,452     66 %   17 %
                           

          Content & Media Revenue from Owned and Operated Websites    

    2009 compared to 2008.  Content & Media revenue from our owned and operated websites increased by $10.4 million, or 17% to $73.2 million for the year ended December 31, 2009, compared to $62.8 million for the same period in 2008. The year over year increase was largely due to increased page views, and, to a lesser extent RPMs. Page views on our owned and operated websites increased by 15%, from 5.9 billion page views in the year ended December 31, 2008 to 6.8 billion page views in the year ended December 31, 2009. The increase in page views was due primarily to increased publishing of our platform content on our owned and operated websites offset by a decrease in page views from certain owned and operated websites that are not heavily dependent upon our platform content, such as certain entertainment web properties. RPMs on our owned and operated websites increased slightly by 1%, from $10.56 in the year ended December 31, 2008 to $10.69 in the year ended December 31, 2009. The overall increase in RPMs was primarily attributable to the overall increase in page views on eHow, which has higher RPMs than the weighted average of our other owned and operated websites, offset by decreased RPMs on the monetization of our undeveloped websites, which was largely due to overall declines in advertising yields from our advertising providers.

    2008 compared to 2007.  Content & Media revenue from our owned and operated websites increased by $27.4 million, or 77% to $62.8 million for the year ended December 31, 2008, compared to $35.4 million for the nine months ended December 31, 2007. While the increase was largely due to non-comparable periods (twelve months in 2008 as compared to nine months in 2007), the period to period increase was also due to higher page views and RPMs on our owned and operated websites. Page views on our owned and operated websites increased by

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      2.4 billion or 71%, from 3.5 billion pages viewed in the nine months ended December 31, 2007 to 5.9 billion pages viewed in the year ended December 31, 2008, combined with a 4% increase in RPMs from $10.18 in the nine months ended December 31, 2007 to $10.56 in the year ended December 31, 2008. The increase in page views was due primarily to the lack of comparability for the nine months in 2007 compared to a full year in 2008. The increase in RPMs was largely due to increased page views on our owned and operated properties, coupled with improved advertising yields on our undeveloped websites.

          Content & Media Revenue from Network of Customer Websites    

    2009 compared to 2008.  Content & Media revenue from our network of customer websites for the year ended December 31, 2009 increased by $12.5 million or 57% to $34.5 million, as compared to $22.0 million in the same period in 2008. The increase was largely due to growth in page views, offset by a decline in RPMs. Page views on our network of customer websites increased by 4.6 billion or 84%, from 5.4 billion page views in the year ended December 31, 2008 to 10.0 billion pages viewed in the year ended December 31, 2009. The increase in page views was due to the acquisition of Pluck in March 2008, which resulted in the inclusion of page views from our social media customer base for approximately ten months for the year ended December 31, 2008 compared to a full year in 2009, and the subsequent growth of publishers adopting our social media applications. RPMs decreased 15% from $4.04 in the year ended December 31, 2008 to $3.45 in the year ended December 31, 2009. The decrease in RPMs was largely due to overall declines in advertising yields from our advertising providers relating to our customers' undeveloped websites.

    2008 compared to 2007.  Content & Media revenue from our network of customer websites increased by $8.1 million, or 58% to $22.0 million for the year ended December 31, 2008, as compared to $13.9 million for the nine months ended December 31, 2007. The increase in dollars was largely due to non-comparable periods (twelve months in 2008 as compared to nine months in 2007) and the contribution of $6.9 million in additional revenue from the Pluck acquisition that was completed in March 2008. Largely, as a result of this acquisition, page views on our network of customer websites grew by 5.3 billion page views, from 108 million page views in the nine months ended December 31, 2007 to 5.4 billion page views in the year ended December 31, 2008. Offsetting our growth in page views was a decrease in RPMs from $129.06 in the nine months ended December 31, 2007 to $4.04 in the year ended December 31, 2008. The decrease in RPMs was largely due to a higher mix of page views from our social media customers in 2008, which have significantly lower RPMs on average than our undeveloped websites.

