10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission file number 001-34749

REACHLOCAL, INC.

(Exact name of registrant as specified in its charter)

Delaware	20-0498783
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

21700 Oxnard Street, Suite 1600 Woodland Hills, California	91367
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (818) 274-0260

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company’ in Rule 12b-2 of the Exchange Act.

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Title of Class	Number of Shares Outstanding on May 1, 2012
Common Stock, $0.00001 par value	28,491,914

INDEX

			Page
Part I.	Financial Information
	Item 1.	Condensed Consolidated Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011	2
		Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011	3
		Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2012 and 2011	4
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011	5
		Notes to the Condensed Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
	Item 4.	Controls and Procedures	29
Part II.	Other Information
	Item 1.	Legal Proceedings	30
	Item 1A.	Risk Factors	30
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
	Item 6.	Exhibits	31
		Signatures	32

PAGE 1

PART I

FINANCIAL INFORMATION

Item 1.         FINANCIAL STATEMENTS

REACHLOCAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(Unaudited)

	March 31, 2012			December 31, 2011
Assets
Current assets:
Cash and cash equivalents	$	90,336		$	84,525
Short-term investments		497			644
Accounts receivable, net of allowance for doubtful accounts of $441 and $363 at March 31, 2012 and December 31, 2011, respectively		4,388			4,240
Other receivables and prepaid expenses		8,354			9,226
Total current assets		103,575			98,635
Property and equipment, net		11,321			9,885
Capitalized software development costs, net		11,643			10,942
Restricted certificates of deposit		1,069			1,286
Intangible assets, net		1,472			1,957
Other assets		1,991			1,966
Goodwill		41,766			41,766
Total assets	$	172,837		$	166,437
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable	$	32,541		$	29,831
Accrued expenses		20,634			19,537
Deferred revenue and other current liabilities		35,025			30,747
Liabilities of discontinued operations		860			996
Total current liabilities		89,060			81,111
Deferred rent and other liabilities		2,686			3,039
Total liabilities		91,746			84,150
Commitments and contingencies (Note 6)
Stockholders’ Equity:
Common stock, $0.00001 par value—140,000 shares authorized; 28,499 and 28,552 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively		—			—
Receivable from stockholder		(87	)		(87	)
Additional paid-in capital		108,596			108,883
Accumulated deficit		(27,240	)		(26,234	)
Accumulated other comprehensive loss		(178	)		(275	)
Total stockholders’ equity		81,091			82,287
Total liabilities and stockholders’ equity	$	172,837		$	166,437

See notes to condensed consolidated financial statements.

PAGE 2

REACHLOCAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

	Three Months Ended March 31,
	2012			2011
Revenue	$	104,003		$	84,058
Cost of revenue		52,390			44,500
Operating expenses:
Selling and marketing		38,543			32,161
Product and technology		4,333			3,022
General and administrative		9,807			7,077
Total operating expenses		52,683			42,260
Loss from continuing operations		(1,070	)		(2,702	)
Other income, net		203			196
Loss from continuing operations before provision for income taxes		(867	)		(2,506	)
Provision for income taxes		139			166
Loss from continuing operations, net of income taxes		(1,006	)		(2,672	)
Loss from discontinued operations, net of income taxes		—			(775	)
Net loss	$	(1,006	)	$	(3,447	)
Net loss per share from continuing operations, basic and diluted	$	(0.03	)	$	(0.09	)
Net loss per share from discontinued operations, basic and diluted		—			(0.03	)
Net loss per share, basic and diluted	$	(0.03	)	$	(0.12	)
Weighted average common shares used in computation of net loss per share, basic and diluted		29,111			28,461

See notes to condensed consolidated financial statements.

PAGE 3

REACHLOCAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(Unaudited)

	Three Months Ended March 31,
	2012			2011
Net loss	$	(1,006	)	$	(3,447	)
Other comprehensive income, net of tax:
Foreign currency translation adjustments		97			111
Other comprehensive income, net of tax		97			111
Comprehensive loss	$	(909	)	$	(3,336	)

See notes to condensed consolidated financial statements.

PAGE 4

REACHLOCAL, INC.

     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

	Three Months Ended March 31,
	2012			2011
Cash flow from operating activities:
Net loss from continuing operations	$	(1,006	)	$	(2,672	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		2,964			2,246
Stock-based compensation, net		2,096			1,740
Provision for doubtful accounts		78			90
Changes in operating assets and liabilities:
Accounts receivable		(222	)		(287	)
Other receivables and prepaid expenses		836			203
Other assets		(30	)		86
Accounts payable and accrued expenses		3,530			545
Deferred revenue, rent and other liabilities		5,108			2,617
Net cash provided by operating activities, continuing operations		13,354			4,568
Net cash used for operating activities, discontinued operations		(136	)		(539	)
Net cash provided by operating activities		13,218			4,029
Cash flow from investing activities:
Additions to property, equipment and software		(4,490	)		(3,588	)
Acquisitions, net of acquired cash		(1,035	)		(5,793	)
Maturities of short-term investments		383			—
Purchases of short-term investments		—			(61	)
Net cash used in investing activities, continuing operations		(5,142	)		(9,442	)
Net cash used in investing activities, discontinued operations		—			(345	)
Net cash used in investing activities		(5,142	)		(9,787	)
Cash flow from financing activities:
Proceeds from exercise of stock options		11			1,946
Common stock repurchases		(2,786	)		—
Net cash provided by (used in) financing activities		(2,775	)		1,946
Effect of exchange rate changes on cash		510			315
Net change in cash and cash equivalents		5,811			(3,497	)
Cash and cash equivalents—beginning of period		84,525			79,906
Cash and cash equivalents—end of period	$	90,336		$	76,409
Supplemental disclosure of non-cash investing and financing activities:
Capitalized software development costs resulting from stock-based compensation and deferred payment obligations	$	86		$	650
Deferred payment obligation increase (decrease)	$	(243	)	$	1,849
Accrued purchases of fixed assets	$	—		$	353

See notes to condensed consolidated financial statements.

PAGE 5

REACHLOCAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Organization and Description of Business

ReachLocal, Inc. (the “Company”) was incorporated in the state of Delaware in August 2003. The Company’s operations are located in North America, Australia, the United Kingdom, the Netherlands, Germany, Japan and India. The Company’s mission is to help small- and medium-sized businesses (“SMBs”) acquire, maintain and retain customers via the Internet. The Company offers a comprehensive suite of online marketing solutions, including search engine marketing (ReachSearch™), Web presence (ReachCast™), display advertising and remarketing (ReachDisplay™), online marketing analytics (TotalTrack®), and an out-of-the-box assisted chat service (TotalLiveChat™), each targeted to the SMB market. The Company delivers this suite of services to SMBs through a combination of its proprietary technology platform, the RL Platform, its direct, “feet-on-the-street” sales force of Internet Marketing Consultants, or IMCs, and select third party agencies and resellers. 

2. Summary of Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of ReachLocal, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The condensed consolidated balance sheet as of December 31, 2011 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes required by GAAP.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the Company’s statement of financial position at March 31, 2012, the Company’s results of operations for the three months ended March 31, 2012 and 2011, and the Company’s cash flows for the three months ended March 31, 2012 and 2011. The results for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012. All references to the three months ended March 31, 2012 and 2011 in the notes to the condensed consolidated financial statements are unaudited.

Discontinued Operations

As a result of winding down and closing the operations of Bizzy, the local recommendation engine we developed, effective November 2011, the Company has reclassified and presented all related historical financial information as “discontinued operations” in the accompanying Consolidated Balances Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows. In addition, all Bizzy-related activities have been excluded from the notes unless specifically referenced.

 Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

PAGE 6

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, software development costs, goodwill, long-lived and intangible assets, and stock-based compensation. These estimates are based on information available as of the date of the financial statements. Therefore, actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenue for its services when all of the following criteria are satisfied:

• persuasive evidence of an arrangement exists;

• services have been performed;

• the selling price is fixed or determinable; and

• collectability is reasonably assured.

The Company recognizes revenue as the cost for the third-party media is incurred, which is upon delivery of the advertising on behalf of its clients. The Company recognizes revenue for its ReachSearch product as clicks are recorded on sponsored links on the various search engines and for its ReachDisplay product when the display advertisements record impressions or as otherwise provided in its agreement with the applicable publisher. The Company recognizes revenue for its ReachCast product on a straight line basis over the applicable service period for each campaign. The Company recognizes revenue when it charges set-up, management service or other fees on a straight line basis over the term of the related campaign contract or the completion of any obligation for services, if shorter. When the Company receives advance payments from clients, management records these amounts as deferred revenue until the revenue is recognized. When the Company extends credit, management records a receivable when the revenue is recognized.

When the Company sells through agencies, it either receives payment in advance of services or in some cases extends credit. The Company pays each agency an agreed-upon commission based on the revenue it earns or cash it receives. Some agency clients who have been extended credit may offset the amount otherwise due to the Company by any commissions they have earned. Management evaluates whether it is appropriate to record the gross amount of campaign revenue or the net amount earned after commissions. As the Company is the primary party obligated in the arrangement, subject to the credit risk, with discretion over both price and media, management recognizes the gross amount of such sales as revenue and any commissions are recognized as a selling and marketing expense.

The Company also has a small number of resellers. Resellers integrate the Company’s services, including ReachSearch, ReachDisplay, and TotalTrack, into their product offerings. In most cases, the resellers integrate with the Company’s RL Platform through a custom Application Programming Interface (API). Resellers are responsible for the price and specifications of the integrated product offered to their clients. Resellers pay the Company in arrears, net of commissions and other adjustments. Management recognizes revenue generated under reseller agreements net of the agreed-upon commissions and other adjustments earned or retained by the reseller, as management believes that the reseller has retained sufficient control and bears sufficient risks to be considered the primary obligor in those arrangements.

The Company offers future incentives to clients in exchange for minimum commitments. In these circumstances, management estimates the amount of the future incentives that will be earned by clients and defers a portion of the otherwise recognizable revenue. Estimates are based upon a statistical analysis of previous campaigns for which such incentives were offered. Should a client not meet its minimum commitment and no longer qualify for the incentive, management recognizes the revenue previously deferred related to the estimated incentive.

Software Development Costs

The Company capitalizes costs to develop software when management has determined that the development efforts will result in new or additional functionality or new products. Costs capitalized as internal use software are amortized on a straight-line basis over the estimated three-year useful life. Costs incurred prior to meeting these criteria and costs associated with ongoing maintenance are expensed as incurred and are recorded along with amortization of capitalized software development costs as product and technology expenses within the accompanying condensed consolidated statements of operations.

PAGE 7

Goodwill

The Company’s total goodwill of $41.8 million as of both March 31, 2012 and December 31, 2011 is related to the Company’s acquired businesses.   In accordance with Accounting Standards Codification (“ASC”) 280, Segment Reporting, the Company has identified one reporting segment and two reporting units—North America and Australia—for purposes of evaluating goodwill. These reporting units each constitute a business or group of businesses for which discrete financial information is available and is regularly reviewed by segment management. North America assigned goodwill is $9.4 million and Australia assigned goodwill is $32.4 million. The Company reviews the carrying amounts of goodwill for possible impairment whenever events or changes in circumstance indicate that the related carrying amount may not be recoverable. The Company performs its annual assessment of goodwill impairment as of the first day of each fourth quarter.

The Company follows the amended guidance for assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, in accordance with ASC 350-20, Intangibles – Goodwill and Other. Entities are provided with the option of first performing a qualitative assessment on any of its reporting units to determine whether further quantitative impairment testing is necessary. An entity may also bypass the qualitative assessment for any reporting unit in any period and proceed directly to the quantitative impairment test. If an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a two-step impairment test is necessary. The first step of the impairment test involves comparing the estimated fair values of each of our reporting units with their respective carrying amounts, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, including goodwill, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the estimated fair value of the reporting unit is less than its carrying amount, including goodwill, then the second step is performed to compare the carrying amount of the goodwill with its implied fair value. 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. The Company estimates fair value utilizing the projected discounted cash flow method and a discount rate determined by the Company commensurate with the risk inherent in its business model.

Long-Lived and Intangible Assets      

The Company reports finite-lived, acquisition-related intangible assets at fair value, net of accumulated amortization. Identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives of three years. Straight-line amortization is used because no other pattern over which the economic benefits will be consumed can be reliably determined.

The Company reviews the carrying values of long-lived assets, including intangible assets, for possible impairment whenever events or changes in circumstance indicate that the related carrying amount may not be recoverable. In its analysis of other finite lived amortizable intangible assets, the Company applies the guidance of ASC 350-20, Intangibles – Goodwill and Other, in determining whether any impairment conditions exist. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Intangible assets are attributable to the various developed technologies and client relationships of the businesses the Company has acquired.  Long-lived assets to be disposed of are reported at the lower of carrying amount or estimated fair value less cost to sell.

Stock-Based Compensation

The Company accounts for stock-based compensation based on fair value. The Company follows the attribution method, which reduces current stock-based compensation expenses recorded by the effect of anticipated forfeitures. Management estimates forfeitures based upon its historical experience, which has resulted in a small expected forfeiture rate.

The fair value of each award is estimated on the date of the grant and amortized over the requisite service period, which is the vesting period. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards on the date of grant. Determining the fair value of stock-based awards at the grant date under this model requires judgment, including estimating volatility, expected term and risk-free interest rate. The assumptions used in calculating the fair value of stock-based awards represent management’s estimate based on judgment and subjective future expectations. These estimates involve inherent uncertainties. If any of the assumptions used in the Black-Scholes model significantly changes, stock-based compensation for future awards may differ materially from the awards granted previously.

PAGE 8

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and potential dilutive shares outstanding during the period, to the extent such shares are dilutive. Potential dilutive shares are composed of incremental common shares issuable upon the exercise of stock options, warrants and unvested restricted shares using the treasury stock method.

The following potentially dilutive securities have been excluded from the calculation of diluted net loss per common share as they would be anti-dilutive because the Company had net losses for the periods below (in thousands):

	Three Months Ended March 31,
	2012		2011
Deferred stock consideration and restricted stock		26		458
Stock options and warrant		475		2,639
		501		3,097

In addition, certain other stock options have been excluded from the computation of diluted net loss per share because they would have had an anti-dilutive impact as the deemed proceeds under the treasury stock method were in excess of the average fair market value for the period.  For the three months ended March 31, 2012 and 2011, the number of such securities was 6.8 million and 1.2 million, respectively.

3. Fair Value of Financial Instruments

The Company applies the fair value hierarchy for financial instruments. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last is considered unobservable, that are used to measure fair value:

• Level 1—Quoted prices in active markets for identical assets or liabilities.

• Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table summarizes the basis used to measure certain of the Company’s financial assets that are carried at fair value (in thousands):

			Basis of Fair Value Measurement
	Balance at March 31, 2012		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	90,336	$	90,336	$	—	$	—
Certificates of deposit	$	1,566	$	1,566	$	—	$	—

PAGE 9

			Basis of Fair Value Measurement
	Balance at December 31, 2011		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	84,525	$	84,525	$	—	$	—
Certificates of deposit	$	1,930	$	1,930	$	—	$	—

4. Acquisitions

Deferred Consideration

Pursuant to the terms of its 2011 acquisition  of DealOn, LLC (“DealOn”), on February 8, 2012, the Company made a deferred payment in the amount of $0.5 million, net of the working capital adjustment and certain other adjustments, and issued 10,649 shares of its common stock. The following table summarizes the remaining DealOn deferred consideration milestone payments as of March 31, 2012, subject to adjustment under the acquisition agreement (in thousands):

	Deferred Cash Consideration		Deferred Stock Consideration		Total
August 2012	$	367	$	122	$	489
February 2013		367		122		489
Total Deferred Consideration	$	734	$	244	$	978

As part of the consideration paid to acquire SMB:LIVE Corporation (“SMB:LIVE”), on February 22, 2011, the Company paid $0.2 million in cash and issued 90,062 shares of its common stock. On August 22, 2011 the Company paid $0.3 million in cash and issued 93,346 shares of its common stock, and on February 22, 2012  the Company paid $0.6 million in cash and issued 181,224 shares of its common stock. The February 22, 2012 payment represented the final payment of deferred consideration in connection with the SMB:LIVE acquisition.