          Registrar Revenue    

    2009 compared to 2008.  Registrar revenue for the year ended December 31, 2009 increased $5.3 million or 6%, to $90.7 million compared to $85.4 million for the same period in 2008. The increase was largely due to an increase in domains, due in large part to an increased number of domain renewal registrations in 2009 compared to 2008, coupled with a slight increase in our average revenue per domain. The number of domain registrations increased 0.3 million or 3% to 9.1 million during the year ended December 31, 2009 as compared to 0.3 million or 4% to 8.8 million during the same period in 2008. Our average revenue per domain increased slightly by $0.26 or 3% to $10.11 during the year ended December 31, 2009 from $9.85 in the same period in 2008 largely due to price increases effected by our registry partners and increased sales of value-added services.

    2008 compared to 2007.  Registrar revenue for the year ended December 31, 2008 increased $32.4 million or 61%, to $85.4 million compared to $53.0 million during the nine months ended December 31, 2007. While the increase in dollars was largely due to non-comparable periods

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      (twelve months in 2008 as compared to nine months in 2007), the period to period increase was also due to a smaller amount of non-cash purchase accounting adjustment and an increase in domains and average revenue per domain. Domains increased 0.3 million or 4%, to 8.8 million during the year ended December 31, 2008 from 8.5 million during the nine months ended December 31, 2007. Our average revenue per domain increased by $1.24 or 14% to $9.85 during the year ended December 31, 2008 from $8.61 in the nine months ended December 31, 2007 largely due to price increases effected by our registry partners and increased sales of value-added services.

Cost and Expenses

          Operating costs and expenses were as follows:

 
   
   
   
  % Change  
 
  Nine Months
ended
December 31,
2007
  Year ended December 31,  
 
  (2007
to
2008)
  (2008
to
2009)
 
 
  2008   2009  
 
  (in thousands)
   
   
 

Service costs (exclusive of amortization of intangible assets)

  $ 57,833   $ 98,238   $ 114,482     70 %   17 %

Sales and marketing

    3,601     15,360     19,994     327 %   30 %

Product development

    10,965     14,407     21,502     31 %   49 %

General and administrative

    19,584     28,191     28,358     44 %   1 %

Amortization of intangible assets

    17,393     33,204     32,152     91 %   (3 )%

          Service Costs    

    2009 compared to 2008.  Service costs for the year ended December 31, 2009 increased by approximately $16.3 million or 17% to $114.5 million compared to $98.2 million in the same period in 2008. The increase was largely due to a $2.9 million increase in domain registry fees associated with our growth in domain registrations and related revenue over the same period, a $2.9 million increase in TAC due to an increase in undeveloped website customers and related revenue over the same period, a $1.7 million increase in direct costs associated with operating our network, a $1.7 million increase in revenue share payments and a $3.7 million increase in depreciation expense of technology assets purchased in the prior and current periods required to manage the growth of our Internet traffic, data centers, advertising transactions, domain registrations and new products and services. As a percentage of revenues, service costs remained flat at 57.7% in 2009 compared to 2008 largely due to the revenue growth from our owned and operated websites, which decreased service costs as a percentage of revenue, offset by the revenue growth from our undeveloped website customers, which resulted in slightly higher TAC as a percentage of our revenue in 2009 compared to 2008.

    2008 compared to 2007.  Service costs for the year ended December 31, 2008 increased by approximately $40.4 million or 70% to $98.2 million compared to $57.8 million for the nine months ended December 31, 2007. The increase was also due to non-comparable periods (twelve months in 2008 as compared to nine months in 2007) and due to the acquisition of Pluck in March 2008. As a percentage of revenue, service costs increased 117 basis points to 57.7% during the year ended December 31, 2008 compared to 56.5% during the nine months ended December, 31 2007, largely as a result of higher TAC as a percentage of our overall revenue during the nine months ended December 31, 2007 compared to the year ended December 31, 2008.

          Sales and Marketing    

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    2009 compared to 2008.  Sales and marketing expenses increased 30% or $4.6 million to $20.0 million for the year ended December 31, 2009 from $15.4 million for the same period in 2008. The increase was largely due to a $2.5 million increase in personnel costs related to growing our direct advertising sales team and an increase in sales commissions, coupled with a $1.5 million increase in marketing and advertising expense for our owned and operated properties in 2009 compared to 2008. As a percentage of revenue, sales and marketing expenses increased by 105 basis points from 9.0% during the year ended December 31, 2008 to 10.1% during the year ended December 31, 2009 largely due to the above-discussed growth of our sales personnel and advertising costs.

    2008 compared to 2007.  Sales and marketing expenses for the year ended December 31, 2008 increased by approximately $11.8 million or 327% to $15.4 million compared to $3.6 million for the nine months ended December 31, 2007. While the increase was partially due to non-comparable periods (twelve months in 2008 as compared to nine months in 2007), the primary increases were increased sales personnel associated with the acquisition of Pluck in March 2008 (not comparable to 2007) and increased expenses associated with growing our direct advertising sales team in 2008. As a percentage of revenues, sales and marketing expenses increased by 550 basis points to 9.0% during the year ended December 31, 2008 compared to 3.5% during the nine months ended December, 31 2007 largely due to the above-discussed growth of our sales personnel ahead of our direct advertising sales initiatives, which were in their beginning phase in 2008.

          Product Development    

    2009 compared to 2008.  Product development expenses increased by $7.1 million or 49% to $21.5 million during the year ended December 31, 2009 compared to $14.4 million in the same period in 2008. The year-over-year increase was largely due to approximately $6.1 million increase in personnel and related costs, net of internal costs capitalized as internal software development, to further develop our platform, our owned and operated websites, and to support and grow our Registrar product and service offerings. As a percentage of revenue, product development expenses increased 237 basis points to 10.8% during the year ended December 31, 2009 compared to 8.5% during the same period in 2008.

    2008 compared to 2007.  Product development expenses for the year ended December 31, 2008 increased by approximately $3.4 million or 31% to $14.4 million compared to $11.0 million for the nine months ended December 31, 2007. While the increase was largely due to non-comparable periods (twelve months in 2008 as compared to nine months in 2007), the increase was also due to increased personnel costs related to supporting and developing the growth of current and future offerings, some of which were ahead of our growth in revenues during the nine months ended December 31, 2007. As a percentage of revenues, product development expenses decreased by 226 basis points to 8.5% during the year ended December 31, 2008 compared to 10.7% during the nine months ended December 31, 2007.

          General and Administrative    

    2009 compared to 2008.  General and administrative expenses increased by $0.2 million or 1% to $28.4 million during the year ended December 31, 2009 compared to $28.2 million in the same period in 2008. The increase was largely due to increases in personnel costs of $0.9 million and facilities-related expenses of $0.6 million offset by decreases of $0.4 million in our bad debt expense due to improved cash collections and the inclusion of a $0.6 million gain on sale of one of our acquired website properties as a reduction to general and administrative expenses. As a percentage of revenue, general and administrative costs decreased 227 basis points to 14.3% during the year ended December 31, 2009 compared to 16.6% during the same period in 2008.

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    2008 compared to 2007.  General and administrative expenses for the year ended December 31, 2008 increased by approximately $8.6 million or 44% to $28.2 million compared to $19.6 million for the nine months ended December 31, 2007. While the increase was largely due to non-comparable periods (twelve months in 2008 as compared to nine months in 2007), the increase was also attributable to higher personnel costs, facilities and depreciation expense during the year ended 2008 compared to the nine months ended December 31, 2007 primarily associated with supporting the companywide growth during the year ended December 31, 2008. As a percentage of revenue, general and administrative expenses decreased by 259 basis points to 16.6% during the year ended December 31, 2008 compared to 19.1% during the nine months ended December 31, 2007.