Intangible Assets

As of March 31, 2012, intangible assets from the acquisitions of DealOn, ReachLocal Australia Pty Ltd. (“ReachLocal Australia”) and SMB:LIVE included developed technology of $1.0 million (net of accumulated amortization of $2.1 million), and customer relationships of $0.4 million (net of accumulated amortization of $3.1 million). Intangible assets are amortized on a straight-line basis over the estimated useful life of three years. Based on the current amount of intangibles subject to amortization, the estimated amortization expense for the succeeding three years is as follows (in thousands):

Year Ending December 31,
2012 (9 months)	$	1,090
2013		357
2014		25
Total	$	1,472

PAGE 10

For each of the three months ended March 31, 2012 and 2011, amortization expense related to acquired intangibles was $0.5 million.

5. Software Development Costs

Capitalized software development costs consisted of the following (in thousands):

	March 31, 2012			December 31, 2011
Capitalized software development costs	$	23,856		$	21,686
Accumulated amortization		(12,213	)		(10,744	)
Capitalized software development costs, net	$	11,643		$	10,942

The Company recorded amortization expense of $1.5 million and $1.0 million for the three months ended March 31, 2012 and 2011, respectively.  As of March 31, 2012, $2.3 million of capitalized software development costs relate to projects still in process.

6. Commitments and Contingencies

Deferred Payment Obligations

In connection with the February 8, 2011 acquisition of DealOn, on February 8, 2012, the Company paid $0.5 million in cash and issued 10,649 shares of its common stock. The Company remains obligated to pay up to approximately $0.7 million in cash and issue 10,649 shares of its common stock, subject to adjustment under the terms of the acquisition agreement (see Note 4).

Litigation

The Company is subject to various legal proceedings and claims arising in the ordinary course of business. Although occasional adverse decisions or settlements may occur, management believes that the final disposition of existing matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

7. Stockholders’ Equity

On November 4, 2011, the Company announced that its Board of Directors adopted a program that authorized the repurchase of up to $20.0 million of the Company’s outstanding common stock. At March 31, 2012, the Company had repurchased 1,257,000 shares of its common stock under the program for an aggregate of $9.3 million, of which $2.6 million or 388,000 shares were repurchased during the three months ended March 31, 2012. Purchases will be made from time-to-time in open market or privately negotiated transactions as determined by the Company’s management. The amount and timing of the share repurchase will depend on business and market conditions, stock price, trading restrictions, acquisition activity, and other factors. The share repurchase program does not obligate the Company to acquire any particular amount of common stock, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion.

8. Stock-Based Compensation

Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and recognized on a straight-line basis over the requisite service period, which is generally the vesting period.

PAGE 11

The following table summarizes vested and unvested options activity (number of shares in thousands):

	All Options					Vested Options					Unvested Options
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding at December 31, 2011		6,515		$	12.63		3,471		$	9.72		3,044		$	15.96
Granted		957			7.86		—			—		957			7.86
Options vesting		—			—		478			17.30		(478	)		17.30
Exercised		(17	)		0.69		(17	)		0.69		—			—
Forfeited		(342	)		14.14		(295	)		13.96		(47	)		15.30
Outstanding at March 31, 2012		7,113		$	11.95		3,637		$	10.41		3,476		$	13.56

The following table presents the weighted-average assumptions used to estimate the fair values of the stock options granted during the three months ended March 31, 2012 and 2011.

	Three Months Ended March 31,
	2012			2011
Expected dividend yield		0	%		0	%
Risk-free interest rate		0.88	%		2.30	%
Expected life (in years)		4.75			4.75
Expected volatility		57.1	%		58.5	%

The weighted average remaining contractual life of all options outstanding as of March 31, 2012 was 5.0 years. The remaining contractual life for options vested and exercisable at March 31, 2012 was 4.2 years. The aggregate intrinsic value of all options outstanding as of March 31, 2012 was $2.9 million, and the aggregate intrinsic value of options vested and exercisable at March 31, 2012 was $2.6 million, in each case based on the fair value of the Company’s common stock on March 31, 2012. The per-share weighted-average grant date fair value of unvested options as of March 31, 2012 was $6.39. The per share weighted-average grant date fair value of options vested during the three months ended March 31, 2012 was $8.09. The per-share weighted-average grant date fair value of options forfeited during the three months ended March 31, 2012 was $5.73. The total grant date fair value of options vested during the three months ended March 31, 2012 was $3.9 million. The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2012 was $0.1 million.

Restricted Stock and Restricted Stock Units

The following table summarizes restricted stock awards and restricted stock unit awards (in thousands):

	Number of shares
Unvested at December 31, 2011		123
Granted		182
Cancelled		(1	)
Vested		(16	)
Unvested at March 31, 2012		288

PAGE 12

Stock-Based Compensation Expense

The Company records stock-based compensation expense net of amounts capitalized as software development costs. The following table summarizes stock-based compensation (in thousands):

	Three Months Ended March 31,
	2012		2011
Stock-based compensation	$	2,182	$	2,246
Less: Capitalized stock-based compensation		86		506
Stock-based compensation expense, net	$	2,096	$	1,740

Stock-based compensation expense, net of capitalization, is included in the accompanying condensed consolidated statements of operations in the following captions (in thousands):

	Three Months Ended March 31,
	2012		2011
Stock-based compensation expense, net
Cost of revenue	$	54	$	51
Selling and marketing		300		369
Product and technology		249		229
General and administrative		1,493		1,091
	$	2,096	$	1,740

As of March 31, 2012, there was $21.3 million of unrecognized stock-based compensation related to restricted stock, restricted stock units and outstanding stock options, net of estimated forfeitures. This amount is expected to be recognized over a weighted average period of 1.5 years. Future stock-based compensation expense for these awards may differ in the event actual forfeitures deviate from management’s estimates.

9. Income Taxes

The Company follows ASC Topic 740-270, Income taxes—Interim Reporting, for the computation and presentation of its interim period tax provision. Accordingly, management estimates the effective annual tax rate and applies this rate to the year-to-date pre-tax book income or loss to determine the interim provision for income taxes. For the three months ended March 31, 2012 and 2011, the income tax provisions were $0.1 million and $0.2 million, respectively, and relate to federal, state and foreign income taxes, including the deferred tax impact of prior business combinations.

The Company and its subsidiaries file income tax returns in the U.S. federal, various state and foreign jurisdictions. All of the Company’s income tax returns since inception are open to examination by federal, state, and foreign tax authorities.

10. Segment Information

Revenue by geographic region with respect to the Direct Local channel and national brands is based on the physical location of the sales office, and with respect to agencies and resellers, is based on the physical location of the agency or reseller. The following summarizes revenue and long-lived assets by geographic region (in thousands):

	Three Months Ended March 31,
	2012		2011
Revenue:
North America	$	76,476	$	66,852
International		27,527		17,206
	$	104,003	$	84,058

PAGE 13

	March 31, 2012		December 31, 2011
Long-lived assets (excluding patents and other intangibles):
North America	$	7,455	$	7,203
International		3,898		2,721
	$	11,353	$	9,924

The results of the Australia geographic region have been included in the Company’s consolidated financial statements and include revenues of $16.7 million and $11.3 million for the three months ended March 31, 2012 and 2011, respectively. Long-lived assets of the Australia geographic region were $1.7 million and $1.4 million at March 31, 2012 and December 31, 2011, respectively.

11. Subsequent Events

On April 23, 2012, the Company filed its Notice of Annual Meeting of Stockholders and Proxy Statement for the Annual Meeting of Stockholders of the Company to be held on May 22, 2012, which contains a proposal submitted to the Company’s stockholders to approve a one-time stock option exchange for eligible employees. The proposed option exchange would permit option holders to surrender certain outstanding stock options for cancellation in exchange for the grant of new replacement options to purchase a lesser number of shares having an exercise price equal to the fair market value of our common stock on the replacement grant date, or for replacement options issued to the Company’s executive officers subject to Section 16 of the Exchange Act, an exercise price equal to the greater of the fair market value of our common stock on the replacement grant date or $13 per share. The proposed option exchange is subject to approval of the Company’s stockholders and the Board of Directors, Compensation Committee and senior management retain the discretion not to commence the option exchange even if approved by the stockholders.

If commenced, the exchange ratios will be calculated to result in an aggregate fair value of the replacement options approximately equal to the aggregate fair value of the surrendered options, which is intended to minimize the compensation expense resulting from the option exchange. Participation will be at the discretion of each option holder, thus the potential reduction of the Company’s total number of outstanding options cannot be known until completion of the exchange. If  approved by the Company’s stockholders and the Board of Directors, Compensation Committee or senior management deterime to implement the stock option exchange, it is expected to commence during June 2012.

PAGE 14

Item 2.           MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

In this document, ReachLocal, Inc. and its subsidiaries are referred to as “we,” “our,” “us,” the “Company” or “ReachLocal.”

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our 2011 Annual Report on Form 10-K.

This quarterly report on Form 10-Q contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in our 2011 Annual Report on Form 10-K. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

Our mission is to help small and medium-sized businesses, or SMBs, acquire, maintain and retain customers via the Internet. We offer a comprehensive suite of online marketing and reporting solutions, including search engine marketing (ReachSearch), Web presence and social media marketing (ReachCast), display advertising and remarketing (ReachDisplay), online marketing analytics (TotalTrack), an out-of-the-box assisted chat service (TotalLiveChat), and other related products and services, each targeted to the SMB market. We deliver these solutions to SMBs through a combination of our proprietary platform, the RL Platform, and our direct, “feet-on-the-street” sales force of Internet Marketing Consultants, or IMCs, and select third-party agencies and resellers.

We use our RL Platform to create advertising campaigns for SMBs to target potential customers in their geographic area, optimize those campaigns in real time and track tangible results. Through a single Internet advertising budget, we enable our clients to reach local customers across the Internet, including through all of the major search engines and leading general interest and vertically focused online publishers. In 2010, we expanded the RL Platform to include ReachCast, our full-service Web presence and social media solution. We continue to expand the RL Platform to include additional advertising products designed specifically for the needs of our SMB clients. Empowered by the RL Platform, our IMCs, which are based in or near the cities in which our clients operate, establish a direct consultative relationship with our clients and provide our solutions to achieve their marketing objectives.

We generate revenue by providing online advertising solutions for our clients through our portfolio of online marketing and advertising solutions. We sell ReachSearch and ReachDisplay based on a package pricing model in which our clients commit to a fixed fee that includes the media; the optimization, reporting and tracking technologies of the RL Platform; and the personnel dedicated to support and manage their campaigns. We also generate revenue from digital marketing solutions for our clients that do not include the purchase of third-party media, including ReachCast, TotalTrack and TotalLiveChat. Generally our products are sold to our clients in a single budget to simplify the purchasing process.

We offer our products and services through two primary channels. Our IMCs sell our products and services directly to SMBs, which we refer to as our Direct Local channel. We also sell our products and services through third-party agencies and resellers, and to national or regional businesses with multiple locations, such as franchisors, which we refer to as national brands. Because the sale to agencies, resellers and national brands involves negotiations with businesses that generally represent an aggregated group of SMB advertisers, we group them together as our National Brands, Agencies and Resellers channel.

PAGE 15

In 2006, we entered our first market outside of North America through a joint venture in Australia, and in 2009, we acquired the remaining interest in the joint venture. We entered the United Kingdom and Canada in 2008, Germany and the Netherlands in 2011, and Japan in 2012. In 2010, we commenced campaign management and provisioning operations in India.

Business Model and Operating Metrics

Our Direct Local channel represents the majority of our revenue. As a percentage of revenue, Direct Local revenue has increased to 79% for the three months ended March 31, 2012, from 77% for the three months ended March 31, 2011. Growth in Direct Local revenue is primarily driven by the growth in the number of IMCs, the maturity of our IMCs, the increase in the number of international IMCs as a percentage of our total IMCs, and the increase in IMC productivity. Underclassmen expense for the three months ended March 31, 2012 and 2011 were $11.1 million and $10.4 million, respectively.

      Number of IMCs

Our ongoing investment in increasing the number of our IMCs has been the principal engine for our growth. Typically, each month we hire 40-60 IMCs worldwide, with the hiring weighted towards the first ten months of the year. We refer to IMCs with 12 months or less of experience as Underclassmen. In particular, our revenue growth is driven by the increase in the number of our Upperclassmen, who are significantly more productive than our Underclassmen. As such, we believe that our ability to grow our business is highly dependent on our ability to grow the number of our Upperclassmen. Beyond our hiring practices, which determine the number of IMCs to be hired as well as the rate at which we hire them, the increase in the number of Upperclassmen depends primarily on the productivity of Underclassmen, as the majority of Underclassmen attrition has been involuntary and is based on performance relative to a standard level of revenue growth and other performance metrics determined by us. We do not expect all Underclassmen to become Upperclassmen, and our investment decisions anticipate the cost of attrition. Our revenue growth is also driven by the increase in the number of our international IMCs as our international IMCs are on average more productive than our IMCs in North America, which we attribute to lower levels of competition and lower existing online advertising consumption by SMBs in those markets. The increase in the number of international IMCs was a result of our international expansion.

At March 31, 2012, we had 381 Upperclassmen and 417 Underclassman, for a total of 798 IMCs, as compared to 303 Upperclassmen and 435 Underclassman, for a total of 738 IMCs, as of March 31, 2011.

      Underclassmen Expense

Underclassmen do not, in the aggregate, make a positive contribution to operating income. Our largest operating expenses include the hiring, training and retention of Underclassmen in support of our goal of developing more Upperclassmen.

Underclassmen Expense is a number we calculate to approximate our investment in Underclassmen and is comprised of the selling and marketing expenses we allocate to Underclassmen during a reporting period. The amount includes the direct salaries and allocated benefits of the Underclassmen (excluding commissions), training and sales organization expenses, including depreciation, allocated based on relative headcount and marketing expenses allocated based on relative revenue. While we believe that Underclassmen Expense provides useful information regarding our approximate investment in Underclassmen, the methodology we use to arrive at our estimated Underclassmen Expense was developed internally by management, is not a concept or method recognized by GAAP and other companies may use different methodologies to calculate or approximate measures similar to Underclassmen Expense. Accordingly, our calculation of Underclassmen Expense may not be comparable to similar measures used by other companies.

We determine the amount to invest in Underclassmen based on our objectives for development of the business and the key factors affecting IMC productivity described above. The increase in Underclassmen Expense for the three months ended March 31, 2012 as compared to the preceding year period was primarily attributable to our international expansion, partially offset by a reduced investment in North America.

PAGE 16

      Active Advertisers and Active Campaigns

We track the number of Active Advertisers and Active Campaigns to evaluate the growth, scale and diversification of our business. We also use these metrics to determine the needs and capacity of our sales forces, our support organization, and other personnel and resources.

Active Advertisers is a number we calculate to approximate the number of clients directly served through our Direct Local channel as well as clients served through our National Brands, Agencies and Resellers channel. We calculate Active Advertisers by adjusting the number of Active Campaigns to combine clients with more than one Active Campaign as a single Active Advertiser. Clients with more than one location are generally reflected as multiple Active Advertisers. Because this number includes clients served through the National Brands, Agencies and Resellers channel, Active Advertisers includes entities with which we do not have a direct client relationship. Numbers are rounded to the nearest hundred.

Active Campaigns is a number we calculate to approximate the number of individual products or services we are managing under contract for Active Advertisers. For example, if we were performing both ReachSearch and ReachDisplay campaigns for a client, we consider that two Active Campaigns. Similarly, if a client purchased ReachSearch campaigns for two different products or purposes, we consider that two Active Campaigns. Numbers are rounded to the nearest hundred.

At March 31, 2012, we had approximately 20,400 Active Advertisers and 30,100 Active Campaigns, as compared to approximately 17,400 Active Advertisers and 24,300 Active Campaigns as of March 31, 2011. Active Advertisers and Active Campaigns increased over the period due to an increase in the number of IMCs and an increase in the number of products available for our IMCs to sell.

Basis of Presentation

      Discontinued Operations

As a result of the winding down of the operations of Bizzy, we have reclassified and presented all related historical financial information as “discontinued operations” in the Consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows. In addition, we have excluded all Bizzy-related activities from the following discussions, unless specifically referenced.

      Sources of Revenue

We derive our revenue principally from the provision and sale of online advertising to our clients. Revenue includes the sale of our ReachSearch, ReachCast, ReachDisplay, and other products based on a package pricing model in which our clients commit to a fixed fee that includes the media, the optimization, reporting and tracking technologies of the RL Platform, and the personnel dedicated to support and manage their campaigns; the sale of our ReachCast, TotalTrack, TotalLiveChat, and other products and services; and set-up, management and service fees associated with these products and other services. We distribute our products and services directly through our sales force of IMCs, who are focused on serving SMBs in their local markets through an in-person, consultative process, which we refer to as our Direct Local channel, as well as a separate sales force targeting our National Brands, Agencies and Resellers channel. The sales cycle for sales to SMBs ranges from one day to over a month. Sales to our National Brands, Agencies and Resellers clients generally require several months.

We typically enter into multi-month agreements for the delivery of our ReachSearch, ReachDisplay and ReachCast products. Under our agreements, our SMB clients typically pay, in advance, a fixed fee on a monthly basis, which includes all charges for the included technology and media services, management, third-party content and other costs and fees. We record these prepayments as deferred revenue and only record revenue for income statement purposes as we purchase media and perform other services on behalf of clients. Generally, when at least 85% of requisite purchases and other services have occurred and an additional campaign cycle remains under the agreement, we make an additional billing or automatic collection for the next campaign cycle.

Our National Brands, Agencies and Resellers clients enter into agreements of various lengths or that are indefinite. Our National Brands, Agencies and Resellers clients either pay in a manner similar to Direct Local clients or are extended credit privileges with payment generally due in 30 to 60 days. There were $4.0 million and $3.8 million of accounts receivables related to our National Brands, Agencies and Resellers at March 31, 2012 and December 31, 2011, respectively

PAGE 17

      Cost of Revenue

Cost of revenue consists primarily of the costs of online media acquired from third-party publishers. Media cost is classified as cost of revenue in the period in which the corresponding revenue is recognized. From time to time, publishers offer the Company rebates based upon various factors and operating rules, including the amount of media purchased. We record these rebates in the period in which they are earned as a reduction to cost of revenue and the corresponding payable to the applicable publisher, or as an other receivable, as appropriate. Cost of revenue also includes third-party telephone and information services costs, data center and third-party hosting costs, credit card processing fees, third-party content and other direct costs.

In addition, cost of revenue includes costs to initiate, operate and manage clients’ campaigns, other than costs associated with the Company’s sales force, which are reflected as selling and marketing expenses. Cost of revenue includes salaries, benefits, bonuses and stock-based compensation for the related staff, including the cost of Web Presence Professionals who are the principal service providers for the Company’s ReachCast product, and allocated overhead such as depreciation expense, rent and utilities, as well as an allocable portion of our technical operations costs.  Cost of revenue also includes the amortization and impairment charges on certain acquired intangible assets.

      Operating Expenses

Selling and Marketing. Selling and marketing expenses consist primarily of personnel and related expenses for our selling and marketing staff, including salaries and wages, commissions, benefits, bonuses and stock-based compensation; travel and business costs; training, recruitment, marketing and promotional events; advertising; other brand building and product marketing expenses; and occupancy, technology and other direct overhead costs. A portion of the compensation for IMCs, sales management and other employees in the sales organization is based on commissions. In addition, the cost of agency commissions is included in selling and marketing expenses.

Product and Technology. Product and technology expenses consist primarily of personnel and related expenses for our product development and technology staff, including salaries, benefits, bonuses and stock-based compensation, and the cost of certain third-party service providers and other expenses, including occupancy, technology and other direct overhead costs. Technology operations costs, including related personnel and third-party costs, are included in product and technology expenses. We capitalize a portion of costs for software development and, accordingly, include amortization of those costs as product and technology expenses as the RL Platform addresses all aspects of our activities, including supporting the IMC selling and consultation process, online publisher integration, efficiencies and optimization, providing insight to our clients into the results and effects of their online advertising campaigns and supporting all of the financial and other back-office functions of our business.

Product and technology expenses also include the amortization of the technology obtained in acquisitions and expenses of the deferred payment obligations related to acquisitions attributable to product and technology personnel.

General and Administrative. General and administrative expenses consist primarily of personnel and related expenses for executive, legal, finance, human resources and corporate communications, including wages, benefits, bonuses and stock-based compensation, professional fees, insurance premiums and other expenses, including occupancy, technology and other direct overhead, public company costs and other corporate expenses.

      Critical Accounting Policies and Estimates

The preparation of our condensed consolidated financial statements in conformity with GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses. We continually evaluate our estimates, judgments and assumptions based on available information and experience. Because the use of estimates is inherent in the financial reporting process, actual results could differ from those estimates.

There have been no material changes to our critical accounting policies. For further information on our critical and other significant accounting policies, see our 2011 Annual Report on Form 10-K.

PAGE 18

We believe that the following critical accounting policies involve our more significant judgments, assumptions and estimates and, therefore, could have the greatest potential impact on our condensed consolidated financial statements:

•     Revenue recognition

•      Software development costs

•      Goodwill

•      Long-lived and intangible assets

•      Stock-based compensation

      Revenue Recognition

We recognize revenue for our services when all of the following criteria are satisfied:

•     persuasive evidence of an arrangement exists;

•      services have been performed;

•      the selling price is fixed or determinable; and

•      collectability is reasonably assured

We recognize revenue as the cost for the third-party media is incurred, which is upon delivery of the advertising on behalf of our clients. We recognize revenue for our ReachSearch product as clicks are recorded on sponsored links on the various search engines and for our ReachDisplay product when the display advertisements record impressions or as otherwise provided in our agreement with the applicable publisher. We recognize revenue for our ReachCast product on a straight line basis over the applicable service period for each campaign. We recognize revenue when we charge set-up, management service or other fees on a straight line basis over the term of the related campaign contract or the completion of any obligation for services, if shorter. When we receive advance payments from clients, we record these amounts as deferred revenue until the revenue is recognized. When we extend credit, we record a receivable when the revenue is recognized.

When we sell through agencies, we either receive payment in advance of services or in some cases extend credit. We pay each agency an agreed-upon commission based on the revenue we earn or cash we receive. Some agency clients that have been extended credit may offset the amount otherwise due to us by any commissions they have earned. We evaluate whether it is appropriate to record the gross amount of campaign revenue or the net amount earned after commissions. As we are the primary party obligated in the arrangement, subject to the credit risk, with discretion over both price and media, management recognizes the gross amount of such sales as revenue and any commissions are recognized as a selling and marketing expense.

We also have a small number of resellers. Resellers integrate our services, including ReachSearch, ReachDisplay  and TotalTrack, into their product offerings. In each case, the resellers integrate with the our RL Platform through a custom Application Programming Interface (API). Resellers are responsible for the price and specifications of the integrated product offered to their clients. Resellers pay us in arrears, net of commissions and other adjustments. We recognize revenue generated under reseller agreements net of the agreed-upon commissions and other adjustments earned or retained by the reseller, as we believe that the reseller has retained sufficient control and bears sufficient risks to be considered the primary obligor in those arrangements.

We offer future incentives to clients in exchange for minimum commitments. In these circumstances, we estimate the amount of the future incentives that will be earned by clients and defer a portion of the otherwise recognizable revenue. Estimates are based upon a statistical analysis of previous campaigns for which such incentives were offered. Should a client not meet its minimum commitment and no longer qualify for the incentive, we recognize the revenue previously deferred related to the estimated incentive.

      Software Development Costs

We capitalize our costs to develop internal-use software when management has determined the development efforts will result in new or additional functionality or results in new products. Costs incurred prior to meeting these criteria and costs associated with ongoing maintenance are expensed as incurred. We track our costs by project and by each release and objectively determine which projects resulted in additional functionality or new products for which we can improve our offerings and market presence. Our developers, engineers and quality assurance staff currently record their time spent on various projects on a weekly basis so we may determine the approximate amount of costs that should be capitalized. Our senior management team reviews these estimates to determine the appropriate level of capitalization. We monitor our existing capitalized software and reduce its carrying value as the result of releases that render previous features or functions obsolete or otherwise reduce the value of previously capitalized costs.

PAGE 19

Costs capitalized as software development costs are amortized on a straight-line basis over the estimated useful life of the software of three years. Amortization of those costs is included in product and technology expenses as the RL Platform addresses all aspects of our activities, including supporting the IMC selling and consultation process, online publisher integration, efficiencies and optimization, providing insight to our clients into the results and effects of their online advertising campaigns and supporting all of the financial and other back office functions of our business.

      Goodwill

Our total goodwill of $41.8 million at both March 31, 2012 and December 31, 2011 is related to our acquired businesses. In accordance with Accounting Standards Codification (“ASC”) 280, Segment Reporting, and have identified one segment and two reporting units—North America and Australia—for purposes of evaluating goodwill. These reporting units each constitute a business or group of businesses for which discrete financial information is available and is regularly reviewed by segment management. At both March 31, 2012 and December 31, 2011, assigned-goodwill was $9.4 million for North America and $32.4 million for Australia. We review the carrying amounts of goodwill for possible impairment whenever events or changes in circumstance indicate that the related carrying amount may not be recoverable. We perform our annual assessment of goodwill impairment as of the first day of each fourth quarter.

We apply the guidance of ASC 350-20, Intangibles – Goodwill and Other. Entities are provided with the option of first performing a qualitative assessment on any of its reporting units to determine whether further quantitative impairment testing is necessary. An entity may also bypass the qualitative assessment for any reporting unit in any period and proceed directly to the quantitative impairment test. If an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a two-step impairment test is necessary. The first step of the impairment test involves comparing the estimated fair values of each of our reporting units with their respective carrying amounts, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, including goodwill, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the estimated fair value of the reporting unit is less than its carrying amount, including goodwill, then the second step is performed to compare the carrying amount of the goodwill with its implied fair value. 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. We estimate fair value utilizing the projected discounted cash flow method and discount rate determined by management to commensurate the risk inherent in our business model.

      Long-Lived and Intangible Assets      

We report finite-lived, acquisition-related intangible assets at fair value, net of accumulated amortization. Identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives of three years. Straight-line amortization is used because no other pattern over which the economic benefits will be consumed can be reliably determined.

Management reviews the carrying values of long-lived assets, including intangible assets, for possible impairment whenever events or changes in circumstance indicate that the related carrying amount may not be recoverable. In our analysis of other finite lived amortizable intangible assets, we apply the guidance of ASC 350-20, Intangibles – Goodwill and Other, in determining whether any impairment conditions exist. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Intangible assets are attributable to the various developed technologies and client relationships of the businesses we have acquired.  Long-lived assets to be disposed of are reported at the lower of carrying amount or estimated fair value less cost to sell.

      Stock-Based Compensation

We account for stock-based compensation based on fair value. We follow the attribution method, which reduces current stock-based compensation expenses recorded by the effect of anticipated forfeitures. We estimate forfeitures based upon its historical experience, which has resulted in a small expected forfeiture rate.

The fair value of each award is estimated on the date of the grant and amortized over the requisite service period, which is the vesting period. We use the Black-Scholes option pricing model to estimate the fair value of stock-based awards on the date of grant. Determining the fair value of stock-based awards at the grant date under this model requires judgment, including estimating volatility, expected term and risk-free interest rate. The assumptions used in calculating the fair value of stock-based awards represent management’s estimate based on judgment and subjective future expectations. These estimates involve inherent uncertainties. If any of the assumptions used in the Black-Scholes model significantly changes, stock-based compensation for future awards may differ materially from the awards granted previously.

PAGE 20

Results of Operations

Comparison of the Three Months Ended March 31, 2012 and 2011

	Three Months Ended March 31,
	2012			2011
Revenue	$	104,003		$	84,058
Cost of revenue (1)		52,390			44,500
Operating expenses:
Selling and marketing (1)		38,543			32,161
Product and technology (1)		4,333			3,022
General and administrative (1)		9,807			7,077
Total operating expenses		52,683			42,260
Loss from continuing operations		(1,070	)		(2,702	)
Other income, net		203			196
Loss from continuing operations before provision for income taxes		(867	)		(2,506	)
Provision for income taxes		139			166
Loss from continuing operations, net of income taxes		(1,006	)		(2,672	)
Loss from discontinued operations, net of income taxes		—			(775	)
Net loss	$	(1,006	)	$	(3,447	)

(1) Stock-based compensation, net of capitalization, and depreciation and amortization, included in the above line items (in thousands):

	Three Months Ended March 31,
	2012		2011
Stock-based compensation:
Cost of revenue	$	54	$	51
Selling and marketing		300		369
Product and technology		249		229
General and administrative		1,493		1,091
	$	2,096	$	1,740
Depreciation and amortization:
Cost of revenue	$	122	$	156
Selling and marketing		518		325
Product and technology		1,969		1,467
General and administrative		355		298
	$	2,964	$	2,246

PAGE 21

Revenue

	Three Months Ended March 31,
	2012		2011		2012-2011 % Change
(in thousands)
Direct Local	$	81,740	$	64,515		26.7	%
National Brands, Agencies and Resellers		22,263		19,543		13.9	%
Total revenue	$	104,003	$	84,058		23.7	%
At period end:
Number of IMCs:
Upperclassmen		381		303		25.7	%
Underclassmen		417		435		(4.1	)%
Total		798		738		8.1	%
Active Advertisers (1)		20,400		17,400		17.2	%
Active Campaigns (2)		30,100		24,300		23.9	%

(1) Active Advertisers is a number we calculate to approximate the number of clients directly served through our Direct Local channel as well as clients served through our National Brands, Agencies and Resellers channel. We calculate Active Advertisers by adjusting the number of Active Campaigns to combine clients with more than one Active Campaign as a single Active Advertiser. Clients with more than one location are generally reflected as multiple Active Advertisers. Because this number includes clients served through the National Brands, Agencies and Resellers channel, Active Advertisers includes entities with which we do not have a direct client relationship. Numbers are rounded to the nearest hundred.