          Amortization of Intangibles    

    2009 compared to 2008.  Amortization expense for the year ended December 31, 2009 decreased by $1.0 million or 3% to $32.2 million compared to $33.2 million in the same period in 2008. The decrease was due to a $1.8 million decrease in amortization of our identifiable intangible assets acquired in business combinations as a result of no business acquisition activities in 2009 compared to prior years, and a $1.4 million decrease in amortization of our undeveloped websites largely due to reduced investments in undeveloped websites in 2009 compared to 2008. Offsetting these decreases was a $2.1 million increase in amortization of content due to our growing investment in our platform. As a percentage of revenue, amortization of intangible assets decreased 330 basis points to 16.2% during the year ended December 31, 2009 compared to 19.5% during the same period in 2008.

    2008 compared to 2007.  Amortization expense for the year ended December 31, 2008 increased by $15.8 million or 91% to $33.2 million compared to $17.4 million during the nine months ended December 31, 2007. The increase was largely due to non-comparable periods (twelve months in 2008 as compared to nine months in 2007), and included increases of $8.5 million in amortization of our identifiable intangible assets acquired in business combinations, $5.1 million in amortization of our undeveloped websites and a $2.2 million increase in amortization of content. As a percentage of revenue, amortization of intangible assets increased 250 basis points to 19.5% during the year ended December 31, 2009 compared to 17.0% during the nine months ended December 31, 2007.

          Interest Income    

    2009 compared to 2008.  Interest income for the year ended December 31, 2009 decreased by $1.1 million or 70% to $0.5 million compared to $1.6 million in the same period in 2008. The decrease in our interest income during the year ended December 31, 2009 was a result of our receiving higher returns on our cash and short-term investment balances during the year ended December 31, 2008, coupled with higher average cash balances during the year ended December 31, 2008 as a result of our decision to pay down $45.0 million on our revolving line of credit throughout 2009.

    2008 compared to 2007.  Interest income for the year ended December 31, 2008 increased by $0.2 million or 16% to $1.6 million compared to $1.4 million during the nine months ended December 31, 2007. The increase in dollars was largely due to non-comparable periods (twelve months in 2008 as compared to nine months in 2007).

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          Interest Expense    

    2009 compared to 2008.  Interest expense for the year ended December 31, 2009 decreased by $0.3 million or 17% to $1.8 million compared to $2.1 million in the same period in 2008. The decrease in our interest expense during the year ended December 31, 2009 was primarily a result of lower overall interest rates associated with our revolving credit facility throughout the year ended December 31, 2009 compared to the same period in 2008. In addition, we issued $10 million in unsecured promissory notes in conjunction with the acquisition of Pluck in March 2008, which were repaid in full in April 2009. Interest expense related to these promissory notes was approximately $0.6 million in 2008 compared to $0.2 million in 2009.

    2008 compared to 2007.  Interest expense for the year ended December 31, 2008 increased by $0.9 million or 71% to $2.1 million compared to $1.2 million during the nine months ended December 31, 2007. The increase was largely due to non-comparable periods (twelve months in 2008 as compared to nine months in 2007), and a higher average debt balance under our revolving credit facility during the year ended December 31, 2008 compared to the nine months ended December 31, 2007.

          Other Income (Expense), Net    

    2009 compared to 2008.  Other income (expenses), net for the year ended December 31, 2009 decreased by $0.2 million or 92% to less than $0.1 million compared to $0.3 million in the same period in 2008. The decrease in other income (expense) net during the year ended December 31, 2009 was primarily a result of $0.2 million in lower overall transaction gains and losses on settlements of international receivables and an approximately $0.2 million decrease in the impact of changes in the fair value associated with our preferred warrant outstanding in 2008 and 2009, offset by one time write-down of a certain investments in 2008 of $0.3 million.