(2) Active Campaigns is a number we calculate to approximate the number of individual products or services we are managing under contract for Active Advertisers. For example, if we were performing both ReachSearch and ReachDisplay campaigns for a client, we consider that two Active Campaigns. Similarly, if a client purchased ReachSearch campaigns for two different products or purposes, we consider that two Active Campaigns. Numbers are rounded to the nearest hundred.

The increase in Direct Local revenue of $17.2 million for the three months ended March 31, 2012, compared to the same period in 2011, was largely attributable to increased productivity resulting from an increase in the number of Upperclassmen and the tenure of our Upperclassmen. Contributing to the increase, was growth in the number of international IMCs who, on average, are more productive than our IMCs in North America, and higher spend from clients purchasing multiple ReachLocal products.

The increase in National Brands, Agencies and Resellers revenue of $2.7 million for the three months ended March 31,  2012, compared to the same period in 2011, was primarily due to increases in  revenue of $1.7 million from our domestic and international National Brands clients and $1.2 million from an increase in our international Agencies and Resellers, partially offset by a slight decrease from our North American Agencies and Resellers.

Cost of Revenue

	Three Months Ended March 31,						2012-2011 % Change
	2012			2011
(in thousands)
Cost of revenue	$	52,390		$	44,500			17.7	%
As a percentage of revenue:		50.4	%		52.9	%

The decrease in our cost of revenue as a percentage of revenue for the three months ended March 31, 2012, compared to the same period in 2011, was primarily due to an increase in publisher rebates and scaling of our operations and service infrastructure, partially offset by the change in our geographic, product and service mix. In our emerging international markets, the initial sales focus is on our ReachSearch product, which affects our product and service mix.  

PAGE 22

 Publisher rebates as a percentage of revenue increased to 4.5% of revenue for the three months ended March 31,  2012 from 1.1% for the three months ended March 31, 2011, due to more favorable rebate terms, primarily from the reseller agreements we entered into with Google during May 2011.

Our cost of revenue as a percentage of revenue will be affected in the future by the mix and relative amount of media we purchase to fulfill service requirements, the availability and amount of publisher rebates, the mix of products and services we offer, our geographic mix, our media buying efficiency, and the costs of support and delivery.

      Operating Expenses

Over the past several years, we have significantly increased the scope of our operations. We intend to continue to increase our sales force, product offerings and the infrastructure to support them. In growing our business, particularly in international markets, we are incurring expenses to support our long-term growth plans, acknowledging that these investments may put pressure on near-term periodic operating results and increase our operating expenses as a percentage of revenue.

Selling and Marketing

	Three Months Ended March 31,						2012-2011 % Change
	2012			2011
(in thousands)
Salaries, benefits and other costs	$	27,445		$	22,704			20.9	%
Commission expense		11,098			9,457			17.4	%
Total selling and marketing	$	38,543		$	32,161			19.8	%
Underclassmen Expense included above, excluding commissions (1)	$	11,055		$	10,396			6.3	%
As a percentage of revenue:
Salaries, benefits and other costs		26.4	%		27.0	%
Commission expense		10.7	%		11.3	%
Total selling and marketing		37.1	%		38.3	%

(1) See “Non-GAAP Financial Measures” for our definition of Underclassmen Expense.

The increase in selling and marketing salaries, benefits and other costs in absolute dollars for the three months ended March 31, 2012, compared to the same period in 2011, was primarily due to an increase in our IMC headcount and related recruiting, training and facilities costs.  The decrease as a percentage of revenue for the three months ended March 31, 2012, compared to the same period in 2011, was due primarily to increased productivity and operational scalein our established markets, partially offset by expenses related to our entrance into new international markets.

The increase in commission expense in absolute dollars for the three months ended March 31, 2012, compared to the same period in 2011, was due to increased sales. As a percentage of revenue, commission expense decreased due to a higher percentage of revenue from our Direct Local channel, for which we pay lower commission rates. We do not expect continued decreases in commission expense as a percentage of revenue due to an expected higher percentage of Upperclassmen, who generally earn higher commission rates based on increased productivity.

The increase in Underclassmen Expense for the three months ended March 31, 2012, compared to the same period in 2011, was primarily due to increased IMC hiring in international markets. As we continue to invest in additional Underclassmen and retain additional Upperclassmen, selling and marketing expenses will continue to increase in absolute dollars.

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Product and Technology

	Three Months Ended March 31,						2012-2011
	2012			2011			% Change
(in thousands)
Product and technology expenses	$	4,333		$	3,022			43.4	%
Capitalized software development costs from product and technology resources		1,707			1,997			(14.5	)%
Total product and technology expenses and capitalized costs	$	6,040		$	5,019			20.3	%
As a percentage of revenue:
Product and technology expenses costs		4.2	%		3.6	%
Capitalized software development costs from product and technology resources		1.6	%		2.4	%
Total product and technology costs expensed and capitalized		5.8	%		6.0	%

The increase in product and technology expenses in both absolute dollars and as a percentage of revenue for the three months ended March 31, 2012, compared to the same period in 2011, was primarily attributable to $1.0 million of increased salaries and compensation expense as a result of increased headcount related to the ongoing development of the RL Platform and new product initiatives, and $0.5 million of increased amortization expense related to previously capitalized software development costs.

The decrease in the amount of capitalized software development costs in both absolute dollars and as a percentage of revenues for the three months ended March 31, 2012, compared to the same period in 2011, was primarily due to the timing of capitalizable and non-capitalizable projects.

General and Administrative

	Three Months Ended March 31,						2012-2011 % Change
	2012			2011
(in thousands)
General and administrative	$	9,807		$	7,077			38.6	%
As a percentage of revenue:		9.4	%		8.4	%

The increase in general and administrative expenses in absolute dollars and as a percentage of revenue for the three months ended March 31, 2012, compared to the same period in 2011, was primarily due to  $1.7 million of increased employee and facilities costs to support the growth of the business, including our international expansion, $0.5 million of increased tax, consulting and audit fees, including costs to support our Sarbanes-Oxley compliance efforts and our international expansion initiatives, and $0.4 million of increased stock-based compensation expense.

We expect general and administrative expenses to increase in absolute dollars as we continue to add administrative personnel and incur additional professional fees and other expenses resulting from our continued growth, including internationally, and the compliance requirements associated with being a public company.

PAGE 24

Other Income (Expense), Net

Other income, net was essentially flat for the three months ended March 31, 2012 and 2011. Other income, net consists of interest income resulting from invested balances.

Provision (Benefit) for Income Taxes

The income tax provision of $0.1 million and $0.2 million for the three months ended March 31, 2012 and 2011, respectively, relate to federal, state and foreign income taxes, including the deferred tax impact of prior business combinations.

Loss from Discontinued Operations

There was no activity in the discontinued operations of Bizzy for the three months ended March 31, 2012; the loss from discontinued operations of $0.8 million for the three months ended March 31, 2011 was related to the wind-down of the operations of Bizzy.

Non-GAAP Financial Measures

In addition to our GAAP results discussed above, we believe Adjusted EBITDA and Underclassmen Expense are useful to investors in evaluating our operating performance. For the three months ended March 31, 2012 and 2011, our Adjusted EBITDA and Underclassmen Expense were as follows:

	Three Months Ended March 31,
	2012		2011
(in thousands)
Adjusted EBITDA (1)	$	4,022	$	1,698
Underclassmen Expense (2)	$	11,055	$	10,396

(1) Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) from continuing operations before interest, income taxes, depreciation and amortization expenses, excluding, when applicable, stock-based compensation, the effects of accounting for business combinations (including any impairment of acquired intangibles and, in the case of the acquisition of SMB:LIVE, the deferred cash consideration), and amounts included in other non-operating income or expense. This definition excludes the effect of Bizzy as a discontinued operation and the impairment of certain intangibles acquired in the DealOn acquisition.

(2) Underclassmen Expense. We define Underclassmen Expense as our investment in Underclassmen, which is comprised of the selling and marketing expenses we allocate to Underclassmen during a reporting period. The amount includes the direct salaries and allocated benefits of the Underclassmen (excluding commissions), training and sales organization expenses including depreciation allocated based on relative headcount and marketing expenses allocated based on relative revenue. While we believe that Underclassmen Expense provides useful information regarding our approximated investment in Underclassmen, the methodology we use to arrive at our estimated Underclassmen Expense was developed internally by the company, is not a concept or method recognized by GAAP and other companies may use different methodologies to calculate or approximate measures similar to Underclassmen Expense. Accordingly, our calculation of Underclassmen Expense may not be comparable to similar measures used by other companies.

Our management uses Adjusted EBITDA because (i) it is a key basis upon which our management assesses our operating performance; (ii) it may be a factor in the evaluation of the performance of our management in determining compensation; (iii) we use it, in conjunction with GAAP measures such as revenue and income (loss) from operations, for operational decision-making purposes; and (iv) we believe it is one of the primary metrics investors use in evaluating Internet marketing companies.

PAGE 25

Our management believes that Adjusted EBITDA permits an assessment of our operating performance, in addition to our performance based on our GAAP results, that is useful in assessing the progress of the business. By excluding (i) the effects of accounting for business combinations and associated acquisition and integration costs, which obscure the measurable performance of the business operations; (ii) depreciation and amortization and other non-operating income and expense, each of which may vary from period to period without any correlation to underlying operating performance; and (iii) stock-based compensation, which is a non-cash expense, we believe that we are able to gain a fuller view of the operating performance of the business. We provide information relating to our Adjusted EBITDA so that investors have the same data that we employ in assessing our overall operations. We believe that trends in our Adjusted EBITDA are a valuable indicator of operating performance on a consolidated basis and of our ability to produce operating cash flow to fund working capital needs, capital expenditures and investments in Underclassmen.

In addition, we believe Adjusted EBITDA and similar measures are widely used by investors, securities analysts, ratings agencies and other interested parties in our industry as a measure of financial performance and debt-service capabilities. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

• Adjusted EBITDA does not reflect our cash expenditures for capital equipment or other contractual commitments;

• Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect capital expenditure requirements for such replacements;

• Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

• Adjusted EBITDA does not consider the potentially dilutive impact of issuing equity-based compensation to our management team and employees;

• Adjusted EBITDA does not reflect the potentially significant interest expense or the cash requirements necessary to service interest or principal payments on indebtedness we may incur in the future;

• Adjusted EBITDA does not reflect income and expense items that relate to our financing and investing activities, any of which could significantly affect our results of operations or be a significant use of cash;

• Adjusted EBITDA does not reflect certain tax payments that may represent a reduction in cash available to us; and

• Other companies, including companies in our industry, calculate Adjusted EBITDA measures differently, which reduces their usefulness as a comparative measure.

Adjusted EBITDA is not intended to replace operating income (loss), net income (loss) and other measures of financial performance reported in accordance with GAAP. Rather, Adjusted EBITDA is a measure of operating performance that you may consider in addition to those measures. Because of these limitations, Adjusted EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results, including cash flows provided by operating activities, and using total Adjusted EBITDA as a supplemental financial measure.

The following table presents a reconciliation of Adjusted EBITDA to our loss from operations for each of the periods indicated:

	Three Months Ended March 31,
	2012			2011
(in thousands)
Loss from continuing operations	$	(1,070	)	$	(2,702	)
Add:
Depreciation and amortization		2,964			2,246
Stock-based compensation, net		2,096			1,740
Acquisition and integration costs		32			414
Adjusted EBITDA	$	4,022		$	1,698

PAGE 26

Liquidity and Capital Resources

	Three Months Ended March 31,
Consolidated Statements of Cash Flow Data: (in thousands)	2012			2011
Net cash provided by operating activities, continuing operations	$	13,354		$	4,568
Net cash used in investing activities, continuing operations	$	(5,142	)	$	(9,442	)
Net cash used by discontinued operations	$	(136	)	$	(884	)
Net cash provided by (used in) financing activities	$	(2,775	)	$	1,946

At March 31, 2012, we had cash and cash equivalents of $90.3 million and short-term investments of $0.5 million. Cash and cash equivalents consist of cash, money market accounts and certificates of deposit. Short term investments consist of certificates of deposit with original maturities in excess of three months but less than 12 months. To date, we have experienced no loss of our invested cash, cash equivalents or short-term investments. We cannot, however, provide any assurances that access to our invested cash, cash equivalents and short-term investments will not be impacted by adverse conditions in the financial markets. At March 31, 2012, we had no long-term indebtedness for borrowed money and are not subject to any restrictive bank covenants. At March 31, 2012, we had $1.1 million in restricted certificates of deposit to secure letters of credit issued to landlords and others.

Although we expect that cash flow from operations and our existing cash balances will be sufficient to continue funding our expansion activities, these investments, including investments in developing new products and services for our clients, could require us to seek additional equity or debt financing, and that financing may not be available on terms favorable to us or at all. In addition, we intend to continue to increase our investment in Underclassmen and in the development of new products and services for our clients, which could require significant capital and entail non-capitalized expenses that could increase our loss from operations.

      Operating Activities

Our cash flow from operating activities during the three months ended March 31, 2012 resulted primarily from adjustments for non-cash expenses and increases in accounts payable and other liabilities, and deferred revenue. Our loss from continuing operations of $1.0 million was more than offset by non-cash depreciation and amortization of $3.0 million, and non-cash stock-based compensation of $2.1 million. Cash flow from operating activities also reflected increases in deferred revenue and deferred payment obligations of $5.1 million due to the growth of our business, and an increase in accounts payable and accrued expenses of $3.5 million due to the fluctuation in timing of payments to certain vendors, including the normalization of rebates receivable.

Our cash flow from operating activities during the three months ended March 31, 2011 also resulted primarily from changes in our operating assets and liabilities and non-cash operating expenses. Our loss from continuing operations of $2.7 million was more than offset by increases in deferred revenue and rent of $2.6 million and accounts payable and accrued expenses of $0.5 million, both due to the growth of our business. Cash flow from operating activities also resulted from non-cash depreciation and amortization of $2.2 million and non-cash stock-based compensation of $1.7 million.

      Investing Activities

Our primary investing activities have consisted of purchases of property and equipment, capitalized software development costs, short-term investments, and business acquisitions. During the three months ended March 31, 2012, our purchases of property and equipment and capitalization of software costs increased year-over-year as the business grew. Purchases of property and equipment and capitalization of software costs will vary from period to period due to the timing of the expansion of our operations and our software development efforts. In addition, we made payments on deferred obligations related to the DealOn and SMB:LIVE acquisitions totaling $1.0 million. The payment of deferred consideration for the SMB:LIVE acquisition represented the final payment. These uses of cash were partially offset by maturities of short-term investments of $0.4 million.

During the three months ended March 31, 2011, we invested $5.8 million, net of cash acquired, in the purchase of DealOn.

PAGE 27

      Financing Activities

Our cash flow used in financing activities during the three months ended March 31, 2012 resulted primarily from repurchases of our common stock of $2.8 million pursuant to our share repurchase program. During the three months ended March 31, 2011, we received $1.9 million in proceeds from the exercise of stock options.

Future cash flows from financing activities may also be affected by our repurchases of our common stock pursuant to our share repurchase program. On November 4, 2011, we announced that our Board of Directors authorized the repurchase of up to $20.0 million of our outstanding common stock. At March 31, 2012, we had executed repurchases of $9.3 million of 1,257,000 shares of our common stock under the program. Purchases may be made from time-to-time in open market or privately negotiated transactions as determined by our management. The amount and timing of the share repurchase will depend on business and market conditions, stock price, trading restrictions, acquisition activity, and other factors. The share repurchase program does not obligate us to acquire any particular amount of common stock, and the repurchase program may be suspended or discontinued at any time at our discretion.

Off-Balance Sheet Arrangements

At March 31, 2012, we did not have any off-balance sheet arrangements.

Item 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflation risks.

Interest Rate Fluctuation Risk

We do not have any long-term indebtedness for borrowed money. Our investments include cash, cash equivalents and short-term investments. Cash and cash equivalents and short-term investments consist of cash, money market accounts and certificates of deposit. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. We do not enter into investments for trading or speculative purposes. Our investments are exposed to market risk due to a fluctuation in interest rates, which may affect our interest income and the fair market value of our investments. Due to the short-term nature of our investment portfolio, we do not believe an immediate 10% increase in interest rates would have a material effect on the fair market value of our portfolio, and therefore we do not expect our operating results or cash flows to be materially affected to any degree by a sudden change in market interest rates.

Foreign Currency Exchange Risk

We have foreign currency risks related to our investments, revenue and operating expenses denominated in currencies other than the U.S. dollar, principally the Australian dollar, the British pound sterling, the Canadian dollar, the European euro, the Japanese yen, and the Indian rupee. An unfavorable change in these exchange rates relative to the dollar would result in an unfavorable impact on the value of our investments, our revenue and operating losses. For the three months ended March 31, 2012, an unfavorable 10 percent change in exchange rates would have resulted in a decrease in revenue of $3.0 million and an increase in operating loss for the period of $0.2 million. We currently do not hedge or otherwise manage our currency exposure. As our international operations expand to more countries and mature, our risks associated with fluctuations in currency rates will become greater, and we will continue to reassess our approach to managing this risk. In addition, currency fluctuations or a weakening U.S. dollar can increase the costs of our international expansion.

Inflation Risk

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

PAGE 28

Item 4.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of March 31, 2012. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (2) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PAGE 29

PART II

OTHER INFORMATION

Item 1.          LEGAL PROCEEDINGS

From time to time we are involved in various legal proceedings and claims arising in the ordinary course of business. Although occasional adverse decisions or settlements may occur, we believe that the final disposition of existing matters will not have a material adverse effect on our financial position, results of operations or cash flows.

Item 1A.       RISK FACTORS

Investors should carefully consider the risk factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, in addition to the other information contained in our Annual Report and in this quarterly report on Form 10-Q.

Item 2.          UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On November 4, 2011, we announced that our Board of Directors adopted a program that authorized the repurchase of up to $20.0 million of our outstanding common stock. At March 31, 2012, we had repurchased 1,257,000 shares of our common stock under the program for an aggregate of $9.3 million, of which $2.6 million was repurchased during the three months ended March 31, 2012. Purchases will be made from time-to-time in open market or privately negotiated transactions as determined by our management. The amount and timing of the share repurchase will depend on business and market conditions, stock price, trading restrictions, acquisition activity, and other factors. The share repurchase program does not obligate us to acquire any particular amount of common stock, and the repurchase program may be suspended or discontinued at any time at our discretion.

Common stock repurchases during the quarter ended March 31, 2012 were as follows:

Period	Total Number of Shares Purchased	Average Price Paid Per Share	Total Number of Shares Purchased as Part of a Publicly Announced Program	Maximum Value of Shares That May Yet Be Purchased Under a Publicly Announced Program
January 2012	295,100	$6.32	295,100	$11,462,743
February 2012	80,420	$7.65	80,420	$10,844,889
March 2012	12,582	$7.82	12,582	$10,746,110

PAGE 30

Item 6.          EXHIBITS

Exhibit No	Description of Exhibit
10.01	Offer Letter between ReachLocal, Inc. and John Mazur, dated January 14, 2008, as amended
10.02	Secondment Letter between ReachLocal, Inc. and John Mazur, dated January 1, 2012
31.01	Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02	Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.02	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calcualtion Libnkase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extesnion Presentation Linkbase Document

PAGE 31

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

REACHLOCAL, INC.
By:	/s/ Zorik Gordon
Name: Title:	Zorik Gordon  Chief Executive Officer
By:	/s/ Ross G. Landsbaum
Name: Title:	Ross G. Landsbaum Chief Financial Officer

Date: May 4, 2012

PAGE 32

EXHIBIT INDEX

Exhibit No	Description of Exhibit
10.01	Offer Letter between ReachLocal, Inc. and John Mazur, dated January 14, 2008, as amended
10.02	Secondment Letter between ReachLocal, Inc. and John Mazur, dated January 1, 2012
31.01	Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02	Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.02	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calcualtion Libnkase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extesnion Presentation Linkbase Document

EX-10.01

 Exhibit 10.01

January 14, 2008

John Mazur

1625 Dempsey Street

Mclean, VA. 22101

Dear John:

I am pleased to extend to you an offer of employment with ReachLocal, Inc. (the “Company”) as Managing Director, (“MD”), Reach Local Europe (“RLE”) residing in the United Kingdom.  In this capacity, you will be reporting to the Company’s Chief Executive Officer.  With your talent and leadership experience, we look forward to you joining the Company as MD of RLE.

Now, let me clarify the following important points concerning the terms of your employment in the following agreement (the “Agreement”):

1.           Commencement Date. The commencement date will be as of December 31, 2007.

2.           Cash Compensation.

a.           Base Compensation.  During your employment, the Company will pay you a base salary at the rate of £300,000 (British Pounds Sterling). Until such time as you have permanently relocated to the United Kingdom and the Company has established a United Kingdom payroll system, you will be paid the base salary in equivalent US Dollars at the currency exchange rate in effect when each payroll is processed.  Your base compensation will be paid in accordance with the Company’s normal payroll procedures.

b.           Incentive Compensation.The Company will establish a VIP Agent Account to which sales managers, agencies and advertisers for RLE will be linked.  During your employment, the Company will pay you a monthly commission equal to the lesser of (i) 0.5% of the Net Advertising Revenue (as defined below) generated by RLE in that calendar month in excess of One Million Pounds (₤1,000,000) or (ii) Twenty-Five Thousand Pounds (₤25,000).  Commissions will be paid in accordance with the Company’s normal payroll procedures.  “Net Advertising Revenue” shall refer to the total advertising dollars spent on behalf of advertisers or agencies established under your VIP Agent Account and for which the Company has received payment during your employment, less the sum of the following:  (i) any credits, promotional or otherwise, issued to RLE advertisers or agents; (ii) any credit card charge-backs made to RLE advertisers or agencies; (iii) any other payment cancellations made by or on behalf of RLE advertisers or agencies (in each case whether relating to the current or any previous month).

3.           Equity Compensation.  Subject to your execution of this letter and your commencement of work and the conditions set forth below, the Company’s Board of Directors (the “Board”) has granted to you a stock option to purchase 256,340 shares of Common Stock of the Company (the “Option”), representing, as of the date of this letter, 1.0% of the total outstanding shares of the Company, on a fully diluted basis.  The exercise price for the Option is $9.2260, representing the fair market value of the Common Stock of the Company, as determined by the Board.  Such option shall be subject to the terms and conditions of the Company’s Stock Option Plan and related Stock Option Agreement a copy of which is attached hereto and by this reference made a part hereof.  The Stock Option Agreement will, among other things, provide for the vesting of the shares underlying the Option (the “Option Shares”) as follows:  12.5% of the Option Shares will vest on June 30, 2008.  The remaining 87.5% of the Option Shares will vest in equal increments on a monthly basis over the subsequent forty-two (42) months, such that the Option Shares will be fully vested in four (4) years.  In the event of the termination of your employment with RLE (or any successors thereto) (i) by the Company (or such successor) without Cause (as defined below) or (ii) by you for Good Reason (as defined below), an additional 25% of the unvested Option Shares shall immediately vest (or all remaining Option Shares, if less than 25% of the Option Shares are not then vested).  In the event of a termination of your employment with RLE by the Company (or any successors thereto) without Cause within ninety (90) days prior to or six (6) months following a Change of Control (as defined below) all of your Option Shares shall immediately vest.

The grant of the Option is conditional upon your entering into a joint election and/or indemnifying the Company (or your current employing entity) in such form as reasonably determined by the Company from time to time for the whole of any liability for secondary class 1 national insurance contributions (i.e. employer National Insurance contributions) which arises in respect of the Option or its exercise.

On termination of your employment, whether lawfully or in breach of contract, you shall lose all unvested Options and any of the rights or benefits in respect to the unvested Options, except as is specifically set forth herein.  In relation to any awards or options you held immediately prior to such termination of your employment (“Other Awards”) which you would not have lost had your employment not been terminated (for example, you are not employed as at a vesting date and therefore options which would have vested on that date lapse) you shall not be entitled by way of damages, to be compensated for the loss of rights or benefits in respect of the Option or any Other Awards; provided however in the event you are terminated for Cause, and it is subsequently determined to be wrongful by a court of final jurisdiction, your termination shall be treated as without Cause and you shall be entitled to such rights as are enumerated herein for non-Cause terminations.

Definitions:

· “Change of Control” shall mean a merger or consolidation of the Company with or into another corporation, entity or person, or the sale of all or substantially all of the Company's assets to another corporation, entity or person, where after such merger, consolidation or sale of assets, less than 50% of the capital stock or equity interests in such other corporation, entity or person are owned by persons who owned the capital stock of the Company immediately before such merger, consolidation or sale of assets; provided, however, that neither a transaction whose sole purpose is to change the state of the Company’s incorporation nor an equity financing or series of related transactions in which the Company is the surviving corporation shall constitute a “Change of Control.”

· “Cause” will exist if you are terminated by the Company for any of the following reasons: (i) your willful failure to substantially perform your duties and responsibilities to the Company, (ii) your commission of any act of fraud, embezzlement, dishonesty or any other willful misconduct that has caused material injury to the Company, (iii) unauthorized use or disclosure by you of any proprietary information or trade secrets of the Company or any other party to which you owe an obligation of nondisclosure as a result of your relationship with the Company, (iv) your willful material breach of any of your obligations under any written agreement or covenant with the Company, (v) conviction of, or plea of “guilty” or “no contest” to, a felony under the laws of the United States (or any state thereof) or country where you and the Company engage in business.  Your conviction (or guilty plea) in any other jurisdiction of an offense which is to the material detriment of the Company, (vi) the failure to obtain, by March 15, 2008, entry clearance (i.e. a visa) to work in the United Kingdom for a period of at least, twelve (12) months, or (vii) the loss of your right to work in the United Kingdom.  Notwithstanding the foregoing, (vi) and (vii) shall not constitute Cause if the Company has failed to fulfill its responsibilities with respect to such immigration matters and such failure is the primary cause of the resulting immigration problems.  Notwithstanding anything herein to the contrary, you shall be given written notice of termination for Cause and shall have thirty (30) days in which to cure any infraction, breach or failure to the reasonable satisfaction of the Company, provided that the foregoing notice shall not be required if the infraction, breach or failure is not curable within a thirty (30) day period.

· “Good Reason” shall mean (i) a material diminution in your title, authority or responsibility with the Company; provided, that neither a mere change in title alone nor reassignment following a Change of Control to a position that is substantially similar to the position held prior to the Change of Control shall constitute a material diminution in authority or responsibility, (ii) a reduction in your then-current base salary by at least 15%; provided, that an across-the-board reduction in salary level of all other executive employees or consultants in positions similar to yours by the same percentage amount as part of a general salary level reduction approved by the Company Board of Directors shall not constitute “Good Reason,” (iii) a material breach by the Company of any employment or consulting agreement with you or (iv) relocation of your primary place of work outside of London.

4.           Relocation Expenses.

a.           The Company will pay Relocation Expenses to include all reasonable moving expenses (collectively “Reasonable Moving Expenses,” including packing, shipping, insurance, business class or economy airfare for residence site visits with family, permanent move to UK residence by family, job counseling for spouse, education counseling for children, assistance in selling/renting current home and housing allowance in the United States, cost of living, dependent education, etc., in an amount not to exceed £20,000.  The Relocation Expenses will be paid within ten (10) business days of your delivery to the Company of receipts evidencing such expenses.

b.           In the event your employment with the Company is terminated for any reason other than for Cause, the Company will immediately pay you £20,000 to reimburse you for your Reasonable Moving Expenses in connection with moving back to the United States, including temporary housing in the United Kingdom or United States.  Such reimbursement will happen within ten (10) business days after your delivery to the Company of receipts evidencing such expenses.

c.           Please note that the foregoing payments may be considered taxable income to you.

5.           Ex Pat Benefits.

a.           Air Fare.  Upon your relocation to the United Kingdom, once per calendar year, and for so long as you are employed by the Company and living in the United Kingdom, the Company will pay for business class round trip tickets from the United Kingdom to the United States for you, your spouse and your children.  The purchase of such tickets shall be coordinated by the Company.

b.           Home Leave.  In addition to the Company’s standard vacation time and upon your relocation to the United Kingdom and for so long as you are employed by the Company and living in the United Kingdom, you will also be entitled to two (2) weeks of home leave per year.  Such home leave shall not accrue as vacation time under the Company’s policies regarding vacation accrual

c.           Tax Preparation.  For so long as you are employed by the Company and living or working (on a full-time basis) in the United Kingdom on behalf of the Company, the Company will pay you a lump sum payment of US $15,000 on March 1st of each calendar year, commencing on March 1, 2008, to help defray the costs associated with your initial tax planning, financial management and equalization strategy, and annual filing obligations in the United States and United Kingdom.

6.           Immigration Expenses.  The Company will use commercially reasonable efforts, and bear all reasonable expenses (including legal expenses), associated with obtaining, for your benefit, a work visa, or any other work permits, as may be required for you to perform your obligations to the Company.

7.           Medical and Dental Benefits.As an employee, you will be entitled to participate in a Company-sponsored medical and dental plan (the “Health Benefits”).  Coverage under the Health Benefits, if elected by you, will begin the first day of the first month after thirty (30) days following your Commencement Date (the “Coverage Commencement Date”).  While you are paid in US dollars, you will also be entitled to participate in the Company’s 401(k) plan.  Upon your relocation to the United Kingdom and while you are working there, the Company shall provide you with a private medical benefits package reasonably comparable to the benefits provided to the Company’s United States employees.   Notwithstanding anything herein to the contrary, the Company will maintain your Company-sponsored United States medical and dental plan for you, your spouse and dependents throughout your employment.  You will also be entitled to three (3) weeks of vacation per year.

8.           Miscellaneous.

a. Insurance.  During the employment period, the Company shall provide you with coverage under its current directors’ and officers’ liability to the same extent that it provides such coverage to its other executive officers and directors.   The Company will, in consultation with you, purchase such other insurance as may be reasonably necessary and prudent to cover its European operations.

b. Business Travel.  For all international flights over six (6) hours in length, you will be permitted to fly business class.

c. Attorney’s Fees. The Company shall reimburse you for fifty percent (50%) of your reasonable legal fees and expenses in connection with the review, negotiation and drafting of this Agreement and related documents up to $10,000.

9.           Nature of Employment/Termination.  Your employment with the Company is at-will, meaning that either you or the Company can terminate it at any time, with or without cause.  Notwithstanding the foregoing, if the Company terminates your employment other than for Cause, or if you terminate your employment for Good Reason, you shall be entitled to receive the following (the “Severance Benefits”):

a.      Salary Continuation.  Your base compensation for a period of six (6) months following the termination of your employment (the “Severance Period) in accordance with the Company’s standard payroll procedures.

b.      Medical Insurance.  For the Severance Period, group medical insurance and dental insurance, on the same terms and conditions as in effect immediately prior to your termination.  Receipt of the foregoing Severance Benefits is contingent upon you (a) signing a reasonable general release of claims against the Company, in a form mutually acceptable to the Company and you, and (b) returning all Company property.