    2008 compared to 2007.  Other expenses for the year ended December 31, 2008 decreased by $0.7 million or 75% to $0.3 million compared to $1.0 million during the nine months ended December 31, 2007. The decrease was primarily a result of approximately $0.6 million of higher write-downs of certain investments during the nine months ended December 31, 2007 as compared to the year ended December 31, 2008.

          Income Tax (Benefit) Provision    

    2009 compared to 2008.  During the year ended December 31, 2009, we recorded an income tax provision of $2.7 million compared to an income tax benefit of $5.7 million during the same period in 2008, representing an $8.4 million year-over-year increase despite no significant changes in our year over year operating losses before income taxes. The $8.4 million increase was largely due to a change in our valuation allowance, which increased by $8.8 million from $1.8 million during the year ended December 31, 2008, to $10.6 million in the same period in 2009, primarily as a result of tax amortization of deductible goodwill, the ultimate realization of which is uncertain and thus not available to assure the realization of deferred tax assets.

    2008 compared to 2007.  Income tax benefit for the year ended December 31, 2008 increased by $3.4 million or 150% to $5.7 million compared to $2.3 million during the nine months ended December 31, 2007. While the increase was largely due to non-comparable periods (twelve months in 2008 as compared to nine months in 2007), the period to period increase was also a result of higher losses before income taxes, resulting in higher income tax benefit during the year ended December 31, 2008 compared to the nine months ended December 31, 2007. As a percentage of losses before income taxes, income tax benefits recognized in the 2008 and 2007 periods were relatively consistent at approximately 29%.

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Quarterly Results of Operations

          The following unaudited quarterly consolidated statements of operations for the quarters in the year ended December 31, 2009 and the nine months ended September 30, 2010, have been prepared on a basis consistent with our audited consolidated annual financial statements, and include, in the opinion of management, all normal recurring adjustments necessary for the fair statement of the financial information contained in those statements. The period-to-period comparison of financial results is not necessarily indicative of future results and should be read in conjunction with our consolidated annual financial statements and the related notes included elsewhere in this prospectus.

 
  Quarter ended,  
 
  March 31,
2009
  June 30,
2009
  September 30,
2009
  December 31,
2009
  March 31,
2010
  June 30,
2010
  September 30,
2010
 
 
  (in thousands, except per share data)
 

Revenues:

                                           
   

Content & Media:

                                           
   

Owned and operated websites

  $ 15,374   $ 16,823   $ 19,452   $ 21,555   $ 20,934   $ 25,702   $ 29,346  
   

Network websites

    6,721     8,133     9,138     10,521     9,264     10,391     10,471  
                               

Total Content & Media

    22,095     24,956     28,590     32,076     30,198     36,093     39,817  

Registrar

    21,864     22,358     23,102     23,411     23,449     24,262     25,538  
                               
       

Total revenue

    43,959     47,314     51,692     55,487     53,647     60,355     65,355  

Operating expenses(1)(2):

                                           
   

Service costs (exclusive of amortization of intangible assets)(3)

    25,995     27,314     29,632     31,541     30,164     31,571     33,474  
   

Sales and marketing

    4,549     4,632     5,143     5,670     4,751     5,645     6,409  
   

Product development

    4,843     4,932     5,478     6,249     6,032     6,482     6,622  
   

General and administrative

    7,181     6,813     7,082     7,282     7,978     9,462     9,595  
   

Amortization of intangible assets

    8,275     8,154     7,825     7,898     7,935     8,238     8,309  
                               
       

Total operating expenses

    50,843     51,845     55,160     58,640     56,860     61,398     64,409  
                               

Income (loss) from operations

    (6,884 )   (4,531 )   (3,468 )   (3,153 )   (3,213 )   (1,043 )   946  
                               

Other income (expense)

                                           
   

Interest income

    139     84     62     209     8     3     8  
   

Interest expense

    (658 )   (481 )   (369 )   (251 )   (181