If the Company terminates your employment for Cause and after any cure period has not been satisfied by you, then the Company will pay you only the compensation and benefits that you would have earned under this Agreement through the effective date of the termination.

10.           Restrictive Covenants.

a. Non-Solicitation.  You agree that during your employment and for a period equal to  twelve (12) months, you will not directly or indirectly solicit, induce, recruit or encourage any of the Company’s employees, consultants, customers, agents, vendors, suppliers or any other party doing business with the Company, with whom you had material business contact with or had confidential information regarding (in each case during the twelve (12) months prior to the termination of your employment) their employment, agency or other relationship with the Company or to render services for or transfer their business from the Company, and you will not initiate discussion with any such person for any such purpose or authorize or knowingly cooperate with the taking of any such actions by any other individual or entity.  In recognition of the fact that irreparable injury will result to the Company in the event of a breach by you of your obligations under this paragraph, that monetary damages for such breach would not be readily calculable, and that the Company would not have an adequate remedy at law therefor, you acknowledge, consent and agree that in the event of such breach, or the threat thereof, the Company shall be entitled, in addition to any other legal remedies and damages available, to specific performance thereof and to temporary and permanent injunctive relief (without the necessity of posting a bond) to restrain the violation or threatened violation of such obligations by you.

a. Non-Compete.  You agree that during your employment with the Company and for a period equal to twelve (12) months immediately following the termination of your employment with the Company, you will not, without the prior written consent of the Company, in the Territory (as defined below), work in the same or similar capacity to your role at the Company or in a management role for any person or entity (including yourself) you engaged in business which competes with  the business engaged in by the Company during the last twelve (12) months of your employment and with which business you were materially involved in the last twelve (12) months of your employment. For the purposes of this provision, the Territory shall refer to any area within 20 miles of any European city (a) in which the Company has done business in the twelve (12) months prior to the termination of your employment or is doing business at the time of the termination of your employment and in relation to such business you were either privy to confidential information or were materially involved; or (b) that is part of a planned roll-out, upon which the Company has expended material resources and in relation to which you have participated in formulating.

c. Outside Interests.  you will not at any time during your employment, except in the proper course of your employment or with prior written consent of the Company and whether  directly or indirectly, paid or unpaid and whether or not during or outside office hours: (a) be engaged or concerned in the conduct of; (b) be or become an employee, agent, partner, consultant or director of; (c) assist or have any financial interest in; or (d) undertake any steps of any kind to promote or establish, (in each case) any other actual or prospective business, organization or profession.   This will not prevent you from engaging in charitable work and organizations which help promote the status of the Company, or in participating in management of personal investments, family and civic activities.  Nothing shall prevent you from holding shares or securities of a company any of whose shares or securities are quoted or dealt in on any recognized investment exchange.

11.           UK Employment Agreement.

Upon establishing the United Kingdom enterprise and if necessary to comply with English law, you and the Company will negotiate, in good faith, the terms and conditions of an employment agreement between you and the Company which is subject to English law and which is materially consistent with the terms set forth herein, with only such changes as may be necessary to comply with English law and practice.  The cost of this employment agreement shall be borne fully by the Company and you shall be fully reimbursed for reasonable attorney fees in connection with such agreement.

12.           Miscellaneous.

a. Employment Pre-conditions.  As a condition of your employment with the Company, you will furnish and will continue to furnish the Company with all necessary documentation that will satisfy the requirements of the Immigration Reform and Control Act of 1986 and the UK Asylum and Immigration Act of 1996.  In addition, to the extent that background and credit checks have not yet been completed, this offer of employment is also contingent on receipt by the Company of credit checks and background investigation satisfactory to the Company in its sole discretion.  Finally, you will be obligated to sign and deliver to the Company the Company’s Employment, Confidential Information, and Invention Assignment Agreement (the “Employee Agreement”), in substantially the form signed by other senior executives of the Company.  Such documentation must be provided to us within three (3) business days of receipt by you of such documents from the Company or our employment relationship with you may be terminated.  The terms of this Agreement shall supersede any inconsistent terms set forth in the Employee Agreement.

b. Prior Employment.  In your work for the Company, you will be expected to refrain from using or disclosing any confidential information, including trade secrets, of any former employer or other person to whom you have any obligation of confidentiality.  You agree that you will not bring onto Company premises any unpublished documents or property belonging to any former employer or other person to whom you have an obligation of confidentiality.  During our discussions about your proposed job duties, you assured the Company that you would be able to perform those duties within these guidelines.  You further warrant that you are neither prevented nor restricted by any court order or any obligation to any third party (whether express or implied) from entering into your employment or performing any of your obligations as an employee.

c. Employing Entity.  In the event that the Company establishes a subsidiary entity to carry on business in the United Kingdom then you agree to additionally enter into an employment agreement with such entity on the same terms as are set out in this Agreement.  References in this Agreement to "the Company" shall, unless the context otherwise requires, include references to such entity; provided, however, all of the terms and conditions that are binding under this agreement shall be binding upon you, the Company and its successors, with only such changes as may be required in connection with the implementation of Section 10 hereof.

d. Choice of Law/Venue.  This Agreement shall be construed under the laws of the Commonwealth of Virginiawithout regard for conflicts of law principles.  In the event of a dispute arising hereunder, the losing party shall reimburse the prevailing party for its reasonable legal fees and expenses.

To indicate your acceptance of the Company's offer, please sign and date this letter in the space provided below and return it to Zorik Gordon within three (3) business days of this letter’s date.  This letter may not be modified or amended except by a written agreement, signed by the Company and by you.

We look forward to working with you.

Sincerely,

ReachLocal, Inc.

/s/ Zorik Gordon                                                      

Zorik Gordon

Chief Executive Officer

I hereby accept employment with ReachLocal, Inc. on the terms set forth in this offer letter.  I acknowledge that this letter, along with the agreement relating to proprietary rights between myself and the Company, set forth the terms of my employment with ReachLocal, Inc. and supersede any prior representations or agreements, whether written or oral.  I acknowledge that no promises, representations or commitments have been made to me concerning my employment with ReachLocal, Inc. other than those set forth in this offer letter.

ACCEPTED AND AGREED TO this 14th day of  January  2008:

/s/ John Mazur                                                     

John Mazur

1625 Dempsey Street

Mclean, Va. 22101

July 30, 2010

Mr. John Mazur

1625 Dempsey Street

Mclean, VA 22101

Re:         Amendment to Offer Letter, dated January 14, 2008 (the “Original Offer Letter”).

Reference is hereby made to the Original Offer Letter with ReachLocal, Inc. (the “Company”).  For good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, you and the Company have mutually agreed to amend certain provisions of the Employment Letter as set forth herein.

1.           Section 2.a. of the Original Offer Letter is hereby amended to provide that your Base Compensation is increased to £315,000, effective as of January 1, 2010.

2.           Section 2.b. of the Original Offer Letter is hereby deleted in its entirety and replaced with the following, effective as of June 1, 2010:

“b.         Incentive Compensation. The Company will establish a VIP Agent Account to which sales managers, agencies and advertisers for RLE will be linked.  During your employment, the Company will pay you a monthly commission equal to the lesser of (i) 0.5% of the Net Advertising Revenue (as defined below) generated by RLE in that calendar month in excess of Six Hundred and Fifty Thousand Pounds (£650,000) or (ii) Twelve Thousand Five Hundred Pounds (£12,500).  Commissions will be paid in accordance with the Company’s normal payroll procedures.  “Net Advertising Revenue” shall refer to the total advertising dollars spent on behalf of advertisers or agencies established under your VIP Agent Account and for which the Company has received payment during your employment, less the sum of the following:  (i) any credits, promotional or otherwise, issued to RLE advertisers or agents; (ii) any credit card charge-backs made to RLE advertisers or agencies; (iii) any other payment cancellations made by or on behalf of RLE advertisers or agencies (in each case whether relating to the current or any previous month).”

Except as set forth herein, the Original Offer Letter shall remain in full force and effect.

21700 Oxnard Street; Suite 1600; Woodland Hills, CA  91367

O: 818.936.9906; Fax: 818.337.7109

Please confirm your agreement to the foregoing by signing and dating the enclosed duplicate original of this letter in the space provided below for your signature and returning it to the Company.  Please retain one fully-executed original for your files.

Sincerely,

ReachLocal, Inc.

By: /s/ Zorik Gordon                                                               

       Zorik Gordon, CEO

Accepted, Acknowledged and Agreed,

this 30th day of July, 2010.

/s/ John Mazur                                                     

John Mazur

21700 Oxnard Street; Suite 1600; Woodland Hills, CA  91367

O: 818.936.9906; Fax: 818.274.0261

EX-10.02

 Exhibit 10.02

January 1, 2012

STRICTLY PRIVATE & CONFIDENTIAL

Mr. John Mazur

1625 Dempsey Street

22101 Mclean, Virginia

USA

Sent per e-mail to: jmazur@reachlocal.co.uk

Dear John

Re.:           Addendum to Offer Letter: Secondment Letter

With establishing the European headquarters in the Netherlands and moving the relevant functions from the ReachLocal UK offices to the Netherlands we agreed that you will no longer be based in the UK offices but will move to the Netherlands instead.

This Secondment Letter supplements the terms and conditions of your employment with ReachLocal, Inc. (the “Company”) set out in the letter offering you employment with the Company of January 14, 2008, as amended in July 2010  (the “Offer Letter”) and replaces the Secondment letter applicable to your secondment to the UK offices dated 3 December 2008. Insofar as the conditions of this Secondment Letter differ from the conditions of the Offer Letter, the parties give, for the duration of the Secondment Agreement, precedent to the conditions of the Secondment Letter. For the avoidance of doubt, any provision in the Offer Letter that is not specifically addressed in the Secondment Letter shall remain in full force and effect during the term of your employment including termination rights as to severance payments and definitions of Cause, No Cause and Good Reason.

In particular, this Secondment Letter sets out in further detail the terms of your secondment to the European headquarters in Amsterdam, the Netherlands, of the Company’s group company, ReachLocal Europe B.V. (“RL EU”), for an initial period of five years commencing 1 January 2012, the date that that secondment commences (the “Secondment”).  Towards the end of that period, we will review whether that period of secondment should be extended.  By signing this Secondment Letter, your secondment to the UK offices and thus the Secondment Letter dated 28 October 2008 will terminate by mutual consent per 1 January 2012 and per the same date your secondment to the Netherlands will become effective under the terms and conditions set out below.

By signing this Secondment Letter, you evidence your agreement to the terms and conditions of your employment being both those set out in the Offer Letter and this Secondment Letter.  The further terms and conditions to those in your Offer Letter set out in this Secondment Letter will cease to apply when your Secondment concludes. The references in the Offer Letter to the “UK” are deemed, to the extent still applicable, to be replaced by “the Netherlands”, respectively “Dutch”.

1. Continuous Employment

Your period of continuous employment with the Company commenced on December 31, 2007. No employment with a previous employer counts towards your period of continuous employment with the Company.

2. Hours of Work

Your normal hours of work are between 9.00am and 5.00pm Mondays to Fridays inclusive of a lunch break of one hour. Given your position within the organisation you will be flexible on working hours and devote as much as may reasonable be required for the proper performance of your duties without extra remuneration for additional hours worked. Also, in your position you will be required to travel through Europe to visit on a regular basis the European offices in other countries.

You agree and acknowledge by signing a copy of this Secondment Letter that you have autonomous decision-making powers, and that the duration of your working time is not measured or predetermined.

3. Secondment to the RL EU

Your Secondment is contingent upon your right to work and stay in the Netherlands. Your secondment will become effective per 1 January 2012. By signing this Secondment Letter you warrant that:

(a) you will provide all necessary documents to the respective (Company) advisors  needed in order to obtain and apply for valid work and residence permits required for performing your duties under this Secondment Letter,

(b) you will throughout your Secondment continue to hold a valid work and residence permit and/or such other permit(s) or visas as is or are necessary, and

(c) You will advise the Company and RL EU of the date your working and residential permits expire and of any subsequent applications you make to extend the same. The Company will provide you with all reasonable assistance in the making of that application and will bear the costs of the same. In the event that any such application is unsuccessful, or the parties believe that another immigration route may be more appropriate, you and the Company will co-operate fully together, at the Company's cost, in promptly making any relevant applications to secure your ability to work lawfully in the Netherlands and Europe. If, notwithstanding the same, you cease to be entitled to work in the Netherlands at any time during your Secondment, the Company and/or RL EU reserve the right to terminate your Secondment immediately and to require you to work elsewhere for the Company.

During your Secondment:

(a) your initial place of work is the RL EU offices at the WTC in Amsterdam, the Netherlands, and you shall be given reasonable notice of any change in your permanent place of work,

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(b) you may be asked to work outside the Netherlands for more than one month at any one time, but you will not be required to do so without your agreement and you will be given reasonable notice of any such request,

(c) if you agree to work outside the Netherlands for more than one month at any one time, you will be paid in Sterling, US Dollars, Euros or such local currency as the Company and/or RL EU shall reasonably determine, and

(d) you are required at all times to comply with the rules, policies and procedures in force at RL EU from time to time.

Termination of the Secondment

In case of any absence or incapacity to work for a period exceeding more than 12 weeks and without limiting any other rights it may have in relation to terminating the Secondment, RL EU has the right to terminate the Secondment Letter with immediate effect, without any prior notice being required.

In the event the employment relationship between you and the Company is terminated, regardless the reasons or the way termination took place, the Secondment Letter will simultaneously terminate by operation of law, per the same date without any separate prior notice being required.

4. Public Holidays

During your Secondment, you are entitled to additional paid vacation time on the official recognised public holidays as applicable to the Dutch employees of RL EU.  If you choose to work on these public holidays, you will not accrue time in lieu.

5. Compensation and Benefits

a.      Base Compensation.  During your Secondment, the base compensation as referred to in clause 2 (a) of the Offer Letter shall be Euro 376,551 (the “Base Salary”), and will be paid via the Dutch payroll system.

As to the Incentive Compensation as referred to in clause 2 (b) of the Offer Letter the following will apply:

A VIP Agent Account has been established to which sales managers, agencies and advertisers for RL EU (including all of its European subsidiaries, collectively known as the “RL European Operations”)) has been linked. During your Secondment, you will receive a monthly commission equal to the lesser of (i) 0.5% of the Net Advertising Revenue (as defined below) generated by the RL European Operations in that calendar month in excess of € 777,010 or (ii) € 14,942.50. The Commissions will be paid in accordance with the RL EU’s s normal payroll procedures. “Net Advertising Revenue” shall refer to the total advertising Euro’s or Sterling Pounds spent on behalf of advertisers or agencies established under your VIP Agent Account and for which the respective part of RL European Operations has received payment during your Secondment, less the sum of the following: (i) any credits, promotional or otherwise, issued to advertisers or agents; (ii) any credit card charge-backs made to advertisers or agencies; (iii) any other payment cancellations made by or on behalf of  advertisers or agencies (in each case whether relating to the current or any previous month).  With respect to those parts of the RL European Operations that operate under a different currency (eg the United Kingdom), for purposes of calculating the commissions owed under this provision, the exchange rate used by the Company for its external reporting purposes shall be applied.

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Appropriate deductions for wage or income taxes and social security contributions applicable for any payments of compensation, allowances or benefits relating to your Secondment, wherever due, will be made in accordance with applicable laws and regulations. In case any of such payments have been paid as a net amount and the tax authorities have established that those payments are considered to be taxable, this shall, unless explicitly agreed otherwise, be for your account and you shall be required to include those payments in your income tax return.

6. Relocation and EX Pat Benefits

The word “relocation” in Section 4 and 5 of your Offer Letter shall be substituted by “Secondment”, as that term is defined in this Secondment Letter.

If and to the extent the Employee qualifies for the Dutch 30% wage tax facility, parties shall agree on an Addendum to this Secondment Letter for purposes of this wage tax facility. It is explicitly agreed that any amendments to the Base Salary as a result of such Addendum will not apply in relation to reviewing the Base Salary for (annual) salary increase nor will it affect any calculations of severance payments as described in the Offer Letter.

It is being understood by the parties that per the date of this Secondment Letter, Employee has no further entitlements to receive payments under Section 4(a) of the Offer Letter.

The Airfare allowance as referred to under Section 5(a) of the Offer Letter shall only be applicable if and to the extent such costs can be paid as a net amount under Dutch tax law and the Dutch 30% wage tax facility.

The Tax Preparation allowance of $ 15,000 as referred to under Section 5(c) of the Offer Letter is a gross amount and shall be paid through the Dutch payroll.

There is no entitlement to pensions benefit in relation to your Secondment to RL EU.

7. Sickness Absence

During any period of absence during the Secondment attributable to sickness or incapacity, you shall receive:

(a) In accordance with applicable Dutch laws and regulations the statutory sick pays provided that, you comply with the relevant Dutch notification requirements and RL EU policies and procedures, and

(b) in the Company’s absolute discretion, other contractual benefits.

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8. Intellectual Property

The Company’s Confidential Information and Invention Agreement as signed on January 14, 2008 remain in full force and effect also under this Secondment Letter.

9. Restrictive Covenants

For the avoidance of doubt, the restrictive covenants set out in Section 10 of the Offer Letter will remain in full force and effect during your employment and your Secondment and it is understood and agreed that the scope of the restrictive covenants are deemed to include also RL EU and its affiliated companies and businesses .

10. Dutch Employment Agreement

If it becomes necessary, during the course of your employment with the Company, whether during the Secondment or otherwise, for you to enter in to a Dutch employment agreement to comply with Dutch law, each of you, the Company and RL EU, will comply with Section 11 of the Offer Letter.

11. Data Protection

By signing this Secondment Letter, you acknowledge and agree that the Company and RL EU and any other company in the group of companies to which the Company belongs (any such company, including the Company, being a “Group Company”) is permitted to hold and process, both electronically and in hard copy form, any personal and/or sensitive data about you as part of its employee-related administration and also for use in the course of any Group Company’s business. You agree that any Group Company may disclose such information to third parties if such disclosure is in any Group Company’s view required for the proper conduct of any Group Company’s business, including forwarding it to countries outside the European Economic Area.

12. Miscellaneous

During the Secondment, Section 12.c of your Offer Letter will not apply.

There are no collective agreements applicable to you or which affect the terms of your employment or of the Secondment.

No amendment or variation of this Secondment Letter shall be effective unless it is in writing and signed by or on behalf of each of the parties.

All notices under the Secondment Letter shall be by e-mail or Certified Mail/Federal Express.

If deemed necessary by the Company or RL EU, it may assign its obligations under the Offer Letter and/or this Secondment Letter to any entity controlled by or under common control with the Company or RL EU.

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13. Choice of law/Venue

To the extent permitted under applicable laws and regulations this contract is subject to US law, and the US courts shall have exclusive jurisdiction in case of any conflicts or disputes arising from or relating to the Secondment Letter. Clause 12 (d) of the Offer Letter will remain applicable to your Secondment and this Secondment Letter.

In order to acknowledge your voluntary acceptance of the terms and conditions set forth in this Secondment Letter, please sign and date this letter and return it to me at your earliest convenience.

Yours sincerely /s/ Zorik Gordon	/s/ Ruud Schuitemaker
Zorik Gordon Chief Executive Officer ReachLocal, Inc.	Ruud Schuitemaker Finance Director Europe ReachLocal Europe B.V.

Read and approved by John Mazur

/s/ John Mazur                                                               

Date: January 1, 2012

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EX-31.01

Exhibit 31.01

I, Zorik Gordon, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of ReachLocal, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Zorik Gordon

Zorik Gordon

Chief Executive Officer

Date: May 4, 2012

EX-31.02

Exhibit 31.02

I, Ross G. Landsbaum, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of ReachLocal, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ Ross G. Landsbaum

Ross G. Landsbaum

Chief Financial Officer

Date: May 4, 2012

EX-32.01

Exhibit 32.01

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2012 of ReachLocal, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Zorik Gordon, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Zorik Gordon

Zorik Gordon

Chief Executive Officer

(Principal Executive Officer)

Date: May 4, 2012

EX-32.02

Exhibit 32.02

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2012 of ReachLocal, Inc. (the “Company”) as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ross G. Landsbaum, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Ross G. Landsbaum

Ross G. Landsbaum

Chief Financial Officer

(Principal Financial Officer)

Date: May 4, 2012

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Note 3 - Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2012

Fair Value Disclosures [Text Block]

3. Fair Value of Financial Instruments

The Company applies the fair value hierarchy for financial instruments. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last is considered unobservable, that are used to measure fair value:

• Level 1—Quoted prices in active markets for identical assets or liabilities.

• Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The following table summarizes the basis used to measure certain of the Company’s financial assets that are carried at fair value (in thousands):

			Basis of Fair Value Measurement
	Balance at March 31, 2012		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	90,336	$	90,336	$	—	$	—
Certificates of deposit	$	1,566	$	1,566	$	—	$	—

			Basis of Fair Value Measurement
	Balance at December 31, 2011		Quoted Prices in Active Markets for Identical Items (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents	$	84,525	$	84,525	$	—	$	—
Certificates of deposit	$	1,930	$	1,930	$	—	$	—

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Note 2 - Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2012

Significant Accounting Policies [Text Block]

2. Summary of Significant Accounting Policies

Principles of Consolidation

The condensed consolidated financial statements include the accounts of ReachLocal, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. The condensed consolidated balance sheet as of December 31, 2011 included herein was derived from the audited consolidated financial statements as of that date, but does not include all disclosures, including notes required by GAAP.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of the Company’s statement of financial position at March 31, 2012, the Company’s results of operations for the three months ended March 31, 2012 and 2011, and the Company’s cash flows for the three months ended March 31, 2012 and 2011. The results for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012. All references to the three months ended March 31, 2012 and 2011 in the notes to the condensed consolidated financial statements are unaudited.

Discontinued Operations

As a result of winding down and closing the operations of Bizzy, the local recommendation engine we developed, effective November 2011, the Company has reclassified and presented all related historical financial information as “discontinued operations” in the accompanying Consolidated Balances Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows. In addition, all Bizzy-related activities have been excluded from the notes unless specifically referenced.

 Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, software development costs, goodwill, long-lived and intangible assets, and stock-based compensation. These estimates are based on information available as of the date of the financial statements. Therefore, actual results could differ from those estimates.

Revenue Recognition

The Company recognizes revenue for its services when all of the following criteria are satisfied:

• persuasive evidence of an arrangement exists;

• services have been performed;

• the selling price is fixed or determinable; and

• collectability is reasonably assured.

The Company recognizes revenue as the cost for the third-party media is incurred, which is upon delivery of the advertising on behalf of its clients. The Company recognizes revenue for its ReachSearch product as clicks are recorded on sponsored links on the various search engines and for its ReachDisplay product when the display advertisements record impressions or as otherwise provided in its agreement with the applicable publisher. The Company recognizes revenue for its ReachCast product on a straight line basis over the applicable service period for each campaign. The Company recognizes revenue when it charges set-up, management service or other fees on a straight line basis over the term of the related campaign contract or the completion of any obligation for services, if shorter. When the Company receives advance payments from clients, management records these amounts as deferred revenue until the revenue is recognized. When the Company extends credit, management records a receivable when the revenue is recognized.

When the Company sells through agencies, it either receives payment in advance of services or in some cases extends credit. The Company pays each agency an agreed-upon commission based on the revenue it earns or cash it receives. Some agency clients who have been extended credit may offset the amount otherwise due to the Company by any commissions they have earned. Management evaluates whether it is appropriate to record the gross amount of campaign revenue or the net amount earned after commissions. As the Company is the primary party obligated in the arrangement, subject to the credit risk, with discretion over both price and media, management recognizes the gross amount of such sales as revenue and any commissions are recognized as a selling and marketing expense.

The Company also has a small number of resellers. Resellers integrate the Company’s services, including ReachSearch, ReachDisplay, and TotalTrack, into their product offerings. In most cases, the resellers integrate with the Company’s RL Platform through a custom Application Programming Interface (API). Resellers are responsible for the price and specifications of the integrated product offered to their clients. Resellers pay the Company in arrears, net of commissions and other adjustments. Management recognizes revenue generated under reseller agreements net of the agreed-upon commissions and other adjustments earned or retained by the reseller, as management believes that the reseller has retained sufficient control and bears sufficient risks to be considered the primary obligor in those arrangements.

The Company offers future incentives to clients in exchange for minimum commitments. In these circumstances, management estimates the amount of the future incentives that will be earned by clients and defers a portion of the otherwise recognizable revenue. Estimates are based upon a statistical analysis of previous campaigns for which such incentives were offered. Should a client not meet its minimum commitment and no longer qualify for the incentive, management recognizes the revenue previously deferred related to the estimated incentive.

Software Development Costs

The Company capitalizes costs to develop software when management has determined that the development efforts will result in new or additional functionality or new products. Costs capitalized as internal use software are amortized on a straight-line basis over the estimated three-year useful life. Costs incurred prior to meeting these criteria and costs associated with ongoing maintenance are expensed as incurred and are recorded along with amortization of capitalized software development costs as product and technology expenses within the accompanying condensed consolidated statements of operations.

Goodwill

The Company’s total goodwill of $41.8 million as of both March 31, 2012 and December 31, 2011 is related to the Company’s acquired businesses.   In accordance with Accounting Standards Codification (“ASC”) 280, Segment Reporting, the Company has identified one reporting segment and two reporting units—North America and Australia—for purposes of evaluating goodwill. These reporting units each constitute a business or group of businesses for which discrete financial information is available and is regularly reviewed by segment management. North America assigned goodwill is $9.4 million and Australia assigned goodwill is $32.4 million. The Company reviews the carrying amounts of goodwill for possible impairment whenever events or changes in circumstance indicate that the related carrying amount may not be recoverable. The Company performs its annual assessment of goodwill impairment as of the first day of each fourth quarter.

The Company follows the amended guidance for assessing qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, in accordance with ASC 350-20, Intangibles – Goodwill and Other. Entities are provided with the option of first performing a qualitative assessment on any of its reporting units to determine whether further quantitative impairment testing is necessary. An entity may also bypass the qualitative assessment for any reporting unit in any period and proceed directly to the quantitative impairment test. If an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a two-step impairment test is necessary. The first step of the impairment test involves comparing the estimated fair values of each of our reporting units with their respective carrying amounts, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, including goodwill, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the estimated fair value of the reporting unit is less than its carrying amount, including goodwill, then the second step is performed to compare the carrying amount of the goodwill with its implied fair value. 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. The Company estimates fair value utilizing the projected discounted cash flow method and a discount rate determined by the Company commensurate with the risk inherent in its business model.

Long-Lived and Intangible Assets      

The Company reports finite-lived, acquisition-related intangible assets at fair value, net of accumulated amortization. Identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives of three years. Straight-line amortization is used because no other pattern over which the economic benefits will be consumed can be reliably determined.

The Company reviews the carrying values of long-lived assets, including intangible assets, for possible impairment whenever events or changes in circumstance indicate that the related carrying amount may not be recoverable. In its analysis of other finite lived amortizable intangible assets, the Company applies the guidance of ASC 350-20, Intangibles – Goodwill and Other, in determining whether any impairment conditions exist. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Intangible assets are attributable to the various developed technologies and client relationships of the businesses the Company has acquired.  Long-lived assets to be disposed of are reported at the lower of carrying amount or estimated fair value less cost to sell.

Stock-Based Compensation

The Company accounts for stock-based compensation based on fair value. The Company follows the attribution method, which reduces current stock-based compensation expenses recorded by the effect of anticipated forfeitures. Management estimates forfeitures based upon its historical experience, which has resulted in a small expected forfeiture rate.

The fair value of each award is estimated on the date of the grant and amortized over the requisite service period, which is the vesting period. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock-based awards on the date of grant. Determining the fair value of stock-based awards at the grant date under this model requires judgment, including estimating volatility, expected term and risk-free interest rate. The assumptions used in calculating the fair value of stock-based awards represent management’s estimate based on judgment and subjective future expectations. These estimates involve inherent uncertainties. If any of the assumptions used in the Black-Scholes model significantly changes, stock-based compensation for future awards may differ materially from the awards granted previously.

Net Loss Per Share

Basic net loss per share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and potential dilutive shares outstanding during the period, to the extent such shares are dilutive. Potential dilutive shares are composed of incremental common shares issuable upon the exercise of stock options, warrants and unvested restricted shares using the treasury stock method.

The following potentially dilutive securities have been excluded from the calculation of diluted net loss per common share as they would be anti-dilutive because the Company had net losses for the periods below (in thousands):

	Three Months Ended March 31,
	2012		2011
Deferred stock consideration and restricted stock		26		458
Stock options and warrant		475		2,639
		501		3,097

In addition, certain other stock options have been excluded from the computation of diluted net loss per share because they would have had an anti-dilutive impact as the deemed proceeds under the treasury stock method were in excess of the average fair market value for the period.  For the three months ended March 31, 2012 and 2011, the number of such securities was 6.8 million and 1.2 million, respectively.

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Condensed Consolidated Balance Sheets (Unaudited) (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Current assets:
Cash and cash equivalents	$ 90,336	$ 84,525
Short-term investments	497	644
Accounts receivable, net of allowance for doubtful accounts of $441 and $363 at March 31, 2012 and December 31, 2011, respectively	4,388	4,240
Other receivables and prepaid expenses	8,354	9,226
Total current assets	103,575	98,635
Property and equipment, net	11,321	9,885
Capitalized software development costs, net	11,643	10,942
Restricted certificates of deposit	1,069	1,286
Intangible assets, net	1,472	1,957
Other assets	1,991	1,966
Goodwill	41,766	41,766
Total assets	172,837	166,437
Current Liabilities:
Accounts payable	32,541	29,831
Accrued expenses	20,634	19,537
Deferred revenue and other current liabilities	35,025	30,747
Liabilities of discontinued operations	860	996
Total current liabilities	89,060	81,111
Deferred rent and other liabilities	2,686	3,039
Total liabilities	91,746	84,150
Commitments and contingencies (Note 6)
Stockholders’ Equity:
Common stock, $0.00001 par value—140,000 shares authorized; 28,499 and 28,552 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively	0	0
Receivable from stockholder	(87)	(87)
Additional paid-in capital	108,596	108,883
Accumulated deficit	(27,240)	(26,234)
Accumulated other comprehensive loss	(178)	(275)
Total stockholders’ equity	81,091	82,287
Total liabilities and stockholders’ equity	$ 172,837	$ 166,437

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Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Cash flow from operating activities:
Net loss from continuing operations	$ (1,006)	$ (2,672)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	2,964	2,246
Stock-based compensation, net	2,096	1,740
Provision for doubtful accounts	78	90
Changes in operating assets and liabilities:
Accounts receivable	(222)	(287)
Other receivables and prepaid expenses	836	203
Other assets	(30)	86
Accounts payable and accrued expenses	3,530	545
Deferred revenue, rent and other liabilities	5,108	2,617
Net cash provided by operating activities, continuing operations	13,354	4,568
Net cash used for operating activities, discontinued operations	(136)	(539)
Net cash provided by operating activities	13,218	4,029
Cash flow from investing activities:
Additions to property, equipment and software	(4,490)	(3,588)
Acquisitions, net of acquired cash	(1,035)	(5,793)
Maturities of short-term investments	383
Purchases of short-term investments		(61)
Net cash used in investing activities, continuing operations	(5,142)	(9,442)
Net cash used in investing activities, discontinued operations		(345)
Net cash used in investing activities	(5,142)	(9,787)
Cash flow from financing activities:
Proceeds from exercise of stock options	11	1,946
Common stock repurchases	(2,786)
Net cash provided by (used in) financing activities	(2,775)	1,946
Effect of exchange rate changes on cash	510	315
Net change in cash and cash equivalents	5,811	(3,497)
Cash and cash equivalents—beginning of period	84,525	79,906
Cash and cash equivalents—end of period	90,336	76,409
Supplemental disclosure of non-cash investing and financing activities:
Capitalized software development costs resulting from stock-based compensation and deferred payment obligations	86	650
Deferred payment obligation increase (decrease)	(243)	1,849
Accrued purchases of fixed assets		$ 353

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Note 1 - Organization and Description of Business

3 Months Ended

Mar. 31, 2012

Nature of Operations [Text Block]

1. Organization and Description of Business

ReachLocal, Inc. (the “Company”) was incorporated in the state of Delaware in August 2003. The Company’s operations are located in North America, Australia, the United Kingdom, the Netherlands, Germany, Japan and India. The Company’s mission is to help small- and medium-sized businesses (“SMBs”) acquire, maintain and retain customers via the Internet. The Company offers a comprehensive suite of online marketing solutions, including search engine marketing (ReachSearch™), Web presence (ReachCast™), display advertising and remarketing (ReachDisplay™), online marketing analytics (TotalTrack®), and an out-of-the-box assisted chat service (TotalLiveChat™), each targeted to the SMB market. The Company delivers this suite of services to SMBs through a combination of its proprietary technology platform, the RL Platform, its direct, “feet-on-the-street” sales force of Internet Marketing Consultants, or IMCs, and select third party agencies and resellers. 

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Condensed Consolidated Balance Sheets (Unaudited) (Parentheticals) (USD $) In Thousands, except Per Share data, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Allowance for doubtful accounts (in Dollars)	$ 441	$ 363
Common stock, par value (in Dollars per share)	$ 0.00001	$ 0.00001
Common stock, shares authorized	140,000	140,000
Common stock, shares issued	28,499	28,552
Common stock, shares outstanding	28,499	28,552

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Note 11 - Subsequent Events

3 Months Ended

Mar. 31, 2012

Subsequent Events [Text Block]

11. Subsequent Events

On April 23, 2012, the Company filed its Notice of Annual Meeting of Stockholders and Proxy Statement for the Annual Meeting of Stockholders of the Company to be held on May 22, 2012, which contains a proposal submitted to the Company’s stockholders to approve a one-time stock option exchange for eligible employees. The proposed option exchange would permit option holders to surrender certain outstanding stock options for cancellation in exchange for the grant of new replacement options to purchase a lesser number of shares having an exercise price equal to the fair market value of our common stock on the replacement grant date, or for replacement options issued to the Company’s executive officers subject to Section 16 of the Exchange Act, an exercise price equal to the greater of the fair market value of our common stock on the replacement grant date or $13 per share. The proposed option exchange is subject to approval of the Company’s stockholders and the Board of Directors, Compensation Committee and senior management retain the discretion not to commence the option exchange even if approved by the stockholders.

If commenced, the exchange ratios will be calculated to result in an aggregate fair value of the replacement options approximately equal to the aggregate fair value of the surrendered options, which is intended to minimize the compensation expense resulting from the option exchange. Participation will be at the discretion of each option holder, thus the potential reduction of the Company’s total number of outstanding options cannot be known until completion of the exchange. If  approved by the Company’s stockholders and the Board of Directors, Compensation Committee or senior management deterime to implement the stock option exchange, it is expected to commence during June 2012.

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Document And Entity Information	3 Months Ended
	Mar. 31, 2012	May 01, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	ReachLocal Inc
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		28,491,914
Amendment Flag	false
Entity Central Index Key	0001297336
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Accelerated Filer
Entity Well-known Seasoned Issuer	No
Document Period End Date	Mar. 31, 2012
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1

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Condensed Consolidated Statements of Operations (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Revenue	$ 104,003	$ 84,058
Cost of revenue	52,390	44,500
Operating expenses:
Selling and marketing	38,543	32,161
Product and technology	4,333	3,022
General and administrative	9,807	7,077
Total operating expenses	52,683	42,260
Loss from continuing operations	(1,070)	(2,702)
Other income, net	203	196
Loss from continuing operations before provision for income taxes	(867)	(2,506)
Provision for income taxes	139	166
Loss from continuing operations, net of income taxes	(1,006)	(2,672)
Loss from discontinued operations, net of income taxes		(775)
Net loss	$ (1,006)	$ (3,447)
Net loss per share from continuing operations, basic and diluted (in Dollars per share)	$ (0.03)	$ (0.09)
Net loss per share from discontinued operations, basic and diluted (in Dollars per share)		$ (0.03)
Net loss per share, basic and diluted (in Dollars per share)	$ (0.03)	$ (0.12)
Weighted average common shares used in computation of net loss per share, basic and diluted (in Shares)	29,111	28,461

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Note 6 - Commitments and Contingencies

3 Months Ended

Mar. 31, 2012

Commitments and Contingencies Disclosure [Text Block]

6. Commitments and Contingencies

Deferred Payment Obligations

In connection with the February 8, 2011 acquisition of DealOn, on February 8, 2012, the Company paid $0.5 million in cash and issued 10,649 shares of its common stock. The Company remains obligated to pay up to approximately $0.7 million in cash and issue 10,649 shares of its common stock, subject to adjustment under the terms of the acquisition agreement (see Note 4).

Litigation

The Company is subject to various legal proceedings and claims arising in the ordinary course of business. Although occasional adverse decisions or settlements may occur, management believes that the final disposition of existing matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows.

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Note 5 - Software Development Costs

3 Months Ended

Mar. 31, 2012

Research, Development, and Computer Software Disclosure [Text Block]

5. Software Development Costs

Capitalized software development costs consisted of the following (in thousands):

	March 31, 2012			December 31, 2011
Capitalized software development costs	$	23,856		$	21,686
Accumulated amortization		(12,213	)		(10,744	)
Capitalized software development costs, net	$	11,643		$	10,942

The Company recorded amortization expense of $1.5 million and $1.0 million for the three months ended March 31, 2012 and 2011, respectively.  As of March 31, 2012, $2.3 million of capitalized software development costs relate to projects still in process.

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Note 9 - Income Taxes

3 Months Ended

Mar. 31, 2012

Income Tax Disclosure [Text Block]

9. Income Taxes

The Company follows ASC Topic 740-270, Income taxes—Interim Reporting, for the computation and presentation of its interim period tax provision. Accordingly, management estimates the effective annual tax rate and applies this rate to the year-to-date pre-tax book income or loss to determine the interim provision for income taxes. For the three months ended March 31, 2012 and 2011, the income tax provisions were $0.1 million and $0.2 million, respectively, and relate to federal, state and foreign income taxes, including the deferred tax impact of prior business combinations.

The Company and its subsidiaries file income tax returns in the U.S. federal, various state and foreign jurisdictions. All of the Company’s income tax returns since inception are open to examination by federal, state, and foreign tax authorities.

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Note 7. Stockholders' Equity

3 Months Ended

Mar. 31, 2012

Stockholders' Equity Note Disclosure [Text Block]

7. Stockholders’ Equity

On November 4, 2011, the Company announced that its Board of Directors adopted a program that authorized the repurchase of up to $20.0 million of the Company’s outstanding common stock. At March 31, 2012, the Company had repurchased 1,257,000 shares of its common stock under the program for an aggregate of $9.3 million, of which $2.6 million or 388,000 shares were repurchased during the three months ended March 31, 2012. Purchases will be made from time-to-time in open market or privately negotiated transactions as determined by the Company’s management. The amount and timing of the share repurchase will depend on business and market conditions, stock price, trading restrictions, acquisition activity, and other factors. The share repurchase program does not obligate the Company to acquire any particular amount of common stock, and the repurchase program may be suspended or discontinued at any time at the Company’s discretion.

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Note 8 - Stock-Based Compensation

3 Months Ended

Mar. 31, 2012

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

8. Stock-Based Compensation

Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and recognized on a straight-line basis over the requisite service period, which is generally the vesting period.

The following table summarizes vested and unvested options activity (number of shares in thousands):

	All Options					Vested Options					Unvested Options
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding at December 31, 2011		6,515		$	12.63		3,471		$	9.72		3,044		$	15.96
Granted		957			7.86		—			—		957			7.86
Options vesting		—			—		478			17.30		(478	)		17.30
Exercised		(17	)		0.69		(17	)		0.69		—			—
Forfeited		(342	)		14.14		(295	)		13.96		(47	)		15.30
Outstanding at March 31, 2012		7,113		$	11.95		3,637		$	10.41		3,476		$	13.56

The following table presents the weighted-average assumptions used to estimate the fair values of the stock options granted during the three months ended March 31, 2012 and 2011.

	Three Months Ended March 31,
	2012			2011
Expected dividend yield		0	%		0	%
Risk-free interest rate		0.88	%		2.30	%
Expected life (in years)		4.75			4.75
Expected volatility		57.1	%		58.5	%

The weighted average remaining contractual life of all options outstanding as of March 31, 2012 was 5.0 years. The remaining contractual life for options vested and exercisable at March 31, 2012 was 4.2 years. The aggregate intrinsic value of all options outstanding as of March 31, 2012 was $2.9 million, and the aggregate intrinsic value of options vested and exercisable at March 31, 2012 was $2.6 million, in each case based on the fair value of the Company’s common stock on March 31, 2012. The per-share weighted-average grant date fair value of unvested options as of March 31, 2012 was $6.39. The per share weighted-average grant date fair value of options vested during the three months ended March 31, 2012 was $8.09. The per-share weighted-average grant date fair value of options forfeited during the three months ended March 31, 2012 was $5.73. The total grant date fair value of options vested during the three months ended March 31, 2012 was $3.9 million. The aggregate intrinsic value of stock options exercised during the three months ended March 31, 2012 was $0.1 million.

Restricted Stock and Restricted Stock Units

The following table summarizes restricted stock awards and restricted stock unit awards (in thousands):

	Number of shares
Unvested at December 31, 2011		123
Granted		182
Cancelled		(1	)
Vested		(16	)
Unvested at March 31, 2012		288

Stock-Based Compensation Expense

The Company records stock-based compensation expense net of amounts capitalized as software development costs. The following table summarizes stock-based compensation (in thousands):

	Three Months Ended March 31,
	2012		2011
Stock-based compensation	$	2,182	$	2,246
Less: Capitalized stock-based compensation		86		506
Stock-based compensation expense, net	$	2,096	$	1,740

Stock-based compensation expense, net of capitalization, is included in the accompanying condensed consolidated statements of operations in the following captions (in thousands):

	Three Months Ended March 31,
	2012		2011
Stock-based compensation expense, net
Cost of revenue	$	54	$	51
Selling and marketing		300		369
Product and technology		249		229
General and administrative		1,493		1,091
	$	2,096	$	1,740

As of March 31, 2012, there was $21.3 million of unrecognized stock-based compensation related to restricted stock, restricted stock units and outstanding stock options, net of estimated forfeitures. This amount is expected to be recognized over a weighted average period of 1.5 years. Future stock-based compensation expense for these awards may differ in the event actual forfeitures deviate from management’s estimates.

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Note 10 - Segment Information

3 Months Ended

Mar. 31, 2012

Segment Reporting Disclosure [Text Block]

10. Segment Information

Revenue by geographic region with respect to the Direct Local channel and national brands is based on the physical location of the sales office, and with respect to agencies and resellers, is based on the physical location of the agency or reseller. The following summarizes revenue and long-lived assets by geographic region (in thousands):

	Three Months Ended March 31,
	2012		2011
Revenue:
North America	$	76,476	$	66,852
International		27,527		17,206
	$	104,003	$	84,058

	March 31, 2012		December 31, 2011
Long-lived assets (excluding patents and other intangibles):
North America	$	7,455	$	7,203
International		3,898		2,721
	$	11,353	$	9,924

The results of the Australia geographic region have been included in the Company’s consolidated financial statements and include revenues of $16.7 million and $11.3 million for the three months ended March 31, 2012 and 2011, respectively. Long-lived assets of the Australia geographic region were $1.7 million and $1.4 million at March 31, 2012 and December 31, 2011, respectively.

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Condensed Consolidated Statements of Comprehensive Loss (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Net loss	$ (1,006)	$ (3,447)
Other comprehensive income, net of tax:
Foreign currency translation adjustments	97	111
Other comprehensive income, net of tax	97	111
Comprehensive loss	$ (909)	$ (3,336)

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Note 4 - Acquisitions

3 Months Ended

Mar. 31, 2012

Mergers, Acquisitions and Dispositions Disclosures [Text Block]

4. Acquisitions

Deferred Consideration

Pursuant to the terms of its 2011 acquisition  of DealOn, LLC (“DealOn”), on February 8, 2012, the Company made a deferred payment in the amount of $0.5 million, net of the working capital adjustment and certain other adjustments, and issued 10,649 shares of its common stock. The following table summarizes the remaining DealOn deferred consideration milestone payments as of March 31, 2012, subject to adjustment under the acquisition agreement (in thousands):

	Deferred Cash Consideration		Deferred Stock Consideration		Total
August 2012	$	367	$	122	$	489
February 2013		367		122		489
Total Deferred Consideration	$	734	$	244	$	978

As part of the consideration paid to acquire SMB:LIVE Corporation (“SMB:LIVE”), on February 22, 2011, the Company paid $0.2 million in cash and issued 90,062 shares of its common stock. On August 22, 2011 the Company paid $0.3 million in cash and issued 93,346 shares of its common stock, and on February 22, 2012  the Company paid $0.6 million in cash and issued 181,224 shares of its common stock. The February 22, 2012 payment represented the final payment of deferred consideration in connection with the SMB:LIVE acquisition.

Intangible Assets

As of March 31, 2012, intangible assets from the acquisitions of DealOn, ReachLocal Australia Pty Ltd. (“ReachLocal Australia”) and SMB:LIVE included developed technology of $1.0 million (net of accumulated amortization of $2.1 million), and customer relationships of $0.4 million (net of accumulated amortization of $3.1 million). Intangible assets are amortized on a straight-line basis over the estimated useful life of three years. Based on the current amount of intangibles subject to amortization, the estimated amortization expense for the succeeding three years is as follows (in thousands):

Year Ending December 31,
2012 (9 months)	$	1,090
2013		357
2014		25
Total	$	1,472

For each of the three months ended March 31, 2012 and 2011, amortization expense related to acquired intangibles was $0.5 million.